U.S. GOVERNMENT PUBLISHING OFFICE

31–509 PDF WASHINGTON : 2018

MONETARY POLICY AND 

THE STATE OF THE ECONOMY 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

SECOND SESSION 

JULY 18, 2018 

Printed for the use of the Committee on Financial Services 

Serial No. 115–110 

( 

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HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

LEE M. ZELDIN, New York 

DAVID A. TROTT, Michigan 

BARRY LOUDERMILK, Georgia 

ALEXANDER X. MOONEY, West Virginia 

THOMAS MACARTHUR, New Jersey 

WARREN DAVIDSON, Ohio 

TED BUDD, North Carolina 

DAVID KUSTOFF, Tennessee 

CLAUDIA TENNEY, New York 

TREY HOLLINGSWORTH, Indiana 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

CHARLIE CRIST, Florida 

RUBEN KIHUEN, Nevada 

SHANNON MCGAHN, Staff Director 

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C O N T E N T S 

Page 

Hearing held on: 

July 18, 2018 ..................................................................................................... 1 

Appendix: 

July 18, 2018 ..................................................................................................... 63 

WITNESSES 

WEDNESDAY, JULY 18, 2018 

Powell, Hon. Jerome H., Chairman, Board of Governors of the Federal Reserve System ......................................................................................................... 5 

APPENDIX 

Prepared statements: 

Powell, Hon. Jerome H. .................................................................................... 64 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Powell, Hon. Jerome H.: 

Written responses to questions for the record submitted by Representatives Beatty, Gottheimer, Huizenga, Messer, Sinema, Sherman, and 

Stivers ............................................................................................................ 136 

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MONETARY POLICY AND 

THE STATE OF THE ECONOMY 

Wednesday, July 18, 2018 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:01 a.m., in room 

2128, Rayburn House Office Building, Hon. Jeb Hensarling [chairman of the committee] presiding. 

Present: Representatives Hensarling, McHenry, Royce, Lucas, 

Pearce, Posey, Luetkemeyer, Huizenga, Duffy, Stivers, Hultgren, 

Ross, Pittenger, Wagner, Barr, Rothfus, Tipton, Williams, Poliquin, 

Love, Hill, Emmer, Zeldin, Trott, Loudermilk, Mooney, MacArthur, 

Davidson, Budd, Kustoff, Tenney, Hollingsworth, Waters, Maloney, 

Sherman, Clay, Scott, Green, Cleaver, Moore, Ellison, Perlmutter, 

Himes, Foster, Kildee, Delaney, Sinema, Beatty, Heck, Vargas, 

Gottheimer, and Crist. 

Chairman HENSARLING. The committee will come to order. Without objection, the Chair is authorized to declare a recess of the 

committee at any time. And all members will have 5 legislative 

days within which to submit extraneous materials to the Chair for 

inclusion in the record. 

This hearing is for the purpose of receiving the semiannual testimony of the Chair of the Board of Governors of the Federal Reserve 

System on monetary policy and the state of the economy. 

I now recognize myself for 3–1/2 minutes to give an opening 

statement. 

As we meet today, thanks to the fiscal policies of the Trump Administration and this Congress, many Americans are seeing the 

strongest economy of their lifetime. Most importantly, 3 percent average economic growth is back, 90 percent of Americans are seeing 

bigger paychecks, and in the last quarter real disposable income increased a very strong 3.4 percent, and unemployment remains near 

a 50-year low. 

But the economy may be challenged in significant ways if either 

we find ourselves in a protracted global trade war or the unconventional monetary policy tools of the Fed are not carefully and skillfully wound down in transition to normalcy. 

In February, during or last Humphrey-Hawkins hearing, I questioned whether the Fed would ever return to a monetary policy balance sheet after a decade of accumulating and maintaining, in contrast, a macroprudential balance sheet. And my concern remains, 

because less than a year into the Fed’s balance sheet wind-down 

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some FOMC (Federal Open Market Committee) members are already calling to slow down or end the process. 

We were told by the Fed that letting the roll-off schedule run for 

3 or 4 years would be less exciting than watching paint dry. But 

as we meet today, we face the prospect that maybe the paint stays 

wet. 

In other words, we seem to be faced with an increasing prospect 

of a balance sheet that may never return to a more conventional 

size or composition. 

I believe this is problematic. An unconventional balance sheet 

may well threaten ultimately the integrity and independence of the 

Feds’s conduct of monetary policy by enabling competing activities 

that lie outside its mandate for stable prices and full employment. 

This matter must be reviewed carefully. 

Additionally, I have governance concerns. I would note today that 

only three individuals, as a practical matter, are actually empowered to set U.S. monetary policy. 

This is a matter of concern. We know that interest rates on reserve deposits have now supplanted open market operations of the 

FOMC in playing the lead role in conducting monetary policy, 

given that the Board of Governors can administer interest rates on 

reserve deposits without any input from the FOMC or any district 

bank president. This means three individuals—or, to be more precise, two, given a majority vote—set monetary policy in the U.S. 

I certainly don’t believe this is currently being abused, but I do 

believe, as a matter of public policy, the full FOMC should vote on 

where to set interest rates on reserve deposits. And furthermore, 

I would call upon the Senate to expeditiously confirm the Federal 

Reserve Board Governors that the President has long since nominated. 

Finally, many members, including myself, share a concern about 

the apparent inconsistency of a 2 percent inflation target with the 

goal of price stability. A 2 percent inflation target means that every 

dollar a couple sets aside at a child’s birth for her college education 

will have lost approximately 30 percent of its purchasing power by 

the time the first tuition bill arrives. 

I understand that other central banks do this. I understand this 

may be good policy. But if so, Congress should decide this, because 

Section 2A of the Federal Reserve Act mandates, quote, ‘‘stable 

prices.’’ And last I looked up the word ‘‘stable’’ in the dictionary it 

means quote, unquote, ‘‘fixed,’’ quote, unquote, ‘‘not changing,’’ or, 

quote, unquote ‘‘permanent.’’ And yet we see even some advocating 

a policy rate target that allows for even greater swings than the 

current 2 percent inflation target. 

Chairman Powell, we welcome you and we look forward to hearing more about these issues, and we look forward to a prudent path 

to normalization where interest rates are once again market based 

and credit is allocated to its most efficient use. 

I now recognize the Ranking Member of the committee, the 

gentlelady from California, for 3 minutes for an opening statement. 

Ms. WATERS. Thank you, Mr. Chairman. 

And welcome, Chairman Powell. 

Mr. Chairman, I am very concerned about the impact of the reckless economic policies of Donald Trump on hardworking Americans, 

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vulnerable families, and our Nation’s economy. This President has 

started a trade war that is already harming American consumers 

and companies. 

For example, Whirlpool, based in Michigan has seen its share 

price drop over 15 percent as a result of Trump’s tariffs on steel 

and aluminum. Washing machines and dryer prices have increased 

20 percent. According to The Wall Street Journal, the mayor of 

Clyde, Ohio, where Whirlpool has a plant, commented on the tariffs 

saying, I quote, ‘‘People’s anxiety level is higher because nobody 

knows what is going on,’’ quote, unquote. 

The tax scam that the Congressional Republicans and President 

Trump pushed through, explodes the deficit and raises taxes on 86 

million American families to help out big corporations and very 

wealthy individuals. But most of these corporations are not using 

the windfall to pay better wages to their employees. Instead, they 

are buying back their own stock to boost share prices and enrich 

their CEOs. And in the end, this massive misguided giveaway will 

be paid for by future generations of taxpayers. 

In addition, the Trump Administration’s latest budget proposal 

makes deep cuts to important healthcare, nutritional assistance, 

housing and community development programs, and would be detrimental to families, veterans, seniors, and persons with disabilities. 

In all, the Trump Administration’s policies are deeply harmful 

and threaten the hard-earned economic gains put in motion during 

the Obama Administration. As a result of Democratic policies and 

the policies of the Federal Reserve, we are now experiencing the 

longest stretch of private sector job growth on record, but with 

these harmful economic policies Trump is putting all of that 

progress at risk. 

So I am interested in Chairman Powell’s views on these matters, 

especially the long-term effect of Trump’s damaging economic policies and what tools, if any, the Federal Reserve has to prevent a 

possible recession that could be triggered by the policies of this Administration. 

With that, I yield back the balance of my time. 

Chairman HENSARLING. The gentlelady yields back. 

The Chair now recognizes the gentleman from Kentucky, Mr. 

Barr, the Chairman of the Monetary Policy and Trade Subcommittee, for 1–1/2 minutes. 

Mr. BARR. Thank you, Mr. Chairman. 

Chairman Powell, thank you for testifying today. 

As Chairman Hensarling has already stated, the economy is 

strong and the data supports this statement. Americans have more 

money in their paychecks thanks to tax reform, job creation is 

strong, unemployment is near a 50-year low, and many Americans 

who left the workforce during the financial crisis are reentering it. 

While overall the economic outlook of America is bright, there 

are a few items that we need to carefully watch. One is uncertainty 

surrounding U.S. trade policy which impacts key Kentucky industry such as bourbon, agriculture, and auto manufacturing. Another 

is the legacy of the Fed’s unconventional monetary policies and 

bloated asset sheet that continues to distort credit allocation. A 

third is a flattening yield curve that some economists warn could 

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signal a downturn. And a final risk is out-of-date regulation, such 

as the G–SIB surcharge calculation that puts American banks at 

a disadvantage relative to their international competitors. 

Chairman Powell, thank you for your service at the Federal Reserve, and I look forward to hearing from you today about these 

and other important topics. 

I yield back. 

Chairman HENSARLING. The gentleman yields back. 

The Chair now recognizes the gentlelady from Wisconsin, Ms. 

Moore, the Ranking Member of the Monetary Policy and Trade 

Subcommittee, for 1 minute. 

Ms. MOORE. Thank you so much, Mr. Chairman. 

Mr. Chairman, it is lovely to see you again. 

I am going to paraphrase and channel Ben Franklin here: DoddFrank gave America a stable economic system if we can keep it. 

I fear your greatest challenges in the future will be directly related to the actions of Republican policymakers and our President. 

Ruinous trickle-down tax cuts, adopting their policies that drive 

debt and income inequality, and of course the Wells Fargo model, 

will saddle regular Americans with fourth-place payday loans to 

pay it all back. 

Destabilizing financial deregulation and unqualified nominees 

like Kathy Kraninger to head the Consumer Financial Protection 

Bureau, capricious trade wars, Harley in my district, farmers in my 

State bracing for ruin, fiscal mismanagement, low grade scams, 

and incompetence all seem to be hallmarks of Mr. Trump. 

But, as we discuss Esther 4:14, you have been called for such a 

time as this. God bless you. 

Chairman HENSARLING. The gentlelady yields back. 

The Chair now recognizes the gentleman form Michigan, Mr. Kildee, the vice Ranking Member, for 1 minute. 

Mr. KILDEE. Thank you, Mr. Chairman, for yielding. 

Chairman Powell, thank you for being here. 

I lead an initiative in Congress entitled The Future of America’s 

Cities and Towns. Its purpose is to fuel a national conversation 

around the economic health of our country’s older industrial cities 

and towns, places like my hometown of Flint, that have not fully 

recovered from the Great Recession. 

Even with the job growth and economic recovery we have seen, 

it is uneven. In economic terms there is no average American anymore. A whole cohort of communities across the country continue 

to experience the kind of stress that threatens their sustainability 

as communities and the fiscal solvency of their municipalities. 

I believe we have to have a much more serious and thoughtful 

conversation about how we support these places and the millions 

of people who live there. Many of the regional banks, such as the 

Boston, Cleveland, and Chicago banks, have taken an interest in 

working to improve the fiscal health of these places within their jurisdiction. And so I would be interested in hearing your thoughts 

on how the Fed can help these places. 

Monetary policy is by nature a broad tool for economic growth. 

We must have a particular focus on creating more economic opportunity for those families and those communities that continue to 

struggle. 

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Thank you, Mr. Chairman, for your indulgence. 

Chairman HENSARLING. Today we welcome back to the committee for his second appearance Governor Powell, Chairman of the 

Board of Governors of the Federal Reserve System. Governor Powell has previously testified for this committee, so I believe he needs 

no further introduction. 

Without objection, the witness’ written statement will be made 

part of the record. 

Chairman Powell, you are now recognized for your testimony. 

Welcome. 

STATEMENT OF THE HON. JEROME H. POWELL 

Mr. POWELL. Thank you very much, and good morning, Chairman Hensarling, Ranking Member Waters, and other members of 

the committee here today. I am happy to present the Federal Reserve’s semiannual Monetary Policy Report to Congress. 

Let me start by saying that my colleagues and I strongly support 

the goals that Congress has set for us for monetary policy: Maximum employment and price stability. 

We also support clear and open communication about the policies 

we undertake to achieve these goals. We owe you and the general 

public clear explanations of what we are doing and why we are 

doing it. Monetary policy affects everyone and should be a mystery 

to no one. 

For the past 3 years we have been gradually returning interest 

rates and the Fed’s securities holdings to more normal levels as the 

economy strengthens. And we believe this is the best way we can 

help set conditions in which Americans who want a job can find 

one and in which inflation remains low and stable. 

I will review the current economic situation and outlook and then 

turn to monetary policy. 

Since I last testified here in February, the job market has continued to strengthen and inflation has moved up. In the most recent 

data, inflation was a little above 2 percent, the level that the Federal Open Market Committee thinks will best achieve our price stability and employment objectives over the longer run. The latest 

figure was boosted by a significant increase in gasoline and other 

energy prices. 

An average of 215,000 net new jobs were created each month this 

year in the first half of the year. That number is somewhat higher 

than the monthly average for 2017. It is also a good deal higher 

than the average number of people who enter the workforce each 

month on net. 

The unemployment rate edged down one-tenth of a percent over 

the first half of the year to 4.0 percent in June, which is near the 

lowest level of the past two decades. 

In addition, the share of the population that either has a job or 

has looked for one in the past month, what we call the labor force 

participation rate, has not changed much since late 2013, and this 

development is another sign of labor market strength. 

Part of what has kept that participation rate stable is that more 

working-age people have started looking for a job, which has helped 

make up for the large number of baby boomers who are retiring 

and leaving the workforce. 

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Another piece of good news is that the robust conditions in the 

labor market are being felt by many different groups. For example, 

the unemployment rates for African Americans and Hispanics have 

fallen sharply over the past few years and are now near their lowest levels since the Bureau of Labor Statistics began reporting data 

for these groups in 1972. 

Groups with higher unemployment rates have tended to benefit 

the most as the job market has strengthened. But jobless rates for 

these groups are still higher than those for Whites. And while 

three-quarters of Whites responded in a recent Federal Reserve 

survey that they were doing at least OK financially in 2017, only 

two-thirds of African Americans and Hispanics responded that way. 

Incoming data show that alongside the strong job market, the 

U.S. economy has grown at a solid pace so far this year. The value 

of goods and services produced in the economy, or GDP, rose at a 

modest annual rate of 2 percent in the first quarter after adjusting 

for inflation. However, the latest data suggested that economic 

growth in second quarter was considerably stronger than in the 

first. 

And this solid pace of growth so far this year is based on several 

factors. Robust job gains, rising after-tax incomes, and optimism 

among households have lifted consumer spending in recent months. 

Investment by businesses has continued to grow at a healthy rate. 

Good economic performance in other countries has supported U.S. 

exports and manufacturing. And while housing construction has 

not increased this year, it is up noticeably from where it stood a 

few years ago. 

I will turn now to inflation. After several years in which inflation 

ran below our 2 percent objective, the recent data are encouraging. 

The price index for personal consumption expenditures, or PCE inflation, as we call it, which is an overall measure of prices paid by 

consumers, increased 2.3 percent over the 12 months ending in 

May, and that number is up from 1.5 percent a year ago. 

Overall inflation increased partly because of higher oil prices, 

which caused a sharp rise in gasoline and other energy prices paid 

by consumers. 

Because energy prices move up and down a great deal, we also 

look at core inflation. Core inflation excludes energy and food 

prices and is generally a better indicator of future overall inflation. 

Core inflation was 2.0 percent for the 12 months ending in May, 

compared with 1.5 percent a year ago. We will continue to keep a 

close eye on inflation with a goal of keeping it near 2 percent. 

Looking ahead, my colleagues on the FOMC and I expect that 

with appropriate monetary policy the job market will remain strong 

and inflation will stay near 2 percent over the next several years. 

This judgment reflects several factors. First, interest rates and financial conditions more broadly remain favorable to growth. Second, our financial system is much stronger than before the crisis 

and is in a good position to meet the credit needs of households and 

businesses. Third, Federal tax and spending policies will likely continue to support the expansion. And fourth, the outlook for economic growth abroad remains solid, despite greater uncertainties 

in several parts of the world. 

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Now, what I have just described is what we see as the most likely path for the economy. Of course, economic outcomes that we actually experience often turn out to be a good deal stronger or weaker than those in our best forecast. For example, it is difficult to predict the ultimate outcome of current discussions over trade policy, 

as well as the size and timing of economic effects of the recent 

changes in fiscal policy. 

Overall, we see the risk of the economy unexpectedly weakening 

as roughly balanced with the possibility of the economy growing 

faster than we currently anticipate. 

Over the first half of 2018 the FOMC has continued to gradually 

reduce monetary policy accommodation. In other words, we have 

continued to dial back the extra boost that was needed to help the 

economy recover from the financial crisis and the recession. 

Specifically, we raised the target range for the Federal funds rate 

by 1/4 percentage point at both our March and June meetings, 

bringing the target today to its current range of 1–3/4 percent to 

2 percent. 

In addition, last October we started gradually reducing our holdings of Treasury and mortgage-backed securities, and that process 

has been running quite smoothly. Our policies reflect the strong 

performance of the economy and are intended to help make sure 

that continues. 

The payment of interest on balances held by banks in their accounts at the Federal Reserve has played a key role in carrying out 

these policies, as the current Monetary Policy Report explains in 

some detail. Payment of interest on these balances is our principal 

tool for keeping the Federal funds rate in the FOMC’s target range. 

This tool has made it possible for us to gradually return interest 

rates to a more normal level without disrupting financial markets 

and the economy. 

As I mentioned, after many years of running below target, our 

longer-run objective of 2 percent inflation has recently moved close 

to that level, and our challenge will be to keep it there. Many factors affect inflation. Some of them are temporary and others longer 

lasting. Inflation will at times be above 2 percent and at other 

times below. And we say that the 2 percent objective is symmetric 

because the FOMC would be concerned if inflation were running 

persistently above or below that 2 percent objective. 

The unemployment rate is low and expected to fall further. 

Americans who want jobs have a good chance of finding them. 

Moreover, wages are growing a little faster than they did a few 

years ago. 

That said, they are still not rising as fast as in the years before 

the crisis. One explanation could be that productivity growth has 

been low in recent years. On a brighter note, though, moderate 

wage growth also tells us that the job market is not causing high 

inflation. 

With a strong job market, inflation close to our objective, and the 

risks to the outlook roughly balanced, the FOMC believes that for 

now the best way forward is to keep gradually raising the Federal 

funds rate. We are aware that on the one hand raising interest 

rates too slowly may lead to high inflation or financial market excesses. On the other hand, if we raise rates too rapidly the economy 

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could weaken and inflation could persistently run below our objective. 

The committee will continue to weigh a wide range of relevant 

information when deciding what monetary policy will be appropriate. As always, our actions will depend on the economic outlook, 

which may change as we receive new data. 

For guideposts on appropriate policy, the FOMC routinely looks 

at monetary policy rules that recommend a level for the Federal 

funds rate based on the current rates of inflation and unemployment. The July Monetary Policy Report gives an update on monetary policy rules and their role in our policy discussions. I continue 

to find these rules helpful, although using them requires careful 

judgment. 

Thank you very much, and I will look forward to our conversation. 

[The prepared statement of Mr. Powell can be found on page 64 

of the appendix.] 

Chairman HENSARLING. Thank you, Chairman Powell. 

The Chair now yields to himself 5 minutes for questions. 

I don’t believe, Chairman Powell, there was a discussion about 

this on the Senate side yesterday. I didn’t hear much about it in 

your testimony. But I still seek greater specificity on the current 

goals for the wind-down of the balance sheet. 

It is my current understanding that it is the goal, with respect 

to the pace, that this wind-down will take about 3 to 4 years, that 

ultimately the size of the balance sheet, as of today, the target is 

2 to 2.5 trillion. And with respect to composition, primarily Treasury’s, but some MBS (mortgage-backed security). 

Is my understanding correct? Is that the current goal of the Fed? 

Mr. POWELL. So the plan is to return the balance sheet over time 

to a mainly Treasury balance sheet. I have provided estimates, others have provided estimates, of how long that with take. They are 

fairly uncertain. But my estimate has been 3 or 4 years. 

What will guide the time at which we will ultimately stop 

shrinking the balance sheet will really be a function—and the ultimate size of the balance sheet—will really be a function of the 

public’s demand for our liabilities. 

During quantitative easing that was really about assets. In the 

long run what matters is the public’s demand for currency, which 

has grown very strongly for the last few years, and also the public’s 

demand for reserves. And in an era where we require the banks to 

have lots of high quality liquid assets, reserves are the ultimate 

high quality liquidity asset. 

So I think we are going to be finding out how big that demand 

is for those two liabilities, and also some others. I think there are 

estimates. We don’t have a target range, for example. 

Chairman HENSARLING. OK. So you really don’t know. 

Mr. POWELL. That is right. 

Chairman HENSARLING. Obviously, we all acknowledge there will 

be a greater demand for reserves, but I still would anticipate that 

in the 2 to 2.5 trillion that might actually exceed demand. 

So I guess, Chairman Powell, my next question is, is it a goal of 

the Fed—so I understand you want to keep IOER (interest rate on 

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icy is determined. But do you see a day, is it the goal of the Federal 

Reserve to again have open market operations, the FOMC, primarily drive monetary policy? 

So I guess this is really the debate between the floor and the corridor. Currently we are using the floor. But is that the ultimate 

goal? Is this a permanent tool? Or will we see a future where IOER 

sets the floor, the FOMC sets the higher end, and let the market 

determine the interest rate in between that floor and ceiling? What 

is the goal of the Fed? 

Mr. POWELL. The committee has not made a decision on whether 

in the longer run will it go back to a corridor system or stay in 

what we have now, which is a floor system. 

Chairman HENSARLING. When might the Fed contemplate this? 

Mr. POWELL. We will be returning to that question, I would say 

fairly soon. It is something we have talked about periodically at 

various FOMC meetings. And my thinking is that we will return 

to that discussion in a serious way in the relatively near future. 

Chairman HENSARLING. Well, one thing I would have you consider, Chairman Powell, as the Board of Governors takes a look at 

this, is ultimately the potential risk to the Fed’s independence of 

having such an unconventional-size balance sheet. 

I would say regrettably, Congress raided a relatively small fund 

of the Federal Reserve to fund a transportation bill. I tried to fight 

that. I wasn’t successful. It has been raided twice. So I have joined 

in with my colleagues. 

We also know now that the Fed funds the Bureau of Consumer 

Financial Protection. Both of these have nothing to do with monetary policy. I could foresee a day with a large, large balance sheet 

out there, and with the potential of either municipalities of States 

on the brink of insolvency, having Congress decide the Fed needs 

to buy their bonds and prop them up. 

I can also see one day, an infrastructure bill coming down the 

pike, with no good way to pay for it, and there is a big pot of money 

that the Fed has, maybe the Fed should be directed to buy these 

bonds. And I think we are seeing some of this, frankly, across the 

pond when I look at the Swiss central bank or the ECB. 

So I am just curious, as you think about the size of your balance 

sheet, do you ever consider its impact on your independence? 

Mr. POWELL. We do think about those things. And we have said 

that the balance sheet will return to a size that is no larger than 

it needs to be for us to effect monetary policy in our chosen framework. 

Chairman HENSARLING. Well, I just assure you, Mr. Chairman, 

if there is a big pot of money out there, this Congress might find 

a way to get its hands on it. So you might consider that as you consider the size of your balance sheet. 

The time of the Chair has long since expired. The Chair now recognizes the Ranking Member. 

Ms. WATERS. Thank you, Mr. Chairman. 

Chair Powell, while I have heard you state repeatedly that it is 

too soon to tell whether the economic efforts of the recent implementation of tariffs will be either positive or negative, there are already serious indications that we are headed for trouble. 

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In the most recent June FOMC meeting minutes, several participants noted that their district business contacts had expressed concern about the adverse effects of tariffs and other proposed trade 

restrictions on future investment activity and that they were not 

planning any new investments to increase capacity. 

Mid Continent Nail, America’s largest nail manufacturer, based 

in Missouri, has already laid off 60 workers and expects to go out 

of business by Labor Day. Harley-Davidson, based in Wisconsin, is 

moving jobs overseas to Europe to avoid tariffs on its exports. 

Whirlpool, based in Michigan, has seen its share price drop over 

15 percent as a result of Trump’s tariffs on steel and aluminum. 

Washing machine and dryer prices have increased 20 percent in 

the past 3 months as a result, the steepest rise in the past 12 

years, according to the Department of Labor. 

These tariffs are affecting the price of everything from bicycles 

to washers to automobiles. In addition to these immediate effects, 

to your point, there may be delayed negative effect on the economy 

as well. While the U.S. is taking a protectionist stance toward 

trade policy, the rest of the world is moving forward on trade without us. 

What long-term economic effects can we expect to see if these 

tariffs continue to escalate to the point of a trade war? Do you expect the economic effects of a trade war to be felt more acutely in 

certain regions of the U.S.? And furthermore, is the Fed well suited 

to respond to a recession caused by a trade war? If not, what can 

be done? 

Mr. POWELL. I should start by quickly reminding all of us, including me, that we stay in our lane at the Fed, and when we talk 

about things like fiscal policy and trade policy that are not assigned to us, we try to stay at a high level, a principle level. 

But answering your question, if this process leads to a world of 

higher tariffs on a wide range of goods and services that are traded 

and those are sustained for a longer period of time—in other words, 

if it results in a more protectionist world, that will be bad for our 

economy. And it will be bad for other economies, too. It will be bad 

for the world economy. 

That is not what the Administration says they are trying to 

achieve. It isn’t up to us to criticize their policies in this activity. 

But the evidence is clear that countries that remain open to 

trade have higher productivity, they have higher incomes. Not 

every group is affected positively by trade. There are groups that 

are hurt by trade. And I think all countries have learned that they 

need to do a better job of addressing the needs of those populations, 

but not through trade barriers and tariffs of that kind. 

Ms. WATERS. While certainly the Fed does not have direct responsibility for trade and for tariffs, were you consulted at all when 

the tariff decisions were made? 

Mr. POWELL. No, we play no role in the Administration’s discussions on these. Like I imagine just about everyone here, we hear 

from our extensive network of business contacts a rising chorus of 

concern. 

As you pointed out, lots and lots of individual companies have 

been harmed by this. We don’t see it in the aggregate numbers yet 

because it is a $20 trillion economy and these things take time to 

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11 

show up. But we hear many, many stories of companies that are 

concerned and are now beginning to make investment decisions— 

or not make them—because of this. 

Ms. WATERS. Have you had any action at all in relationship to 

the Chamber of Commerce? Have they talked with you? Have they 

sought your opinion? Have you talked with them? What do you 

know about the Chamber of Commerce position on tariffs? 

Mr. POWELL. Well, I saw that they took a very strong public position against tariffs. We try to have good relations and strong relations with the Chamber. I haven’t personally discussed their position on trade, but I know what it is. 

Ms. WATERS. Do you know what specifically they were concerned 

about as it relates to tariffs in a particular part of country, agriculture, et cetera? 

Mr. POWELL. I shouldn’t speak for them, but I think it is really 

a general thing. The bottom line is a more protectionist economy 

is an economy that is less competitive, it is less productive. We 

know that. This is the torch we have been carrying around the 

world for 75 years. 

So it is not a good thing, if that is where this goes. We don’t 

know ultimately yet where this will lead. The Administration says 

they want lower tariffs, and that would be good for the economy, 

if we achieve that. 

Ms. WATERS. Well, thank you very much. 

And I yield back the balance of my time. 

Chairman HENSARLING. The gentlelady yields back. 

The Chair now recognizes the gentleman from Kentucky, Mr. 

Barr, Chair of the Monetary Policy and Trade Subcommittee. 

Mr. BARR. Thank you, Mr. Chairman. 

Chairman Powell, welcome back to the committee. 

Some economists argue that a flattening of the yield curve is an 

indication that an economy is headed for a recession. Obviously, 

with the strong data that we are seeing, we don’t see any indication of a recession in the near-term. 

But I asked you this question 6 months ago in your last report, 

and I asked you, given the flattening of the yield curve and the risk 

potentially that short-term rates might exceed long-term rates, 

whether there would be any plans within the normalization strategy to accelerate the roll-off of longer-term assets more quickly to 

counteract the flattening of the yield curve? I believe you indicated 

that there were no such plans 6 months ago. 

I just wanted to ask you, given the fact that that yield curve has 

flattened even further in the interim, since we last met, is there 

any discussion within the FOMC to alter or accelerate the balance 

sheet reduction program in contemplation of this flattening yield 

curve? 

Mr. POWELL. Thank you. 

No, there is not. We very carefully developed and socialized to 

the public the balance sheet reduction, balance sheet normalization 

plan. It is working smoothly. We are not thinking really about 

changing it, except in the conditions that we have identified, which 

would be a meaningful downturn. 

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12 

Mr. BARR. If that is the case, what are the Fed’s plans with respect to that flattening yield curve? And what risk does that pose 

to the economy? 

Mr. POWELL. Maybe let me tell you how I think about the yield 

curve. 

We know why the short end of the yield curve is moving up. It 

is because essentially out to 2 years or so really the market is pricing in its expectations of what the Fed will do, plus or minus 

maybe a little bit of a term premium when you get out to 2 years. 

So we know why the short end is moving up. 

The real question is, what is the story with long rates? So the 

long rate, like take the 10-year Treasury, you have to decompose 

that and ask what is in it. 

And I think the whole point of the yield curve conversation is 

that you can decompose that, and in that, whatever the long-term 

rate is, 2.85 percent this morning, 10-year—what is in there is a 

term premium. But there is also the market’s estimate of the longrun neutral rate. And so it is telling you something and we are listening. 

But it involves many other things. You have to do a decomposition to pull that out. And then that tells you what the stance of 

monetary policy is. So whether a policy is accommodative or whether it is restrictive. And that is the important question, not the 

shape of the yield curve. 

Mr. BARR. Chairman, would you agree that the oversized balance 

sheet is putting downward pressure on those long-term interest 

rates, continues to put downward pressure? 

Mr. POWELL. Yes, but to a diminishing degree. 

Mr. BARR. Let me switch gears to IOER. For decades now the 

Board of Governors has administered interest rates on reserves, 

not for the intended purpose of fairly compensating commercial 

banks for required deposits at Federal Reserve banks, but rather 

as a monetary policy rate. 

Given the fact that IOER is now your principal tool for interest 

rate setting, would it not be better if IOER was set by the FOMC, 

a much more diverse body that includes not only the Governors, 

but also the five voting district bank presidents, as opposed to just 

the Board of Governors? 

Mr. POWELL. I guess I would—I think of it this way. The FOMC 

sets the target range for the Federal funds rate. IOER is just a tool 

to make sure that the Federal funds rate trades in the range that 

has been set by the FOMC. So it is really just a tool to follow 

through on the much more important decision which is made by 

the FOMC. 

Mr. BARR. Well, thank you. This committee and the Congress is 

considering a proposal to transfer that responsibility of IOER to 

the FOMC, the larger, more diverse group, and we continue to engage you on that. 

Let me finally conclude with a question about trade. I agree with 

your assessment that free trade and low tariffs result in better economic performance as opposed to a trade war or high tariffs. 

How important is it for the Administration to quickly resolve its 

trade and tariff negotiations? And what are the risks of a protracted period of increasing tariffs? 

mcarroll on FSR431 with DISTILLER

13 

Mr. POWELL. Again, wanting not to be an adviser or in any way 

a participant in these discussions, which are really up to the Administration, uncertainty is one of those things where businesses— 

there was a lot of momentum in the economy earlier this year. I 

wouldn’t want to see uncertainty lead people to start putting off decisions, and that would be the risk of a long, protracted discussion. 

Mr. BARR. Thank you for your answers. 

I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from Wisconsin, Ms. 

Moore, Ranking Member the Monetary Policy and Trade Subcommittee. 

Ms. MOORE. Thank you so much Mr. Chairman. 

Again, welcome back, Mr. Chairman. 

You talk a lot about productivity, and indeed economists keep 

talking about an aging population, the boomers, and that is impacting productivity, and how lagging productivity is an ongoing drag 

on economic growth. 

I an wondering if you think that having a comprehensive immigration policy would help increase productivity? 

Mr. POWELL. Immigration is another one of those policies that is 

high up on the list of things that are not assigned to us, but I 

can—I can still—so I am going to try to stay in our lane. 

But I do think to the extent these issues connect to the health 

of the economy in the long run, then we have an obligation to 

speak to that. 

So you think about potential growth in the United States, you 

can really boil it down to how fast is the labor force growing and 

how much is output per hour growing. That is it, that is all you 

have. 

Ms. MOORE. Our CRS does anticipate that over the next decade 

or so it could increase our economy by a trillion dollars to get these 

people out of the shadows. 

You talk in your remarks about the lower unemployment rates 

for African Americans and Hispanics. That is something we are all 

celebrating. But I swear to you, I know a lot of African Americans, 

I am related to them, I don’t know many that don’t have two jobs 

in order to make it. I know some who have bachelor’s degrees, and 

yet they are forced to live with roommates because they can’t sustain themselves. 

So what we have found is that while there might be lower unemployment, wages have actually decreased, despite the tax cuts, 

which claimed that there were going to be $4,000 for everybody, we 

know we got these one-time-only bonuses. 

Wages have decreased and income equality has increased. And I 

am wondering what your projection is for flat or lowered wages despite increased unemployment. 

Mr. POWELL. We look at a wide range of wage and compensation 

indicators, and pretty consistently across the board, if you look 

back at where they were 5 years ago and look back where they are 

now, they have all moved up. They used to be right around 2 percent increase per year. Now they are around 3 percent. We think 

this is a good thing. 

Ms. MOORE. So African Americans, their wages are increasing? 

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14 

Mr. POWELL. Yes. I think it is pretty broad at this point in different— 

Ms. MOORE. And I would surely like to see these data, because 

other economists have said that it has actually decreased. All right. 

Thank you. 

I am wondering—I know you aren’t going to ask any questions 

about the tax cut, so I’ll let you off—I am wondering, though, about 

the big tax cut, I have to ask, the big tax cut that we just provided 

and it has increased income inequality. 

I am just wondering what your thoughts are and projections 

about how sustainable that is when 80 percent of these tax cuts 

have gone for shareholder type buybacks versus increase in wages 

or capital improvements. I am wondering what do you think going 

forward, what impact that will have on economic growth. 

Mr. POWELL. U.S. Fiscal policy has been on an unsustainable 

path for some time. It continues to be unsustainable. 

Ms. MOORE. Higher debt? 

Mr. POWELL. Yes. The debt is going up and I think it is growing 

faster than the economy. We need to get the economy growing faster than the debt, it comes down to that, and we are not doing that. 

It is something we should be working on now. We should all be 

working on that together. 

Ms. MOORE. Do you think that shareholder buybacks is a healthy 

indicator of healthy prospect for growth? 

Mr. POWELL. I think when a company decides to buy back stock, 

they are saying that we have more cash than we can put to work 

for our shareholders, that is the capital markets working. That 

money doesn’t go away, of course, it goes into people who then can 

spend it or— 

Ms. MOORE. This is more money for them to use to chase yield. 

Don’t you think that the chasing of yield creates bubbles and that 

is one of big problems that we had in 2008, is money chasing yield? 

Mr. POWELL. I think we certainly can find ourselves in a situation where we are seeing financial bubbles. We watch that very 

closely. Don’t see that now, but it is a key risk that we monitor 

very carefully. 

Ms. MOORE. And I thank you so much, sir. 

Mr. POWELL. Thank you. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Luetkemeyer, Chairman of our Financial Institutions Subcommittee. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

And welcome, Chairman Powell. 

Yesterday we had a hearing with our Financial Institutions Subcommittee, and I asked the question of Acting Comptroller of the 

Currency, Keith Noreika, about the implementation about S. 2155, 

and specifically whether or not the statutory language around the 

$250 billion threshold for SIFI (systemically important financial institution) designation was clear. Mr. Noreika said that the language and Congressional intent were pretty straightforward. 

And so my question to you is, would you agree with your former 

colleague that the language is pretty clear, no ambiguity there, 

mcarroll on FSR431 with DISTILLER

15 

that you know exactly what should be done with those banks under 

250 with regards to SIFI activity and testing? 

Mr. POWELL. I think that it is very clear and I think that the 

language gives us the authority that we need. 

Mr. LUETKEMEYER. OK. So now we know what we should be 

doing. How long would you anticipate it is going to take to implement the statute with regards to 2155? 

Mr. POWELL. So with regards to that particular provision, we are 

thinking already about exactly the framework we are going to publish for comment and receive public comment on that will allow us 

to identify systemic risk or risks to safety and soundness among 

banks below 250. 

Some of the aspects of 2155 were already out of door. We published a document on Friday of July Fourth week which talked 

about many things that we are doing. We have a big job to implement 2155 and we are going at it very hard. 

Mr. LUETKEMEYER. Thank you very much. And it is nice to know 

that—or it should be noted anyway—that those banks under 250 

are not significantly important financial institutions from the 

standpoint of endangering the economy. That is what a SIFI is supposed to be, a bank that would endanger—while they are nice size 

banks, they are not something that is going to endanger the economy and therefore they fall under a different regulatory regime. So 

we thank you for that. 

With regards to another issue I brought up yesterday, former 

Governor Dan Tarullo said in his farewell address that stress testing programs should be moved into the normal examination cycle. 

And I agree with that proposition and said while I don’t underestimate the importance of stress tests, those tests should be run by 

regulators. Banks are doing this right now on a regular basis with 

regulatory oversight. 

Would you agree with Governor Tarullo that we need to assimilate those exams, the stress testing things into the regular examination cycle, or do you want to retain those as a separate type of 

testing that the banks are going to be putting out information for 

and modeling? 

Mr. POWELL. I believe he was talking about the qualitative aspect, so we are looking to return the qualitative part of the test 

over time to the regular examination cycle. And we are looking for 

the right way and time to do that. 

Mr. LUETKEMEYER. Well, it seemed to me, just to throw ideas 

out, that it would seem to me if the Fed would have several different models and then they would go into the bank, take the information from it, throw it into those models, to see once if there is 

an area within the bank’s business model that is of concern, that 

could be pointed out by the various models and update those models on an annual basis or whatever it would take. 

It seems to me like now the stress testing is a game of ‘‘gotcha.’’ 

The models are not disclosed until the very last instance. And then 

are the models going to actually be useful? 

So I would hope that you would think along those lines, that you 

could assimilate it into part of the examination process, take the 

information and put it into several different models to see once if 

mcarroll on FSR431 with DISTILLER

16 

there is a weakness somewhere in the bank’s business model. Does 

that make sense? 

Mr. POWELL. Yes. We are working hard to make the quantitative 

side of the test and the qualitative side more transparent to the 

public generally and to the firms, and we think that is a key innovation. We have a proposal out on that. 

Mr. LUETKEMEYER. And one of the things also with regards to 

international banks, I have had some visits from our friends across 

the pond recently. And so while I am a staunch advocate for capital, I am also concerned about this notion that arbitrarily parking 

capital around the globe creates a safer financial system. 

The Fed started this trend with FBO rule, something I pointed 

out to Chair Yellen during her tenure. Now Europe is following suit 

with the immediate parent undertaking rule, which will hit the 

U.S. and ultimately U.K. banks. It seems as though we are finding 

ourselves in a global back and forth here with regards to capital. 

Would you agree with that? Or what are your comments? 

Mr. POWELL. I think we feel like our intermediate holding company regulation is working. It has settled down now and it is working. We have been consulted as Europe has looked at something 

similar to that. And I think the last time I checked we felt that 

our concerns were being reasonably well addressed. I will look 

back, though, to make sure that is right. 

Mr. LUETKEMEYER. One of the questions I got yesterday from a 

group of politicians from Europe, was with regards to equivalency. 

And I am not a big fan of that from the standpoint of with the 

equivalency rules and regulations, somebody wins and somebody 

loses. I am fearful that we are going to lose in that situation. So 

just to comment. 

Thank you very much for being here. 

I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Cleaver, Ranking Member of our Housing and Insurance Subcommittee. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

And thank you for being here, Mr. Chairman. 

Last week we were here having a conversation with Secretary 

Mnuchin, and when I raised issues, they related to the fact that 

I represent a rural part of the State of Missouri. 

I had a townhall meeting in Higginsville, Missouri, 2 weeks ago 

and brought in the Canadian consul general to talk with the farmers in my district. Standing room crowd. Nobody in there supported 

what was going on. 

Some of the farmers were questioning whether they should allow 

the beans to just stay in the fields this year, because, as you probably know, the price is continuing to fall since the tariffs were implemented. 

First of all, I am concerned about whether or not the harm could 

spread and do damage to the economy. I know you were asked a 

similar question earlier, but it stands to reason that if the soybean 

crop is damaged, as it apparently is, there has to be a rippling effect. 

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17 

And I am wondering, right now we are just talking mainly about some farm products from my State. I think China buys $60 billion 

a year in soybeans, just in soybeans, $60 billion from us, from the 

United States. 

If you just deal with the $60 billion, is there cause to be concerned about the damage that other parts of the economy could experience? 

Mr. POWELL. The answer would be yes. You are just beginning 

to see the retaliatory tariffs come into place, they are only just beginning. And so we hear a few reports here and there about this 

company and that company. The agricultural patch is clearly very 

seriously affected, but it is just beginning. So I think you want to 

be careful to walk on this path because it may not be so easy to 

get off it. 

Mr. CLEAVER. I have a large rural part of my district, and then 

I have the largest city in the State, Kansas City, in my district. So 

I have talked about my farm problem. When I was mayor of Kansas City, I was successful in bringing Harley-Davidson to Kansas 

City, they built a plant, went up to 1,000 employees. We made an 

investment as a city. Of course, we are now facing the possibility 

of an empty building. 

But the steel tariffs are going to also have a rippling effect. The 

SmootHawley Act is credited with making the Depression even 

worse. But I am just wondering if you are not going to answer this 

question, I understand it, so it is almost a statement, I have to say 

it. 

So I think when decisions like this are made they probably 

should be made with the Legislative Branch of the Government because the issues are too significant for one human being on the 

planet. I don’t care if it is a Democrat or Republican or a member 

of the Oakland Raiders. We are talking about the world economy 

being impacted and only one person has something to say. 

Frankly, Congress hasn’t spoken on issues like this since 1930. 

We have just been frozen out of the process on an issue that can 

impact the entire world. 

Thank you for listening to me. 

And I would also—just like to yield back, Mr. Chairman—I 

would also like to express appreciation that you speak English. 

When I was first elected to this committee a lot of people from the 

Fed didn’t speak English. 

Mr. POWELL. Thanks. 

Mr. CLEAVER. Thank you. 

Chairman HENSARLING. The Chair takes note that the Chairman 

of the Fed speaks English. 

The Chair now recognizes the gentleman from Michigan, Mr. 

Huizenga, Chairman of our Capital Markets Subcommittee. 

Mr. HUIZENGA. Thank you, Mr. Chairman. 

Chair Powell, good to see you again. 

And I think my friend from Missouri is very pleased for English 

versus economese or economistism or whatever you want to tag it 

with. But this clearly is some complicated stuff. 

I have a number of issues I want to hit on very briefly. And one 

of them is just a simple thing, something that we had talked about 

with the FEC, the FORM Act bill that I had proposed previously. 

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18 

We had a provision that we had put in there that each Federal Reserve Board Governor should be able to hire up to two senior staff 

members. And just wondering if you could maybe briefly comment 

on that or whether you have looked at that. 

Mr. POWELL. I think it is a good idea. Don’t need legislation on 

it. That is now the rule. 

Mr. HUIZENGA. All right. Well, good, we are making progress already. 

As Chair of the Monetary Policy and Trade Subcommittee, I had 

worked on monetary policy and the effects of that. Now as Chair 

of the Capital Markets Subcommittee, we still see a lot of that tiein in the world economy and the health of what is going on. 

I have real concerns about the Volcker rule situation. Last month 

the Fed, along with the other four Federal agencies, something that 

Mr. Quarles had called the five-headed hydra at one point. Had put 

some proposed rule changes in there. 

And my understanding is that the goal of the new rule is to simplify the regime and make it easier on the regulators, as well as 

the regulated institutions, to identify proprietary trading while allowing banks to continue providing important market-making activities. 

How do these reforms address the Volcker rule so that compliance can be streamlined, rules clarified, and markets actually made 

more efficient? 

Mr. POWELL. I think for the smaller institutions we will be 

streamlining quite a lot. 

Let me say, this rule is out for comment and we are very, very 

open to better ideas, how to do this better. But we want to stay 

faithful to Congress’ intent, which is, these institutions, particularly the largest ones, should not have big proprietary trading businesses, shouldn’t be doing proprietary trading as a business line. 

Mr. HUIZENGA. I look forward to continuing to explore how the 

Fed and FOMC will be properly tailoring the Volcker rule. However, I have been hearing some complaints from some companies 

that the proposed rule, as introduced, has a new concept of using 

accounting rules to identify prop trading, which were not included 

in the original Volcker rule. I have been told that this could actually result in more activities getting caught up in the Volcker regime than there are pulled in today. 

Can you please tell me how that result, to simplify the rule, appears to make it actually a little more cumbersome and complex? 

Again, my understanding is a new metrics regime could result in 

a roughly 50 percent increase in metrics reporting by the banks 

subject to the rule. 

Mr. POWELL. That is not the intent at all. And I assume we are 

going to see those comments through the comment process, and believe me, we will give them careful consideration. 

Mr. HUIZENGA. OK. And we are wide-ranging and far afield here 

on a number of issues. 

My next issue, on page 39 in your report you had your chart 

about the rules. You mentioned this on page 5 of your testimony. 

You gave an update on monetary rule. This is a quote from your 

July Monetary Policy Report, gives an update on monetary policy 

rules and their role in our policy discussions. 

mcarroll on FSR431 with DISTILLER

19 

I understand you have a series of rules that you reference as you 

are moving forward, including the Taylor rule, the adjusted, the 

Taylor rule as it is. 

What is the balanced approach rule? I am not familiar with that. 

The balanced approach rule would have called for the most negative interest rates during the downturn. Could you unpack that a 

little bit? 

Mr. POWELL. So each of the rules have an estimate of the neutral 

rate inflation, they have how far you are away from your inflation 

target and how far you are away from your unemployment target 

or your slack target. 

What the balance rule does is, it doubles the coefficient on the 

slack target. So in this case unemployment. So the weighting is 

doubled. That is all it is. 

Mr. HUIZENGA. And then real quickly, Chairman Barr had talked 

about the yield curve flattening. And I am wondering if there could 

be a circumstance when what might be good for the Federal Government, lower interest rates long term as we deal with our national debt load payments, frankly, might that not necessarily be 

beneficial for the overall economy? 

Mr. POWELL. We are concerned with carrying out the mandate 

you have given us, which is maximum employment, stable prices, 

financial stability. We are not concerned with fiscal. 

Mr. HUIZENGA. Do you have discretion as to whether to sell 

short-term versus long-term? 

Mr. POWELL. Sure. 

Mr. HUIZENGA. OK. And if you sell long— 

Mr. POWELL. So we are not selling anything. We don’t sell any 

assets. We let them mature. 

Mr. HUIZENGA. OK. I will have to follow up with some written 

on that, because I am curious, if you did sell those long terms could 

the long-term rate go up. 

Thank you, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Connecticut, Mr. 

Himes. 

Mr. HIMES. Thank you, Mr. Chairman. 

Chairman Powell, welcome. It is a pleasure for me to have this 

opportunity to chat with you. It is something I hope we can do on 

an ongoing basis in the future. 

I want to use my 5 minutes to ask you about two specific risks 

and for your elaboration thereon. The first one is related to financial stability and stability in the overall financial system. I watched 

carefully the conversation you had with Senators Warren and 

Brown about capital. 

I am actually interested in hearing you for a couple of minutes, 

because I do have two questions, elaborate on risks that we might 

not see coming, that aren’t conventional capital risks. 

So my concern of course is that we tend to get hit by the bullets 

that we don’t see, and while we are focused on Volcker rule or capital, what happens, what comes upon us out of nowhere. These 

things tend to come with a speed and severity that we don’t predict. 

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20 

So what keeps you up at night that is not conventional capital 

ratio type issues? Is it student loans? Is it proprietary trading? Is 

it ETFs? Elaborate for me, if you would, on things that concern you 

with respect to stability in the banking system in particular. 

Mr. POWELL. The clear answer to me from that would be cyber 

risk. We have spent 10 years building up capital, helping the banks 

be much more conscious of their risks, building up liquidity, stress 

testing all those things. And we have a really good playbook there. 

I think we carefully monitor all of the things that you mentioned, 

although some of them are worth talking about as well right now. 

But the thing that is really hard, is the idea of a successful cyber 

attack. And we work hard on having a plan for that. The Administration plays a leading role in that. That would be the big one. 

I think if you turn to traditional financial stability, we think that 

risks are at the normal/moderate level. You see some high asset 

prices. You don’t see high leverage among households or among 

banks. You do see a little bit of high leverage in nonfinancial 

corporates, and that is something we are watching very carefully. 

But again, nothing really is flashing red in our observation of it in 

the financial market. 

Mr. HIMES. Let me ask you to elaborate. You said there are some 

worth talking about, and then you highlighted asset prices. Which 

category of assets in particular were you? 

Mr. POWELL. Just generally, you have had 10 years, almost 10 

years of low interest rates and we are in the process of normalizing 

policy. Bond prices are high, equity prices—broadly speaking, commercial real estate prices are in the upper range, generally elevated. I wouldn’t use the bubble word here, but I would say that 

many financial asset prices are elevated above their normal ranges 

and we will have to see. 

Mr. HIMES. With respect to cybersecurity, which is where you 

started, what would you recommend to this body that we do as you 

do your reviews and whatnot, within the banking industry, what 

should Congress do to assist in the process of addressing 

cybersecurity risk? 

Mr. POWELL. I would say as much as possible, and then double 

it. 

So we do a great deal and it is about making sure the banks 

have basic plans in mind. A lot of it is just basic cyber hygiene and 

making sure that your systems, you are implementing the latest 

things that come out. 

So—and I think planning for failure too is very important. That 

is what we do. We do everything we can to prevent a failure, but 

then you have to ask yourselves, OK, what would we do if there 

were a successful cyber attack. You have to have a plan for that 

too. So those are the things we are working on. 

Mr. HIMES. OK. Let me ask you another category of risk that is 

maybe a little bit more sensitive. But like so many people, I scrutinize the words in this report—my words, not yours—very bullish 

on the economy. Careful on inflation. You note that inflation has 

moved up. Our challenge will be to keep it there. 

I am reflecting on where we have been in the last 10 years in 

that regard. We saw a pretty substantial fiscal stimulus in 2009. 

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21 

My friends on the other side of the aisle completely rejected 

Keynesian economics at the time and said that wasn’t going to 

work. They then had an epiphany and embraced Keynesian economics around a $2 trillion deficit-financed fiscal tax cut at a time 

in which the economy was growing robustly. It has been a long 

time since I studied economics, but stimulus in the face of a robust 

economy concerns me from the angle of inflation. 

You say that the 2 percent objective is symmetric in the sense 

of your concern. How would you divide the probability that we see 

upward trending inflation versus downward trending inflation 

going forward from this point? 

Mr. POWELL. I would say it is roughly balanced. I think maybe 

slightly more worried about lower inflation still. But I think, for a 

long time, inflation was below target and we were pushing it. We 

have now just about reached a symmetric 2 percent objective, so it 

is very close. And I think from this point forward the risks are 

roughly balanced. 

Mr. HIMES. Thank you. Thank you, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from North Carolina, 

Mr. McHenry, Vice Chair of the committee. 

Mr. MCHENRY. Well, Chair Powell, thank you for being here. I 

want to shift to cryptocurrency, which is a bit of your monetary 

policy hat, but also a bit of your regulatory hat. And I want to get 

your thinking along the lines of cryptocurrency. 

So the Bank of International Settlements just released a report 

saying that cryptocurrencies were, quote: ‘‘a poor substitute for the 

solid institutional backing of money.’’ 

You have stated publicly that cryptocurrencies are currently not 

big enough yet to matter, or something along those lines. I would 

submit the report by the Bank of International Settlements misses 

the mark of the potential of blockchain, the potential of crypto, 

more broadly, but there is a great deal of interest in your views 

and Central Bank’s views more broadly on cryptocurrency. 

So can you just outline to me your thinking on cryptocurrency? 

Mr. POWELL. Sure. So, first, I would say I think the question I 

was asked that you are referring to was, do cryptocurrencies currently present a serious financial stability threat. And my answer 

was they are not big enough to do that yet. 

Mr. MCHENRY. Sure. 

Mr. POWELL. That is really what I was saying, not that they are 

not a longer term thing. So they are very challenging because 

cryptocurrencies are great if you are trying to hide money or if you 

are trying to launder money. So we have to be very conscious of 

that. I think there are also significant investor risks. 

Investors, relatively unsophisticated investors, see the asset 

going up in price and they think, this is great, I will buy this. In 

fact, there is no promise behind that. It is not really a currency. 

It doesn’t really have any intrinsic value. So I think there are investor or consumer protection issues as well. 

Another thing I will say is that we are not looking at this, at the 

Fed, as something that we should be doing, that the Fed would do 

a digital currency. That is not something we are looking at. 

mcarroll on FSR431 with DISTILLER

22 

So mainly, I have concerns. If you think about what currencies 

do, they are supposed to be a means of payment and a store of 

value, basically. And cryptocurrencies, they are not really used 

very much in payment. Typically, people sell their cryptocurrencies 

and then pay in dollars. 

In terms of a store value, look at the volatility. And it is just not 

there. 

Mr. MCHENRY. Well, has there been discussion with other G7 

central banks along the lines of cryptocurrency? 

Mr. POWELL. It comes up a lot, yes. I am only just starting to 

go to G7 meetings, but it comes up quite a bit in international forums of various kinds. 

There is a broad concern that the public needs to be well informed about this, again, the money laundering and terrorist financing and all of that is a big risk. 

Mr. MCHENRY. It is a big risk, but is there any conclusion that 

you are hearing or is it just a broad concern? 

Mr. POWELL. Well, I think the BIS report and others have called 

out these risks and called on the appropriate regulatory bodies to 

address them. 

We don’t have jurisdiction over cryptocurrency. We have jurisdiction over banks. And so we know in their activities with 

cryptocurrency companies and cryptocurrency, we can address that. 

The SEC can address the investor protection aspects of it. 

Mr. MCHENRY. But you don’t see this as impairing your ability 

to act on monetary policy just given the current shape and scope 

of the size of the market? 

Mr. POWELL. Really not at all today. 

Mr. MCHENRY. OK. We currently have some level of framework 

around regulation of cryptocurrency. You have a money service license at the State level. In our 50 States, they all have some requirement. So there is a great look into that conversion, the movement of cash into cryptocurrency or out of cryptocurrency back into 

cash. We have some element of regulation of the CFTC and the 

SEC. So there is some broad framework of it, but not a concerted 

effort by the Federal Government to understand what is happening 

in cryptocurrency. 

Do you have any staff resources devoted to figuring out 

cryptocurrency or following cryptocurrency? 

Mr. POWELL. Yes. So we have looked at it carefully. I spoke about 

it. Other Governors have spoken about it, Reserve Bank presidents. 

Certainly, we have work going on. But, again, we just don’t have 

regulatory authority to deal with it, so I think that is the key 

thing, is to be looking at the places where there is that regulatory 

authority. 

Mr. MCHENRY. Thank you, Chairman. 

Chairman HENSARLING. The gentleman yields back. 

The Chair now recognizes the gentleman from California, Mr. 

Vargas. 

Mr. VARGAS. Thank you, Mr. Chair. 

First of all, I would like to thank you for one thing that is obvious, and that is that you haven’t gotten yourself in trouble. You 

have been a great public servant, and I really appreciate that. 

Mr. POWELL. Thank you. 

mcarroll on FSR431 with DISTILLER

23 

Mr. VARGAS. Unfortunately, you shouldn’t have to say that these 

days, but you really do, with what we have seen recently. 

I do want to ask a little more about cryptocurrency, however. 

You talked about terrorism and you also talked about hiding 

money. 

I had a bill here with a colleague of mine on the other side exactly on that point. And I would like you to go a little deeper on 

that. 

You said it is not an issue yet because it is not large enough, but 

it does seem to be growing. And you said you also have jurisdiction, 

you have jurisdiction over the banks. Should you have jurisdiction 

here, cryptocurrency? 

Mr. POWELL. That is a deep question. We are not seeking it. 

Mr. VARGAS. But should you? 

Mr. POWELL. I am not going to say yes today. We are not looking 

to—it is right in the middle of the SEC’s turf, the investor protection aspects of it. I think, Treasury and FinCen and other people 

have—I think it should be well regulated. I don’t really see us as 

probably the right group to do that. 

Mr. VARGAS. But it seems to me right now, that no one seems 

to have quite a hold on it either. It seems to be this amorphous 

blob that is moving around. You talk to the SEC and they, at the 

same time, kick the ball around also. 

Shouldn’t there be a more concerted effort to try to figure out 

who is in charge here of cryptocurrency? Because I think that there 

are lots of opportunities here for, not only terrorism, but also for 

drug trafficking, sexual exploitation, human trafficking. You said 

terrorism, but all sorts of bad actors can use this. And I don’t think 

that we have a good hold on it yet. 

Mr. POWELL. I think it is a good idea to focus on getting the regulation at the Federal level of this right. Again, we are not seeking 

that at the Fed. And I know Treasury has done some thinking on 

this. This would be an area where they would have the lead to 

identify the right regulatory structure. They may have already published something on this. I am not sure. 

Mr. VARGAS. In fact, part of the bill asks them to speed that up 

and to report back to us. 

I do want to ask you also about the issue of wage increases. You 

said that there has been some movement upwards, 2 percent, 3 

percent. I think you said 3 percent, so it is beating inflation. But 

the question was then specifically on people of color, African Americans and Latinos. You said you had some breakout numbers for 

those. 

Mr. POWELL. Not handy, I don’t. I can get those for you. 

Mr. VARGAS. OK. I would be interested in that, because I see the 

same situation in California where you have people that have been 

underemployed working very, very hard, two and three jobs, and 

they continue to say that they haven’t seen that wage increase yet. 

We have seen, for sure—I think you are correct about the unemployment go down, but we haven’t seen yet, certainly not in my district in any measurable way, the increases in wages. 

Mr. POWELL. Wages in general have been somewhat slow in moving up and as the labor market has tightened. We understand that 

really matters to people, people’s lives a lot. 

mcarroll on FSR431 with DISTILLER

24 

Mr. VARGAS. Yes. 

Mr. POWELL. And we do see the moving up in the aggregate, but 

I will be happy to supply. 

Mr. VARGAS. You said there was an issue of productivity, because 

maybe this time the reason the rates haven’t increased as much is 

because of productivity. Could you talk about that for a second? 

Mr. POWELL. Sure. So over a long period of time, wages really 

can’t forever go up faster than productivity. 

Productivity is slow, but there is a reason for that. And that is, 

after the financial crisis—there are many reasons for it—after the 

financial crisis, though, companies didn’t invest much because 

there was no need to or there wasn’t demand, the economy was 

weak. And so weak investment casts a shadow over productivity 

growth for a number of years. 

So we are still—investment has now popped up. Investment was 

strong in 2017. That continues in 2018. That is really important, 

and we are glad to see it, but it may take some time to show up 

in higher productivity. It is not because people aren’t working 

harder. It is because you need those information technology and 

other tools to be more productive. 

Mr. VARGAS. And again, with the last moments that I have, I just 

want to thank you again. The way you have comported yourself, 

the way you have been open to talking to people, the confidence 

that we have in you. I think the American people really need, at 

the moment, someone like yourself that we can look up to and say 

you are not involved in any scandal, you are not involved in any 

other thing out there that would lose confidence. It is just the opposite. And I want to appreciate that and thank you for that. 

Mr. POWELL. Thank you, sir. I will try to live up to that. 

Mr. VARGAS. I hope you do. 

Chairman HENSARLING. The gentleman yields back. 

The Chair now recognizes the gentleman from Wisconsin, Mr. 

Duffy, Chairman of our Housing and Insurance Subcommittee. 

Mr. DUFFY. Thank you, Mr. Chairman. 

And thank you, Mr. Powell. Some of my colleagues on the other 

side of the aisle have discussed harmful economic policies. Some in 

their opening statements, specifically. 

So if you look at the harmful economic policies that have taken 

hold over the last year and a half, so President Trump has worked 

hard to streamline and reduce regulation. We had a historic tax 

cut. We have tried to rebuild our military. We have pushed for 

American energy independence. 

When you take together all of, I would quote, ‘‘those harmful economic policies, what has that actually done for the African-American unemployment rate in America?’’ 

Mr. POWELL. As I mentioned, I think— 

Mr. DUFFY. Is it going up? 

Mr. POWELL. It is going down significantly. 

Mr. DUFFY. Say that one more time. What has happened to African-American unemployment? 

Mr. POWELL. It is come down quite a bit. 

Mr. DUFFY. It is come down quite a bit. 

How about the Hispanic unemployment rate? Has that gone up 

under these harmful economic policies? 

mcarroll on FSR431 with DISTILLER

25 

Mr. POWELL. It has come down quite a bit. 

Mr. DUFFY. It has come down quite a bit. 

So is it fair to say these policies actually aren’t harmful? They 

are actually growing the economy. They are putting people back to 

work. 

Is that a fair assessment, Mr. Powell? 

Mr. POWELL. It is fair to say that the unemployment rates are 

very low and a lot of things go into that. 

Mr. DUFFY. So you wouldn’t say today that it has anything to do 

with regulation or tax? 

Mr. POWELL. I am reluctant to get into the credit assignment 

game. It is really not up to us. I can report on the economy, but 

I do think that— 

Mr. DUFFY. But you report on the economy and you look at all 

the different factors that come into play in the economy. 

Mr. POWELL. Yes. 

Mr. DUFFY. So have these factors had anything to do with the 

growth that you have seen in this economy? 

Mr. POWELL. So I attribute declining unemployment to positive 

surveys among businesses, really they feel good about the business 

climate. 

Mr. DUFFY. Why do they feel better about their businesses, Mr. 

Chairman? Because they get to keep a little more of their money? 

Is that possible, maybe? 

How about if instead of having to navigate government rules and 

regulations, they actually get to focus on running their business. 

Could that attribute to the positive view they have on the economy 

and their businesses? 

Mr. POWELL. I think you have seen very positive business confidence surveys. 

Mr. DUFFY. So I will take it that you are not going to answer my 

question. I understand the position and what you said. 

I want to talk to you about trade. I am a free trader like you are. 

I think free trade is great for our economy. But I also think that 

if you don’t have fair trade, if you have deals with places like 

China where you have American companies that invest millions or 

billions of dollars in their technology and you do business with 

China and they steal it from you, and/or they subsidize their companies that come and do business in America where we have, for 

the most part, free trade ourselves, where we actually can’t—they 

have barriers to American-produced goods, how long does that relationship last where our economy is open and theirs is closed? Does 

that set us up for a long-term successful economy as it relates to 

China? 

Mr. POWELL. I strongly agree with you that trade needs to be fair 

as well as free. 

Mr. DUFFY. Is it fair now? 

Mr. POWELL. Well, I think—so if you look at the rules-based postwar system, it has consistently resulted in lower and lower trade 

barriers. 

Mr. DUFFY. No. Our relationship with China, is it a fair trade— 

do we have a fair trade relationship with China? 

mcarroll on FSR431 with DISTILLER

26 

Mr. POWELL. I think it is very clear that some countries, and 

China in particular, have less open trading systems than we would 

like. 

Mr. DUFFY. It is not fair. 

Mr. POWELL. And it is inappropriate for us to address that. 

Mr. DUFFY. And so do you think it is easier to deal with China 

15 years from now when their economy is that much larger and 

stronger or maybe their military is larger and stronger than it is 

today? 

Mr. POWELL. That is really a judgment for the people who have 

responsibility for trade. 

Mr. DUFFY. I would agree with that. 

I am going to quickly turn to the President’s America First policy. Do you agree with that? 

Mr. POWELL. Maybe you could be more specific. 

Mr. DUFFY. Do you think we should put American interest first? 

Do you think we should look out for the global interest or American 

interest? 

Mr. POWELL. We work under a statute that has us focused on 

maximum employment and stable prices here in America. 

Mr. DUFFY. Maximum employment for Americans, not for the 

globe. 

Mr. POWELL. Here in America. 

Mr. DUFFY. So we are looking out for Americans. 

Mr. POWELL. Of course, we live in a global economy where the 

global economy affects that. 

Mr. DUFFY. That is true. But we go to the global economy, but 

always how it affects our own— 

Mr. POWELL. Entirely domestic. Our goals are entirely domestic. 

Mr. DUFFY. Do you believe the U.S. insurance companies are well 

capitalized and solvent today? 

Mr. POWELL. Yes. 

Mr. DUFFY. Do you believe that our system of regulating American insurers has worked well over the last 150 years? 

Mr. POWELL. I can speak to the last decade or so, and I would 

say yes. 

Mr. DUFFY. Pretty good, huh? 

Mr. POWELL. Yes. 

Mr. DUFFY. So would you agree that we should not enter into 

any international agreement or standards that would undermine 

our U.S. insurance regulatory system, State-based model? 

Mr. POWELL. Yes, I would. 

Mr. DUFFY. Great. My time is up. I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from California, Mr. 

Sherman. 

Mr. SHERMAN. I commend the gentleman from Wisconsin and the 

Chair of the Fed for their comments about insurance. And I will 

probably disagree with many other things. 

Thank you once again for returning where you will be independent and accountable, tall and short, the Fed plays an interesting role. 

First as to cryptocurrencies. You and we should have the courage 

to ban them. As an investment, they are an investment with no inmcarroll on FSR431 with DISTILLER

27 

vestor protection, and they take the animal spirits, the willingness 

to invest, divert them from the real economy, and instead engage 

in what is basically gambling. Many jurisdictions support gambling 

only if there is local taxation, but cryptocurrencies don’t pay gambling taxes. 

As a medium of exchange, cryptocurrencies offer no advantages 

over regular currencies, unless you are a terrorist, a narcotics dealer, or a tax evader. There is no positive role for us for 

cryptocurrencies. 

A lot of discussion in here about who deserves credit for the good 

economy. Let me point out, since Dodd-Frank, 17 million jobs have 

been created; 15 million of them under Obama, 2 million under 

Trump. That is 15 million, 2 million. That’s the right ratio. 

Now, the Trump Administration claims credit for the last 3 

months of the Obama Presidency, but Obama was actually president until January 2017, but his policies remained in force all 

through 2017. Dodd-Frank, Janet Yellen’s balance sheet, and 

Obama tax policies were in force until the beginning of this year. 

And in fact, the Fed policies and the securities regulation remained 

pretty much unchanged since the Obama Administration. 

The chairman of this committee urges you to abandon all of the 

unconventional tools, while taking credit for the good economy that 

is in part a result of your unconventional tools. 

I would say keep your balance sheet as big as it was when we 

achieved the economic growth that is so good that Democrats and 

Republicans are fighting over who gets credit, and certainly do not 

cut your balance sheet until Chairman Hensarling tells you how he 

is going to increase taxes to replace the $80 billion of profit you 

gave us last year because you had a big balance sheet. 

The Chair talks about the inflation rate, the Chair of this committee. You ought to have a goal of 2–1/2 percent, not 2 percent. 

The law that we passed in 1978 draws a 3 percent objective or 

maximum for inflation and for unemployment. So unemployment is 

still too high and inflation is too low, and if we have a looser economic policy, maybe we will get somewhat higher inflation and the 

labor shortage necessary to increase wages. 

He puts forward the idea that somebody would save for their 

daughter’s college education by putting money aside in a mattress 

where its value would decline by 30 percent by the time his young 

girl got to college. 

I would say if you are smart enough to save for college education 

once your daughter is born, you are probably smart enough to invest the money in something that grows faster than inflation. 

As to trade, my party suffers from Trump derangement syndrome which is, whatever Trump does, we have to be the opposite. 

The fact is China launched this trade war against us in the year 

2000, right after two-thirds of Democrats voted against giving 

China most favored nation status. We were right then; we 

shouldn’t change now. 

There are those who say that trade deficits don’t have a harm. 

They lead to hollowed-out manufacturing, which leads to manufacturing towns where you have opioids, alcoholism, and votes for 

Donald Trump. Three terrible scourges that hit the Midwest. 

mcarroll on FSR431 with DISTILLER

28 

As to your testimony, Mr. Chairman, you say that wages are 

growing a little faster than they did a few years ago. That is nominal wages. Real wages, if anything, have stagnated over the last 

year, depending upon your measure of inflation. One more reason 

for a looser monetary policy, faster economic growth. 

And believe it or not, I have a question, that is, LIBOR was 

tainted by scandal. You have the alternative reference rates committee. Most of the LIBOR referenced debt is derivatives, but what 

really matters to people is mortgages. And what are you going to 

do to make sure that the new benchmark doesn’t increase mortgage 

bargaining costs or disrupt the mortgage market? That is the one 

question. 

Mr. POWELL. That is a great question. So you are right, many, 

many mortgages reference LIBOR. LIBOR is a rate that is under 

a lot of pressure. It may not be there in 3 or 4 years, so there is 

a big move to find a good backup. We have identified a backup, and 

it is not designed to represent an increase at all in people’s mortgage costs. Rather, it is designed to represent just a more sustainable rate that will always be there and less volatile and more predictable, more reliable. 

Mr. SHERMAN. And it will be as good for mortgages as it is for 

derivatives? 

Mr. POWELL. Yes. 

Mr. SHERMAN. Good. 

Mr. BARR. [presiding]. The gentleman’s time has expired. 

The Chair recognizes the gentlelady from Missouri, the Chair of 

the Oversight and Investigation Subcommittee, Mrs. Wagner. 

Mrs. WAGNER. Thank you. I thank the Chair. And welcome, 

Chairman Powell. 

In comments that you made shortly after being sworn in as 

Chairman of the Federal Reserve, you noted that you were committed to, and I quote: ‘‘explaining what we are doing and why we 

are doing it, and will continue to pursue ways to improve transparency both in monetary policy and in regulation.’’ 

Sir, how much value do you place on being as open and transparent as possible so that, not only Congress, but the American 

people understand the decisions the Fed is making, why they are 

making those decisions? I am just interested in what that kind of 

transparency and openness looks like. 

Mr. POWELL. I think it is our obligation to explain ourselves. 

What we do is very important, sometimes not well understood. And 

it is really on us to explain what we are doing with financial regulation and monetary policy. 

We have this precious grant of independence. We have to earn 

it by being accountable, and the way we do that is through lots and 

lots of transparency. I see myself as following in the footsteps of 

three prior chairmen who worked on this: Greenspan, Bernanke, 

and Yellen. 

Mrs. WAGNER. When you say transparency, what are we talking 

about in a specific fashion? 

Mr. POWELL. So we doubled the number of press conferences. 

Mrs. WAGNER. OK. 

Mr. POWELL. I will have a press conference after every FOMC 

meeting. That is, in monetary policy, that is a way for me to get 

mcarroll on FSR431 with DISTILLER

29 

out and talk about what the committee did at each meeting and 

communicate to the public in a comprehensible way. 

I have also focused very much on communicating in terms that 

people can understand generally, not just economists. There is a 

very small professional audience that understands what we do 

very, very well—economists on Wall Street. And I think the rest of 

the country needs to be let in on this too, and I am trying very 

hard to do that. 

Mrs. WAGNER. I absolutely agree, especially in this era where we 

have a savings crisis and people need to understand the movements that you make as Fed Chair, how it relates to monetary policy and how it affects them and how they invest for their future. 

So I absolutely applaud your efforts in terms of press conferences, but also trying to shape the vernacular so that everyday 

low- and middle-income investors and savers in this country can 

understand what your policy actually means to them personally. 

In 2012, the Fed dealt with a leak of confidential information relating to the deliberation of the Federal Open Market Committee, 

FOMC. Access to that information is valuable to markets and investors because the Fed does not make clear what it is likely to do 

in the future. 

The committee believes that a monetary policy rule would provide the public transparency into future monetary policy decisions 

and eliminate the value of leaks. 

Again, you have talked a lot about being transparent, and we 

have discussed it here previously, but you are the new boss. And 

what is going to change on the issue of securing some of that confidential information and transparency to prevent this going forward? And then also, when will the board improve its internal governance, so episodes like these don’t repeat themselves, sir? 

Mr. POWELL. We take the confidentiality of our deliberations 

very, very seriously as you, I am sure, know and would imagine. 

We remind every person who has access to FOMC information, including all the participants, but also all the staff every year have 

to review those rules, have to signify that they understand, have 

read them, and are bound by them. 

So we do all of the things we can humanly think of to make sure 

that people understand their obligations to confidentiality. And I 

think— 

Mrs. WAGNER. If I could interrupt, sir, as Chairman of the Oversight and Investigation Committee, we have looked into this specific leak. We have had difficulty receiving specific information 

about your internal governance and exactly how it is that we make 

sure these episodes don’t repeat themselves. 

I would like your brief comments on that, and also want to work 

with you to make sure that we are receiving the information in our 

role of oversight and investigation into these kinds of matters. 

Mr. POWELL. I will be happy to take that offline and talk to you 

about it. 

I don’t know what you are referring to about information you 

can’t get. Obviously, there is a lot of confidential information that 

we don’t release that we try to protect, but in terms of our procedures and the kinds of things that we do, I would think that is the 

kind of thing we— 

mcarroll on FSR431 with DISTILLER

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Mrs. WAGNER. Specific to improvements of internal governance, 

I believe, so— 

Mr. POWELL. OK. 

Mrs. WAGNER. I thank you. I look forward to following up with 

you. 

Mr. Chair, I yield back the remainder of my time. 

Mr. BARR. [presiding]. The gentlelady’s time has expired. 

The Chair now recognizes the gentleman from Georgia, Mr. 

Scott. 

Mr. SCOTT. Thank you, Mr. Chairman. 

Chairman Powell, welcome back again. And I want to thank you 

for spending some private time with me. We had a wonderful discussion and covered a lot of territory when you were here last. 

But I watched your testimony over in the Senate yesterday, and 

I want to clarify something with you. You talked about the regional 

banks, those banks that are between $100 billion and $200 billion 

in range. And you talked about Senate bill 2155, which I supported 

very strongly, and we got good support on, in terms of the banking 

regulations. 

But in Senate bill 2155, we gave you, the Fed, substantial authority through rulemaking to tailor regulations for these mid-sized 

banks, for these important regional banks. 

And I watched the testimony, and you reassured the Senators 

that the Fed wasn’t going to just flip the switch off on a bunch of 

the enhanced prudential standards, but instead would diligently 

work through a thoughtful and careful rulemaking. And I was very 

pleased to hear that. 

But I want to get some clarifying information from you. Because 

Georgia, as you may know, is the home of a couple of these very 

important regional banks: Regents Bank and SunTrust Bank. 

And the question is, do you envision the end product of this 

thoughtful and diligent rulemaking process to be a set of enhanced 

prudential regulations to the SIFI banks that is drastically different than those of the G-SIBs or the global banks? 

Mr. POWELL. I anticipate that we will begin by identifying and 

then putting out for comment a framework that we will use to assess financial stability and safety and soundness risks of those institutions from $250 billion down to $100 billion. And then we will 

take comment on that and then we will go ahead and move forward 

with a framework. 

And I anticipate that many of the factors that are used to identify the SIFIs will be used in this context as well. We are still 

working on exactly how to think about it. We have great flexibility 

under the law, which we appreciate, and we will be coming forward 

with something on this pretty quickly, I think. 

Mr. SCOTT. Do you see any problem areas that these mid-size 

banks or regional banks might have to be concerned about? Or do 

you see a clear field here? 

Mr. POWELL. Well, I guess I would just say we are going to go 

ahead and do what the law asks us to do. I don’t see why anyone 

should be concerned about that. 

Mr. SCOTT. Good. Wonderful. That is good to hear. Those banks, 

all our banks are very important. But we have so many different 

mcarroll on FSR431 with DISTILLER

31 

sizes, we have to make sure there is a level playing field for all of 

them. 

Now, let me ask you this question. One of your fellow Cabinet 

members was here, the Treasury Secretary. And we got into discussion on the trade situation. So I want to ask you a question that 

I asked him, and I am hoping I will get a different answer. 

And that is this: Are we or are we not in a trade war? 

Mr. POWELL. Let me say, of course, as an independent regulatory 

head, I am not a member of the Cabinet. And also, I am not at an 

independent agency that has any authority over trade, so— 

Mr. SCOTT. Yes, but the reason this is so important, you may not 

be a member of the Cabinet, but let’s face it, Chairman Powell, 

when you sneeze, Wall Street gets pneumonia. 

Mr. POWELL. It is better than the other way around. 

So on this, we do have responsibility for the economy, and to the 

extent we see— 

Mr. SCOTT. But my timing is coming up, I need an answer. Are 

we or are we not in a trade war? 

Mr. POWELL. It is just not for me to say. Sorry. 

Mr. SCOTT. Well, Mr. Powell, you are our anchor. You are, as the 

head of the Federal Reserve, the fulcrum of our economic system. 

And on top of that, I talked with you, and you are a very learned 

intelligent person, and you do have a very important opinion that 

the people of this Nation will want to hear from you. Are we are 

or are we not in a trade war? 

Mr. BARR. [presiding]. The gentleman’s time has expired. 

The Chair now will recognize the gentleman from Oklahoma, Mr. 

Lucas. 

Mr. LUCAS. Thank you, Mr. Chairman. 

Chairman Powell, you are my fourth Chairman of the Federal 

Reserve that I have had the opportunity to interact with as a member of this committee. And I have over time come to appreciate that 

the best use of my time perhaps is to focus on more specific issues 

since my friends are very broad sometimes in their inquiries of you. 

So I would like to ask you about the recent proposal the Fed released with other agencies regarding the Volcker rule. And while 

a great deal of attention has been paid to proprietary trading restrictions, I would like to focus on the manner in which banks have 

been restricted from making long-term investments in small businesses, startups, merging growth sectors as a result of the covered 

funds provisions. 

I can understand that the agencies want to ensure that banks 

cannot evade the trading restrictions of the Volcker rule through 

certain private funds, but I am concerned that the agency’s interpretation of the restrictions on investing in funds that facilitate 

capital formation has resulted in prohibitions on an activity that 

we want banks to engage in, such as making long-term investments in American companies to help them grow. 

These restrictions cut off as a source of capital where they are 

both needed and important to economic growth. And I will note 

that the venture capital groups also share my reservations, and 

Comptroller Otting testified last month that bank lending provided 

key funding to small businesses by investing in these funds. 

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32 

Do you have any plans to modify the scope of the restrictions on 

banks’ long-term investments in covered funds so that the banks 

are able to serve as an important source of capital to these funds? 

Mr. POWELL. We put out that proposal and we are very eager to 

hear comments on that. I think we are bound by what the statute 

says, but within that, we don’t see it as an activity that typically 

threatens safety and soundness. We would be willing to do whatever we can within the statutory language and intent to accommodate that activity. 

Mr. LUCAS. I am going to define that as a very positive answer. 

And in the respect for my colleagues, yield back the balance of my 

time, Mr. Chairman, while I am ahead. 

Mr. BARR. [presiding]. The gentleman yields back. 

The Chair now recognizes the gentleman from Texas, Mr. Green. 

Mr. GREEN. Thank you, Mr. Chairman. I thank the Ranking 

Member as well, and welcome the Chair back to the committee. 

I want to thank you for this effort that you are making to talk 

to Members of Congress. I think it is important for you to hear 

from us, and I appreciate greatly your outreach. Also appreciative 

that you have made some reference to African-American unemployment in your statement for the record. I think that is important as 

well. 

And like many, I salute the notion that African-American unemployment is low, comparatively speaking. But I still am concerned 

about the historic position that it continually occupies in that of 

being twice that of White unemployment, generally speaking. 

Sometimes a little bit less, sometimes a little bit more. And to this 

end, you and I will continue our interaction about this to see if 

there are some things we may be able to do collectively to have an 

impact. 

I want to move quickly to something related to the United State 

of Texas and tariffs. Texas is the 10th largest economy in the 

world. And based on GDP, it is, of course, our Nation’s top exporter. In Texas, we export 42 billion in goods to China, second 

only to Mexico. Half of the U.S. cotton exported to China comes 

from Texas. 

While you have not captioned it, you have not styled it as a trade 

war, I assume that you would say there is a dispute. And this trade 

dispute is having an impact on people in Texas. But I would like 

for you to give your thoughts on how it will impact middle class 

Americans, if you would. 

Mr. POWELL. Sure. So I think as it relates to China, it is appropriate to address the problems with China’s trading regime as well. 

That is a very appropriate thing for the U.S. to do, and we have 

been doing it for a long time and I think it is something to carry 

on. 

Again, we are not in charge of trade, but I think it is hard to 

know exactly where this process goes. If it goes to a place where 

we lower trade barriers elsewhere and U.S. trade barriers go down, 

then it might be worth paying a little bit of a short-term price to 

get to that better place. 

Lower trade barriers, lower tariffs help our economy over time. 

They make for a better, more productive economy, higher incomes. 

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33 

They don’t help every single group, and we need to do a better job 

of addressing the groups that are not helped by trade. 

I think if you go more broadly in a more protectionist direction 

over time, for a sustained period, that is bad for our economy. That 

will mean lower incomes and lower productivity and I just hope it 

doesn’t go in that direction. But I think it is hard to say where it 

goes from here. 

Mr. GREEN. Well, we do have Canada and European allies engaged in the dispute currently, so it is a little bit bigger than 

China. To what extent it will grow is, I suppose, to be seen. But 

given that it seems to be consuming other nations as well, how, 

again, will this impact middle class people, assuming that we continue along the path that we are going? 

Mr. POWELL. I think an open trading system worldwide with low 

barriers is good generally. It creates rising incomes for middle class 

people and all different kinds of people, generally. Not every group 

is helped, though, and we know that for factory workers who lost 

their job over the years. And I think we need to do a better job of 

addressing those issues. 

Mr. GREEN. So is it fair to say that persons who have been traditionally among those who are unemployed at a higher rate, that 

they will be impacted adversely to a greater extent? 

Mr. POWELL. I think that is probably right. I think the groups 

who are more at the margins of the labor force, at the lower end 

of the labor force in terms of compensation, things like that, who 

get hit the hardest in a downturn. So unemployment goes up the 

most for those people. And I think they tend to be the ones who 

are hardest hit by downturns, generally. 

Mr. GREEN. And for the record, I would simply add that it appears that African Americans would probably be a part of that 

group. And I thank you for nodding. 

I yield back the balance of my time. 

Mr. BARR. [presiding]. The gentleman’s time has expired. 

The Chair now recognizes Mr. Stivers, from Ohio. 

Mr. STIVERS. Thank you, Mr. Chairman. Thank you for being 

here, Mr. Chair. We appreciate your ability to be very accessible to 

all of us. I know you were in my office. You have been in a lot of 

our offices. I appreciate that. 

This hearing today is about the state of the economy and monetary policy. And if you could just give me some true or false’s here, 

we will give a quick summary to people. 

Is it true or false, economic growth is 3.1 percent, the best in 

over 20 years? 

Mr. POWELL. I didn’t know where you have 3.1 percent, but it 

was 2 percent in the first quarter. It is going to be way higher than 

that next quarter. 

Mr. STIVERS. This quarter that is projected to be 3.1 percent? Or 

around that? 

Mr. POWELL. It is going to be higher than that. 

Mr. STIVERS. OK. Higher than that. 

Mr. POWELL. Projected to be higher than that. 

Mr. STIVERS. All right. So good economic growth, true? 

Mr. POWELL. Yes. True. 

Mr. STIVERS. Low unemployment, below 4 percent? 

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34 

Mr. POWELL. It is at 4 percent today, projected to go lower. 

Mr. STIVERS. OK. Around 4 percent. 

Wage growth is increasing? 

Mr. POWELL. Has increased. 

Mr. STIVERS. Has increased. And we have stable prices? 

Mr. POWELL. We are close to our stable price mandate. 

Mr. STIVERS. Close to our stable prices. 

So as you think about the full employment mandate that you 

have, the Fed has historically used the unemployment rate. And 

over the last 10 years, what we have seen, although it is picked 

up a little bit lately, is a decline in the labor participation rate. 

Don’t you think that would be a better proxy for you to use when 

you compare the United States to the U.K. or Japan? Their labor 

participation rate is 5 to 7 points higher than ours among workingage people. 

Mr. POWELL. We say in our longer run statement of principles in 

monetary policy strategy that we actually look at a broad range of 

indicators to define maximum employment. And it is many, many 

measures of unemployment. It also includes labor force participation. 

I would strongly agree with you that is a very important area of 

focus for us and I believe for you as well. It is an area where the 

United States has fallen behind other advanced economies, and it 

is an area where we need to do better. 

Mr. STIVERS. I think we need to transition there. There are lot 

of people left behind. And whether they are looking for work or not, 

we need to figure out how to get them moving toward the American 

dream. And I appreciate you being willing to look at that. 

Quickly on the Volcker rule, I just want to speak for middle 

America. We have a lot of banks in my district, medium-size banks, 

little banks. They are precluded from investing in our economy. 

They can loan to our economy, but they can’t invest in our economy. The preponderance of the wealth that is invested in private 

equity and other things is on the coasts. 

If we were to—and I know it would require a statutory change— 

if we were to allow some of that investment to happen, but separately capitalize those funds at the banks so they can’t just come 

to the Fed funds window—that is the concern, I get it, and why the 

Volcker rule is there—it would really help middle America. 

I’m not asking to you comment on it, but I would love to work 

with you on that issue. 

Mr. POWELL. Great. We will do that. 

Mr. STIVERS. Quickly, a follow up from Mr. Himes on cyber policy. With regard to the thing that keeps you up at night the most, 

I think everybody you regulate inside the financial system has incentives that are aligned with behavior that works. Because the 

customer is limited to a $50 loss, the financial institutions have 

skin in the game. 

The problem is many other people in the cyber system, retailers 

and others, offload their financial risks while they have 

reputational risks to others, and it has become a jurisdictional fight 

between our committee and Energy and Commerce. I believe we 

need to change that. 

mcarroll on FSR431 with DISTILLER

35 

And I think the way to do it is to use cyber insurance the way 

we used workers’ compensation insurance in the 1900s to improve 

worker safety. If we gave safe harbors for certain coverages and 

made sure the payouts aligned the incentives, I think you would 

be able to price a system, but you would have a dynamic system 

instead of naming standards and having them being out of date the 

next day. So we look forward to working with you on that. 

I don’t expect you to comment on that either since I am just 

throwing it at you right now, but I think it is a different way that 

maybe can break through our jurisdictional problem inside Congress. But I agree with you, it is one of the biggest threats that 

we have right now. 

And quickly, one last thing, and this is a question that I do want 

you to address. Because there have been some comments on the 

committee about stock buybacks and how they don’t do anything. 

But, I think it is important that we note that when a company decides to buy back stock, that money doesn’t just disappear into the 

wallets of wealthy people; it goes to work inside the corporation. It 

is their way of saying this is a better way to put our money at 

work. 

But when you look at stock ownership, many people in the middle class have 401(k)s, and that money gets a better return for 

them as well as every other stockholder. 

So I guess the point is—and you have answered it a couple times, 

but just to be more clear, do you believe that stock buybacks can 

help the economy and the middle class, including 401(k) stockholders? 

Mr. POWELL. I see stock buybacks as a way for companies to allocate funds that they don’t need in their own business through the 

capital markets to those who do need them. 

Mr. BARR. [presiding]. The gentleman’s time has expired. 

Mr. STIVERS. Thank you. I yield back. 

Mr. BARR. [presiding]. Thank you. And just as an announcement, 

the chairman has requested a brief break at noon. So we will recognize the gentleman from Minnesota and then take a recess for a 

few minutes. 

And now we recognize the gentleman from Minnesota, Mr. 

Ellison. 

Mr. ELLISON. Thank you. 

Good morning, Mr. Chairman. How are you doing? 

Mr. POWELL. Great, thanks. How are you? 

Mr. ELLISON. So there has been a little bit of discussion about 

whether or not real wages have gone up or going down. But I am 

just looking at what was reported by the Bureau of Labor Statistics 

yesterday. They said that the median weekly earnings of the Nation’s 116 million full-time wage salaried workers rose 2 percent on 

the year, but inflation was up 2.7 percent over the same time period. That says to me that the median full-time wages have actually been falling in real terms for the past three quarters. 

Would you agree with my analysis? 

Mr. POWELL. Yes, as far as it goes. 

Mr. ELLISON. OK. So thank you. And I appreciate that, because 

that allows me to ask what I really want to know, which is why 

in such low unemployment do we have wages either stagnant or 

mcarroll on FSR431 with DISTILLER

36 

even declining a little bit over the last three quarters? And I will 

just give you a minute or two to try to give me some understanding—all of us. 

And it is not a setup question. It is a real question, because you 

would expect, with this level of low unemployment, we would see 

wages go up, but they are not. 

So what some of your observations as to why that is happening? 

Mr. POWELL. So if you look at a range of wages. Of course, there 

are four or five main ones, but there are many, many others, and 

they have differences. None of them is exactly right. And if you 

look at them, they have overall moved up from around 2 percent 

to pretty close to 3 percent now. That is good. We like to see— 

Mr. ELLISON. Nominally. 

Mr. POWELL. This is nominal. Yes, this is nominal. It is reported 

in nominal, not real. 

So that is a good thing. We like to see that moving up. I have 

said before, and I still think you would have expected, when unemployment moves from 10 percent to 4 percent, you might have expected a little bit more in the way of increases. 

On the other hand, inflation has been—employers are looking at 

this through the lens of how much are prices going up. And the answer has been, inflation has been low. And also, how much more 

output am I getting? In other words, people should earn inflation 

plus productivity. Both of those have been low, through no fault of 

any worker. 

Mr. ELLISON. Now, Mr. Chairman, I hate this process because it 

makes me interrupt you. 

Mr. POWELL. I am sorry. 

Mr. ELLISON. And I appreciate what you are sharing, so I didn’t 

want to do that, but I think it has something to do with anti-competitive practices that we see across various sectors. For example, 

many of us have a piece of legislation to ban something called nopoaching agreements. 

Do you know what a no-poaching agreement is? 

Mr. POWELL. I do, yes. 

Mr. ELLISON. Could you describe in about 30 seconds for the 

folks listening what a no-poaching agreement is? 

Mr. POWELL. So, for example, you work at a fast-food outlet. As 

a condition of getting that job, you have to promise not to take a 

job at another fast-food outlet. It is probably unenforceable, but a 

worker working at a fast-food outlet doesn’t have the means to go 

to court and might not know to go to court. So it is a way of restraining competition. And there is really nothing good to be said 

about it. 

Mr. ELLISON. Right. And to me, I think that Congress needs to 

be aggressive about this. Because if we are truly believing in freemarket economics, the free market is being strained by these anticompetitive practices. This ought to be a bipartisan thing where we 

are together saying that if—you cannot, Mr. Employer or Ms. Employer, have an agreement between yourselves that you will not 

hire each other’s employees if they go to you looking for a better 

wage or have a noncompete clause. 

mcarroll on FSR431 with DISTILLER

37 

Mr. POWELL. I think just shining a light on it helps. By the way, 

you may have seen some of the big fast-food companies announce 

they won’t do that anymore. 

Mr. ELLISON. Well, because some Democratic attorneys general 

went after them, and they said, OK, we won’t do it, because they 

know they are going to be held accountable. 

But deeper than that I think is the fact that we have highly concentrated markets these days. Can you talk about market concentration in this particular economy? 

It seems like every industry you look at has highly concentrated 

markets. Look, for example, Amazon, how they are a dominating 

online retailer. If you look at search engines, look at what Amazon 

is doing. It could even be beer or pizza or chicken or whatever it 

is. It seems like the other side of a monopoly is a monopsony, with 

limited number of buyers of labor, which makes it easier for them 

to simply hold wages down. 

I wonder what you think about that. 

Mr. POWELL. It is true that we do see measures of concentration 

going up, but I think that the tech companies that come out and 

invent a new business, they are a special case. And it is hard to 

know how to think about that in terms of the traditional antitrust 

in other ways. It is not something I feel like there are really clear 

answers on yet. 

Mr. ELLISON. Would you consider having the research department at the Fed talk about concentrated markets and the impact 

on wages and the fact that they are growing very slow in an unexpected way? 

Mr. POWELL. We will look into that. 

Mr. ELLISON. Thank you. 

Mr. BARR. [presiding]. The gentleman’s time has expired. 

And pursuant to the announcement just made, the committee 

stands in recess, subject to the call of the Chair. The Chair anticipates that we will reconvene in 10 minutes. 

[Whereupon, at 11:57 a.m., the committee was recessed, subject 

to the call of the Chair.] 

Mr. BARR. [presiding]. The committee will come to order. 

The Chair now recognizes the gentleman from California, the 

gentleman of the Foreign Affairs Committee, Mr. Royce, for 5 minutes. 

Mr. ROYCE. Thank you, Mr. Chairman. 

And let me ask this, Chairman Powell. Housing financial reform 

remains the great undone work of the financial crisis, and you have 

previously called for reform stating that we need to move to a system that attracts ample amounts of private capital to stand between housing sector credit risk and the taxpayers. 

A nationalized mortgage market is an unsustainable status quo, 

obviously, from a moral hazard perspective on this thing. And 

sadly, the situation we find ourselves in today was a predictable 

one. 

In 2003, I introduced legislation, and again in 2005, which would 

have reigned in the GSEs, allowing them to be regulated at that 

time for systemic risk. Then Fed Chairman Greenspan backed the 

amendment, but it was not enough to overcome the outsized political pressure brought by the GSEs themselves. 

mcarroll on FSR431 with DISTILLER

38 

To be fair, you said last summer that this was not a normal issue 

on which the Fed would comment, but that we were in a now or 

never moment for reform, as there is not a current risk with a 

healthy economy now in the housing system. How long with this 

now or never moment last? And what are the consequences of inaction on this? 

Mr. POWELL. I think now continues to be a good time to move 

forward on this. It is one of the big pieces of unfinished business 

from the crisis. It is unsustainable to have effectively the U.S. 

housing finance system on the government’s books for the long run 

and it’s not healthy. 

I don’t know how much long—we are going to need to address 

this. I assume we will at some point, and I would just say the sooner the better. 

Mr. ROYCE. Let me ask you another question on this front. 

Chairman Greenspan often commented on the role of the GSEs in 

our economy. In 2004, in testimony before the Senate, he said: Concerns about systemic risk are appropriately focused on large, highly 

leveraged financial institutions such as the GSEs. To fend off possible future systemic difficulties, which we assess as likely if the 

GSE expansion continues unabated, preventative actions are required sooner, rather than later. 

Those were his words in 2004; ominous words no doubt. 

Today, pressure is being brought on the Administration to release the GSEs out of conservatorship. Although I oppose this 

move, absent Congressional action, I am hopeful that if this were 

to occur, there is no doubt today that Fannie and Freddie, given 

their size and role in the housing market, would be regulated as 

systemically important. 

Do you share this view? 

Mr. POWELL. I—so the form in which this reform takes place will, 

of course, be up to you, not to us, and it is not in our lane. I would 

say I would really hope that these institutions would not be systemically important at some point. I would think when you figure 

out a process where they can be moved off the balance sheet, the 

idea would be that they would not present systemic risk, ideally. 

Mr. ROYCE. Let me move to another question, Chairman Powell. 

Earlier this year, this committee passed legislation that would reverse the previous SEC rule requiring that certain money market 

funds float the NAV. I certainly remember when the Federal Reserve fund broke the buck in 2008—I remember where I was when 

that occurred—and the massive backstop the U.S. taxpayers provided to restart the entire market as a result of this and other factors. 

The fact is that the value of the underlying assets of those products fluctuate. They go up and down. As I said in opposition to the 

bill at the time, if we learned anything from the financial crisis, it 

should be that the price should reflect risk. While understanding 

this is the primary jurisdiction of the SEC and Chairman Clayton 

has already expressed his concerns, I was hoping, as a member of 

the FSOC and as someone uniquely positioned to comment on 

macro financial stability, that you could comment on any concerns 

with this potential move. 

mcarroll on FSR431 with DISTILLER

39 

Mr. POWELL. I very much share your concerns. This was one of 

the many critical weaknesses identified in our financial system 

during the crisis. We worked hard to address it, I think successfully, to some extent. And I would not like to see that undone. 

Mr. ROYCE. Chairman Powell, I am out of time. Thank you very 

much. 

Mr. BARR. [presiding]. The gentleman’s time has expired. 

The Chair now recognizes the gentleman from Illinois, Mr. Foster. 

Mr. FOSTER. Thank you, Mr. Chairman. 

Chair Powell, the last time that you were here, I discussed with 

you a policy of countervailing currency purchases as a response 

when a country has been determined to be a currency manipulator. 

I believe that my staff has transferred to your staff the ideas from 

the Peterson Institute on the specifics of how countervailing currency intervention may be an appropriate response. But I am actually more concerned now about the currency manipulation than I 

have been. 

Obviously, President Trump has recklessly now begun a trade 

war with many of our trading partners, particularly with China. I 

think many of the countries that are on their currency manipulation watch list that gets reported every so often by Treasury have 

been either hit or threatened by tariffs. Some of these countries are 

going to run out of gas in terms of the products that they can impose retaliatory tariffs on, at which point I think it is quite likely 

that they will resume currency manipulation that they have done 

in the past. 

And China is probably top of my list on this, because they have— 

they will run out of gas fairly quickly. And the damage that has 

been done in the past by Chinese currency manipulation is enormous and one that many of my constituents have felt in their businesses. 

And so I think it is more pressing than now that we actually 

have a response in place, ready to go, if and when any one of those 

countries, in particular China, resumes currency manipulation. 

Countervailing currency manipulation is something that can be 

done. I think it is an appropriate response and it can be done. 

And so I was wondering, has Treasury contacted you in any way 

with our suggestions that we have given to them on getting—having this take place? Because, obviously, a significant response 

would be a joint project between Treasury and the Federal Reserve. 

Mr. POWELL. The currency issues are entirely up to Treasury. I 

don’t know whether they have technically consulted with us about 

it or not. It is the first time hearing about it. 

Mr. FOSTER. OK. Well, anyway, so I encourage you to look into 

this. If you find that there is any legislative impediments to that, 

I believe the suggestion from the Peterson Institute is that if this 

goes forward, it would be a joint effort where the currency purchases would be jointly done by Treasury and the Fed. 

Mr. POWELL. We would just be implementing their decisions, 

though. We wouldn’t be making those decisions. 

Mr. FOSTER. Correct. But it is something that I hope that we are 

prepared for, because the risk of anything of a resumption of sigmcarroll on FSR431 with DISTILLER

40 

nificant currency manipulation has certainly gone up because of 

the Republican tariffs. And so I just want to flag that for you. 

Second, there has been some discussion in the previous testimony about wage growth and so on, and this plot that’s up here. 

Did you see the article in The Wall Street Journal a couple of days 

ago about how inflation is eating up workers’ wage increases? Yes. 

And this is essentially the plot from that showing that while workers wages were out—during the Obama era, workers wages were 

modestly outstripping inflation; that is no longer true in the Trump 

era that things like the massive tax cut for the wealthy and the 

deficit spending have driven inflation more than they have driven 

wages. As a result, for wage earners, the situation has not improved. That is in great contrast to the situation for CEOs and so 

on who have seen their compensation go up way faster than inflation. 

And so there was an announcement by the Federal Reserve, I 

guess a month or so ago, that the historic milestone of household 

net worth exceeding $100 trillion, which I think it was a very interesting milestone in the recovery itself from, I believe, around $55- 

or $60 trillion during the deficit of the crisis. And so it is a real 

milestone, but that is an aggregate number. 

And so one of the things we are seeing more and more is a divergence between average numbers when you average in the results 

of the very wealthy with numbers like this, which is the wages for 

wage earners where the situation is very different. What I would 

like to urge you to do is when you report, for example, household 

net worth, to report it not only as an aggregate but as quintiles or 

top 1 percent, top 10 percent, and to report this on a quarterly 

basis the same way you report the aggregate number. I think it 

would really illuminate a lot of where our economy is going. And 

I would like to see that in the next report and future reports, if 

that is possible. 

Mr. POWELL. I will look into that. 

Mr. FOSTER. All right. Well, thanks much. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from New Mexico, Mr. 

Pearce, Chairman of our Terrorism and Illicit Finance Subcommittee. 

Mr. PEARCE. Thank you, Mr. Chairman. 

Mr. Chairman, I appreciate you being here today and your leadership on the economic front for the country. So you had given testimony yesterday or whenever to the Senate about the effect of 

opioids and the labor force participation rate. Can you walk 

through that briefly for me? 

Mr. POWELL. Yes. Well, labor force participation by prime age 

males has been declining for 60 years. It has been declining for females for maybe the last 15, 20 years in the United States. We 

stand out compared to other countries. So many things that happened in the economy are global. This is really something that we 

have. 

A significant number of those in their prime working years who 

are not in the labor force, close to half I think in that one estimate 

was 44 percent, are taking painkillers of some kind, which is the 

opioid crisis to some extent. So there are many, many people who 

mcarroll on FSR431 with DISTILLER

41 

are out there in their prime working years, not in the labor force. 

We would all be better off if they were in the labor force, including 

them. And part of the reason they are not is the drug issue. 

Mr. PEARCE. The problem is especially egregious in much of New 

Mexico, and so we passed a series of bills here that are directed 

at beginning to stem that problem. Have you looked much at the 

legislation that we have passed through the House, anything that 

stands out as being especially effective in your ideas or the ideas 

of the committee? 

Mr. POWELL. I haven’t looked at it carefully. I did see that, but 

I will be happy to go back and look. 

Mr. PEARCE. OK, yes. Now, for New Mexico, we have a little bit 

of an aging population and we also have a lower income population. 

That all argues for less complexity in the investments. And so, 

typically, they would like safe investments, but then the interest 

rate is always at such a low rate that it is driving unsophisticated 

investors into sophisticated items seeking rates of return. 

Any ideas how it can help out our seniors who typically fall into 

that category? I am thinking about my mom. The last few years of 

her life, she just wanted not to lose money and just to have it safe. 

And yet we are seeing a lot of seniors chasing rates of return and 

getting into very unsafe things, then they lose their nest egg. So 

how is the Reserve looking at that? 

Mr. POWELL. We are not responsible for investor protection, but 

we are responsible— 

Mr. PEARCE. No, it is the rate of return. It is the rate of return 

on simple investments. The rate of return on passbook savings or 

money markets, that is the question. 

Mr. POWELL. Right. We have kept rates low for a long time, and 

we think that has had a very positive effect on the economy. It has 

boosted employment, it has boosted activity. I think it has definitely been tough for seniors who are really relying on their passbook savings, for example, for interest. But overall for the economy, 

it has been a good thing. Rates are going up now, to reflect the 

strength of the economy. So that should be helping some. 

Mr. PEARCE. Yes. As we talk about the labor force participation 

rates, we are also noting a lot of skilled atrophy. People who have 

been on different public assistance programs for some time actually 

don’t have much skills. 

So as the President talks, he talks about the apprenticeship programs. Have you all taken a close look at how the apprenticeship 

programs could be directed at the people who have been out of the 

labor force, not the people in the high schools, but the people who 

have been on the sidelines for some time? Are there any studies 

available to us on the effectiveness of those programs? 

Mr. POWELL. Yes. We have an excellent group of labor economists, and that has been a particular focus. So we would be delighted to supply that to you, discuss it with you or your staff. We 

would be happy to work with you on that. 

Mr. PEARCE. The energy economy that you reference in your report a couple of times is one that is playing out in the southeast 

part of New Mexico. Some of the largest finds in most productive 

wells being drilled are occurring right there. The pipeline capacity 

is becoming a chokepoint and then also the refining capabilities. So 

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42 

we are suggesting building a refinery in New Mexico and asking 

for White House help to get the permits done. All of that would 

help us to become energy self-sufficient. 

Thank you, Mr. Chairman. I yield back. 

Chairman HENSARLING. The time of the gentleman is expired. 

The Chair now recognizes the gentlelady from Ohio, Mrs. Beatty. 

Mrs. BEATTY. Thank you, Mr. Chairman, and thank you, Ranking Member. 

And thank you, Chairman Powell. Good to see you again. I just 

have a couple of quick questions I am going to try to get through. 

Mr. Chairman, I brought the Federal Reserve supervision and examination of the insurance savings and loan holding companies up 

previously with Federal Reserve Governor Quarles. And my staff 

brought this topic up with the Fed staff on several occasions. 

Since the economic crisis, the number of insurance and saving 

and loan holding companies has dwindled from some 30 to just 11, 

according to the Fed’s 2017 annual report. I have two of these insurance companies in my district which employ thousands of people. And one of them just announced that they are closing their depository institution. 

While I understand that there are several business reasons for 

an insurance savings and loan holding company to close their own 

depository institution, there is little doubt that one of the factors 

why they are closing them down is due to the burdensome and inefficient supervisory regime by the Federal Reserve. I have worked 

with my colleague on the other side of the aisle, Mr. Rothfus, to 

introduce legislation that would force the Federal Reserve to tailor 

their bank centric regulations to those to insurance companies, 

which are wholly different from banks. While I think there should 

be some cost of admission for an insurance company to own a depository institution, I don’t think that cost should be so high that 

it makes no financial sense to own one, which is where I think that 

we are headed. 

Do you think that this problem that these insurance companies 

are closing their banks, that this is part of the reason, or is it the 

Federal Reserve’s desire for no insurance companies to own a depository institution? 

Mr. POWELL. It is certainly not our desire to drive anybody out 

of owning a bank who can legally own a bank. I think in the case 

of depository institutions that are owned by insurance companies, 

our interest is in the safety and soundness of that depository institution. So we work very carefully not to duplicate the insurance 

regulatory work that the State insurance supervisors capably do, 

but we have a role to play as the holding company supervisor as 

it relates to the depository institution. And that is what we care 

about. That is really all we care about. 

I think my recollection—these companies are getting out of owning depository institutions mostly for business reasons as opposed 

to for regulatory reasons. In any case, we are committed to doing 

that as efficiently as we can and— 

Mrs. BEATTY. Are you familiar with our legislation? 

Mr. POWELL. Yes, I am. 

Mrs. BEATTY. Is it something that will be helpful, or do you have 

an opinion? 

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Mr. POWELL. We have raised concerns. The concern that we 

raised is that we would be effectively out of the business of supervision at the holding company. We would promulgate standards, 

but they would supervised by the insurance supervisor. And the insurance supervisors, they do a fine job of supervising insurance, 

but they are not prudential regulators of banks. And we think if 

you are going to own a bank, you should be subject to regulations 

by a prudential regulator of banks, which would be us in this case. 

Mrs. BEATTY. But you would be at least willing to see if we could 

tweak it or work together? 

Mr. POWELL. Absolutely, absolutely. 

Mrs. BEATTY. OK, thank you. On another good note, let me also 

say thank you for being very responsive to our letters to you from 

the Congressional Black Caucus and from you on diversity. I really 

appreciate that. 

As you will probably recall, we have had several conversations 

about the Beatty rule that is patterned after the Rooney rule. If 

you are looking for minorities and, more specifically, African Americans to serve on the Federal Reserve, then you have to put them 

on the list. You have to include them in the room. 

So while we weren’t necessarily overjoyed with the last appointment, I am pleased that Mr. Bostic is there, and just hoping as 

more openings come, that you will keep that in the back of your 

mind. 

Last, I have an odd question. I was on my way back to Washington, I stopped in a restaurant, and a gentleman came up to me 

and chased me down, and said, I know that Mr. Powell’s going to 

be coming before your committee, would you ask him this question. 

We are going to paraphrase it because my team wasn’t quite sure 

what he was asking and he stated it more as a fact. But I think 

what the constituent was asking me, and he stated it more as a 

fact than a question, but he essentially wanted me to ask you 

whether or not you believe the Federal Reserve’s monetary policies 

exacerbates the wealth inequality in our country. 

I think for some reason he felt that organizations who receive the 

interest payments on our national debt is destroying the middle 

class. 

Mr. POWELL. No, we don’t think monetary policy is exacerbating 

inequality. We think, in fact, it is helping those who didn’t have 

jobs get jobs. So those are the people who need those jobs. 

Mrs. BEATTY. Thank you very much. And I yield. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from Florida, Mr. Ross. 

Mr. ROSS. Thank you, Chairman. 

Chairman Powell, thank you for being here. Your predecessor, for 

whom I have a great deal of respect, I know struggled for some 

time with regard to the impact of the quantitative easing, the low 

interest rates, the high unemployment. And I see that, based on 

your report today, the outlook is much brighter and doing much 

better. 

I echo the concerns of my colleague, Mr. Pearce, because I have 

a great deal of retirees in my community and they want to start 

seeing some return on their investment, of course, instead of having to keep dipping into the principle of their savings. 

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44 

Chairman Powell, it has been more than 9 months since the Federal Reserve had its first official Vice Chair for supervision sworn 

in. Prior to Vice Chair Quarles taking office, the responsibilities of 

his position were unofficially shared between former Fed officials 

to such an extent that it was never really sure who was in charge 

of regulatory affairs at the Federal Reserve. As a consequence, it 

felt to many of us in Congress that the divide between the Federal 

Reserve’s regulatory responsibilities and those related to monetary 

policy wasn’t as explicit as it should have been. Further, there 

seemed to be a high risk that Federal Reserve regulations were not 

being given the necessary oversight and evaluations. There were 

more and more regulations coming out. 

And now with the position filled by Vice Chair Quarles, I would 

like to hear if things have changed at the Federal Reserve. Do you 

find that having a Vice Chair for supervision has allowed you to 

focus more on monetary policy the side of the Federal Reserve’s 

work? In other words, does it help prevent inappropriate overlap of 

the Fed’s roles now that you have distinguished supervisory roles 

in the Fed? 

Mr. POWELL. Let me say it is great to have Vice Chair Quarles 

in his role. And I know he was confirmed yesterday into his underlying Governor term. He is terrific. I worked with him 25 years 

ago, so he has been great. 

We think of the roles as pretty complimentary actually. We think 

that, essentially, the financial system, more broadly, and the banking system is the transmission channel for monetary policy. So we 

think we learned a lot about what is going on in the economy and 

also about how monetary policy is getting out into the economy by 

virtue of the fact that we are in supervision. 

We do have a separate division that takes care of all that, and 

Vice Chair Quarles as the Vice Chair has particular authorities 

under the statute to recommend policies to the Board. I hope I am 

getting to your question. 

Mr. ROSS. Yes. But as I mentioned, I think the past 10 years, as 

a result of financial crisis, we have seen new regulatory schemes 

being imposed. And it seems to me that now would be an appropriate time for the regulators to take a step back and conduct a holistic review of the impact of these regulations. And I believe that 

having Vice Chairman of supervision renders this holistic view 

more appropriate at this time. 

Do you think now would be a good time for such a review? 

Mr. POWELL. It is a good time. In fact, we are doing that. We are 

committed to sustaining the important post-crisis regulatory reforms, higher capital, higher liquidity, stress testing, resolution. 

We are also committed to looking at everything that we have done 

in the last 10 years and making sure that it is right sized and effective. 

Mr. ROSS. Has your review revealed any duplicative or burdensome regulations that could probably be done away with at this 

point? 

Mr. POWELL. Yes. I think we are finding quite a lot to do, mainly 

as it relates to smaller and medium-sized institutions, which I 

think there is quite a lot of good work that we can do on that front. 

mcarroll on FSR431 with DISTILLER

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Mr. ROSS. And also part of your report you note that residential 

investment has leveled off for the first 5 months this year. And 

that is a little disappointing to me, because I think that is a leading indicator force in terms of residential investment. 

When I go home to central Florida, I can see skyrocketing demand for homes, but for some reason developers just can’t keep up. 

One of the things that you have talked about, and I think that Mr. 

Pearce talked about also, is the, quote, ‘‘tight supply of skilled 

labor.’’ 

Can you expand on that? How long have we been approaching 

this tight supply of skilled labor? 

My concern is this, is that we have a great tailwind behind us 

right now. We have a 4 percent GDP. We have lower unemployment than we have had in a long time. We have more capital than 

we have seen before, but yet if we are not going to have the economic recovery because we don’t have a labor market, what is in 

store for us? And how can we best address this labor market shortage that is facing us? 

Mr. POWELL. It is a real challenge. Plumbers, carpenters, electricians in short supply. A lot of people left the industry after the 

crash. Now there is a need. And also, it is very hard to get lots. 

It is difficult. The zoning and everything is quite difficult. 

Mr. ROSS. The training programs? 

Mr. POWELL. They are also facing high materials prices. 

Mr. ROSS. Which is a component of it too. But even if we—we 

have to have the labor is what I am getting at. And even if we have 

to import the labor, we need the skilled labor. 

Mr. POWELL. I think you are right. There is a good question 

about how the economy will absorb all of this momentum, and I 

think the tools to expand the labor force are really not ours, they 

are really yours. 

Mr. ROSS. I agree. Thank you. I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from North Carolina, 

Mr. Pittenger. 

Mr. PITTENGER. Thank you, Mr. Chairman. 

And thank you, Chairman Powell, for being with us. I really 

want to commend you for taking the initiative to provide time to 

be with members and allow those discussions to occur. I think it 

is very helpful for us. 

Mr. Chairman, as I understand, it is your directive to promote 

stable prices. Some of your policy committee members have expressed interest in replacing the current inflation target with different target measures that would provide even greater variability. 

Given that, would you help me just better understand the difference between price stability and stable prices? 

Mr. POWELL. I think they mean the same thing. I wouldn’t say 

there is a big difference there. 

Mr. PITTENGER. Good. Well, thank you. That clarification helps. 

In this year’s monetary policy report, you state that the labor 

force participation rate has been in decline for decades. And has 

seen a recent increase among prime age individuals. Despite the 

factors that continue to cause the decline persisting, you have said 

mcarroll on FSR431 with DISTILLER

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that the continuation of increases seen over the past few years is 

possible if favorable labor market conditions continue as well. 

Have you seen these favorable labor markets, at least more recently, remain or even show increases since the passing of the Tax 

Cuts and Jobs Act? 

Mr. POWELL. We do see the labor market continuing to strengthen. And as you point out, labor-first participation by prime age 

males and females has kicked up in the last couple of years. That 

is a great thing to see. We really hope those gains are sustained 

against a longer run trend of decline. But we hope that this is a 

great chance for people to get back in the labor market and we 

hope stay there. 

Mr. PITTENGER. Would you draw any correlationship between the 

Tax Cut and Jobs Act bill and that dimension? 

Mr. POWELL. I think that there are a variety of things contributing to this. Certainly, the business tax cuts are helping support 

activity, and the individual tax cuts too. 

Mr. PITTENGER. How has the Tax Cuts and Jobs Act affected 

your current monetary policy? 

Mr. POWELL. It is hard to single out an effect. We really look at 

many, many different things. The economy’s strong and we are on 

a path of gradually raising rates, and I think that reflects all of the 

things that are going on, including the changes in fiscal policy. 

Mr. PITTENGER. Yes, sir. With the new tariffs coming from both 

at home and abroad, some businesses are shying away from both 

capital and labor force investments. The report States that exports 

had increased in the second quarter, led by agricultural exports. Do 

you see this changing, especially in light of the retaliatory tariffs 

on numerous agricultural products from Canada and the European 

Union? 

Mr. POWELL. I think there is a lot of uncertainty about how this 

round of discussions between us and essentially all of our major 

trading partners will come out. I think if it does wind up in a lot 

of reciprocal tariffs, then it would certainly affect our exporting industries, including in a big way, U.S. agriculture. So it is a risk. 

Mr. PITTENGER. Yes, sir. You previously stated that the U.S. financial system is substantially more resilient than the decade before the financial crisis. Should there be a trade war, what tools 

do you have, to move quickly to ensure this continued resiliency in 

economic growth? 

Mr. POWELL. I think the financial system is well capitalized and 

so much more strong and resilient in so many ways that it is there 

in a position so that it can resist or be resilient against shocks of 

various kinds, and that would include changes to trade policy that 

became disrupted. Our monetary policy tool we can always use to— 

it really relates to demand. So if demand weakens, then we can 

support demand. 

The harder issue is you could be seeing higher prices because of 

tariffs at the same time you are seeing lower economic activity. 

And potentially, that would imply higher inflation. A mirror increase in tariffs wouldn’t mean necessarily higher future inflation, 

but if it did have that implication, it could be very challenging for 

policy. 

Mr. PITTENGER. Thank you. My time has expired. 

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Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Pennsylvania, Mr. 

Rothfus. 

Mr. ROTHFUS. Thank you, Mr. Chairman, and welcome, Chairman. 

I want to talk a little bit about the automatic SIFI designation being set at $250 billion in S. 2155. This was an important change 

that right sized the regulatory burden for a significant number of 

small and medium-sized institutions. 

In setting the threshold at $250 billion, however, we grouped 

large regional banks together with banks that have assets in excess 

of $1 trillion. These institutions do not only differ from each other 

in terms of size, they also differ in their levels of risk and complexity, as well as their capital structure and their business mix. 

Would you agree with that assessment that there is a distinction 

between those large regional banks and those other banks? 

Mr. POWELL. Very much so. Not just size, activities as well. 

Mr. ROTHFUS. Given this distinction, how will the Fed be tailoring regulations for banks above the $250 billion threshold? 

Mr. POWELL. Working on a framework now. Some ways away 

from publishing it, but it will take into account a range of factors, 

including size will be one, but also many others, such as complexity, interconnectedness, the nature of their activities, all those. 

We will take in a wide range of factors. The bill gives us a great 

deal of flexibility to identify the appropriate factors, and we are 

just in the process of doing that. We are going to put that out for 

comment and listen carefully to public reaction too. 

Mr. ROTHFUS. Any timeframe yet on when that might happen, 

comment period? 

Mr. POWELL. I can’t be precise. I will just tell you we are working 

hard on it right now. 

Mr. ROTHFUS. When Secretary Mnuchin testified before this committee, I asked him about an issue that many of us on this committee have expressed concerns about: Nonbank SIFI designations. 

I have advocated for an activities-based approach to addressing 

systemic risk. I was pleased to hear that Secretary Mnuchin also 

supported adopting this approach and that the FSOC was moving 

in that direction. Do you support an activities-based approach? 

Mr. POWELL. Yes. I think that makes sense. 

Mr. ROTHFUS. What would be the status of FSOC’s implementation of that approach? 

Mr. POWELL. Really a question for the Secretary, but I think that 

is more how we are looking at things these days, is looking at activities, as well as we can always look at institutions when it is appropriate. But for now, we are looking at a lot of activities. 

Mr. ROTHFUS. If I could talk a little bit about the yield curve. 

The inversion of the yield curve is typically viewed as a sign of a 

coming recession. The yield curve is currently flattening and this 

has attracted a lot of attention. 

In a recent post, Minneapolis Fed president Neel Kashkari wrote, 

quote: ‘‘This suggests that there is little reason to raise rates much 

further. Invert the yield curve and put the brakes on the economy 

and risk that it does, in fact, trigger a recession.’’ 

Do you agree with this view? 

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Mr. POWELL. I don’t see any evidence that a recession is imminent. We are not forecasting a recession. And so I don’t really think 

we see a recession coming. 

Mr. ROTHFUS. Do you have an opinion on how strong of a signal 

the yield curve inversion is? 

Mr. POWELL. So the inversion of the yield curve has been—just 

as an empirical matter it has been associated with downturns in 

the past. But I would just say the real point is the yield curve inverts—we know why short-term rates go up, because basically they 

are looking at the Fed’s expected rate path. The real question is 

what is going on with longer term rates. And if you back out the 

term premium and look at that, then it is really an assessment in 

the market of what the neutral longer term rate is, what it will be. 

So if, in fact, monetary policy is higher than that, then that means 

that policy is tight. You are actually tightening policy. 

So the yield curve is simply a way to identify what is really the 

important thing, which is where is current policy and where is expected policy relative to neutral. So I prefer to look directly at the 

question at hand. And you think about the yield curve as giving 

you evidence on that, so the yield curve is not inverted now. It is 

still at a positive slope and it is something that we will watch. All 

of us have a little bit different ways of thinking about it. That is 

how I think about it. Something we are looking at carefully. 

Mr. ROTHFUS. Thank you. When you last testified before this 

committee, we discussed the importance of monetary policy independence and potential risks to that independence posed by both 

our national debt and the Feds outsized balance sheet. Would 

swapping mortgaged-backed securities holdings for treasuries help 

to mitigate some of the political risks that follow for monetary policies becoming credit policies? 

Mr. POWELL. I don’t see our MBS holdings as—they are dwindling over time now. They are in normalization mode. I don’t see 

them as presenting a particularly salient independence risk to us 

right now. 

Mr. ROTHFUS. Thank you, Chairman. I yield back. 

Chairman HENSARLING. The gentleman yields back. 

The Chair now recognizes the gentleman from Maine, Mr. 

Poliquin. 

Mr. POLIQUIN. Thank you, Mr. Chairman, very much. 

Thank you, Chair Powell, for being here. You have been here, sir, 

for almost 3 hours with a 10-minute break, and you look like you 

need a vacation. I want to remind you that Maine, that I represent, 

is vacation land. You don’t even need air conditioning up there. 

And I am sure you and your family would enjoy it. If you want to 

go up there, just give us a call, we will send you in the right direction. 

Sir, the past couple of years, the economy has been getting 

stronger and stronger, and you mention in your testimony that the 

national unemployment rate has been about the lowest it has been 

in 20 years. Up in Maine, we have also good news. The unemployment rate is roughly 2.8 percent. It has been the lowest in about 

50 years, and folks are making more money and they are able to 

change jobs if they don’t like the one they have. And some of our 

young workers are able to come back to the State, where in the 

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past, they haven’t been able to. And our confidence with our consumers and our small businesses is all very strong. 

Now, if you look at the prior 7 to 8 years, the exact opposite was 

going on. Unemployment rates were very high. Confidence was low. 

Taxes and regulations were high, and we had a real problem everywhere. 

Now, my point to you, sir, if you would agree with me, that this 

strong economy we have now is not by accident. It didn’t fall out 

of sky. There is something that had to be done to correct this. 

Would you agree with me that making it easier for businesses to 

grow and hire more people and pay them more through lower taxes 

and fewer regulations, more predictable regulatory environment, 

has helped the economy? 

Mr. POWELL. Yes. I guess I would just say in principle that regulation should be balanced. 

Mr. POLIQUIN. Sure. 

Mr. POWELL. And it should be fair and that will support— 

Mr. POLIQUIN. Anybody that is running a business—and I come 

from that part of the world, sir—would agree with that. And I appreciate—I know you don’t want to dig into policy that we do here 

and I understand that. 

One of my concerns, my major concern, Mr. Powell, is how do we 

keep this going? How do we keep this going for our families in 

Maine and elsewhere? 

I look back at the last few recessions. In 2001, we had a bubble 

in the dot.com sector of the tech stocks and that caused a recession. 

The terrorist attacks of 9/11 caused a mild recession after that. 

That is an external event that we can’t control here anyway. And 

then in the 2008 to 2012 Great Recession, again, a real estate bubble in part brought on by financial instruments that dealt with the 

real estate market brought that on. 

So I think we can both conclude that what happens in the capital 

markets, what happens in the financial sector has a huge impact 

on what happens on Main Street when it comes to a growing economy or the other way around. 

Now, here is my concern, Mr. Powell, and I would love to have 

your response to this. During the past 10 years—for most of the 

past 10 years, interest rates have been very low, in some cases at 

zero, unusually low. And that has caused a rising financial sector, 

whether it be the equity market or the fixed income market. So I 

am looking and I am saying, here we have the Chair of the Fed 

before the committee of jurisdiction in the House. What advice can 

you give to Congress, Mr. Powell, to make sure that we keep this 

strong economy going? What should we make sure we do not do? 

Mr. POWELL. Well, let me say we strongly share a goal to keep 

this expansion going, and we think that continuing to gradually 

raise rates for now is the right way to do that. As I think we discussed when we were together, I think it is important to address 

things like we talked about earlier, things like labor force participation, things like education and training. We need people. We 

need more people who can fill these jobs that are going to be coming open. 

My concerns are really about the supply side at this point. We 

are close to full employment, maybe not quite there. But it is the 

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issues like labor force participation and job training and addressing 

the people who are out of the labor force, get them back in. 

Mr. POLIQUIN. There are some folks that think we ought to raise 

taxes and go back to where we were before. Is that a good idea? 

Mr. POWELL. I am not going to give you advice on fiscal policy. 

Sorry. 

Mr. POLIQUIN. OK. The national debt—I am pivoting a little bit, Mr. Powell—is about $21 trillion. It is horrible. The interest on 

that debt now is approaching roughly $300 billion per year, which 

is about 1–1/2 times what we spend to care for our 7 million veterans every year in this country. At what point do you think the 

debt service payments, the interest on that debt becomes a problem 

for our economy? 

Mr. POWELL. It is hard to identify a particular point. I would just 

say we have been on an unsustainable fiscal path for some time 

and the theory is we should be addressing it when the economy is 

strong. 

Mr. POLIQUIN. Do you agree with me that a balanced budget 

amendment for the Constitution is a good idea to force Washington 

to spend within its means and start paying down our debt, sir? 

Mr. POWELL. No, I do not. 

Mr. POLIQUIN. Thank you, Mr. Chairman. I yield back my time. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Minnesota, Mr. 

Emmer. 

Mr. EMMER. Thank you, sir. Mr. Chairman, it is again a pleasure 

to have you here and have an opportunity to hear you and speak 

with you. 

For starters, I would just like to make a brief comment about tailoring regulations. You mentioned the importance of taking a tailored approach to financial regulation when you appeared before 

our committee in February, but that was actually prior to the passage of the Economic Growth, Regulatory Relief, and Consumer 

Protection Act. 

Eliminating the one-size-fits-all regulatory mindset for small 

community financial institutions is obviously important. However, 

S. 2155 was explicit in its requirement that Federal regulators 

shall tailor enhanced prudential standards for all financial institutions based on their risk instead of asset size. This is a very important issue, and I hope that we can keep an open and constructive 

dialog on this issue in the weeks and months ahead. 

Again, for us it is the issue of risk versus asset size. And I see 

you are nodding, so hopefully that means we are going to keep a 

constructive dialog. 

Mr. POWELL. Look forward to that. 

Mr. EMMER. Moving on, Chairman Powell, your committee initiated a balance sheet roll-off less than a year ago, October 2017. 

During your—shortly thereafter, during your confirmation hearing, 

you testified the balance sheet reductions would likely stay in place 

for, quote, ‘‘about 3 or 4 years.’’ 

I understand, however, that now, some FOMC members are already calling for an early end to what has been a seemingly slow 

balance sheet normalization schedule. Are you considering a premature end to your balance sheet roll-off program? 

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Mr. POWELL. No, but let’s be clear. We have always said that 

there is significant uncertainty about how long it will take. Ultimately, the balance sheet will be no larger than it needs to be for 

us to conduct monetary policy and will consist primarily of Treasury securities. And its ultimate size in the long run will be driven 

by the market’s demand and the people, public’s demand for our liabilities, principally currency and reserves. 

So we are learning, along with everybody else, as the balance 

sheet shrinks, as to what the new normal will be. And I have to 

say there is a significant amount of uncertainty. We will learn a 

lot. The markets are moving their estimates up, but I don’t think 

we are going to know for some time exactly what that equilibrium 

size will be. It will be much bigger, though, than it was before the 

crisis, because the public wants—currency and circulation more 

than doubled since 2008, well more than doubled, and reserves 

have gone up substantially because they are a highly desirable liquid asset for banks. 

Mr. EMMER. All right. But at this point, there is no plan to prematurely end the roll-off? 

Mr. POWELL. Certainly not prematurely, no. 

Mr. EMMER. All right. The European Central Bank is reportedly 

convinced that the region’s economy is strong enough to withdraw 

some of its crisis-era support. Our economy, by contrast, has been 

humming for more than a year. If the EU is lifting off from its unconventional stance, should we be slowing or stopping return to 

fundamentals? And would doing so leave us stuck with a balance 

sheet that remains conflicted between monetary and macro prudential policy? 

Mr. POWELL. We are much more significantly down the road in 

the normalization process. The European Central Bank has said 

that they would stop asset purchases, assuming certain conditions 

are met by the end of year, and would not begin to raise interest 

rates until at least the end of the summer of 2019. So they are 

some years behind our process. We have been raising interest rates 

since December 2015. Our balance sheet has been shrinking, as 

you pointed out, since last October. 

And I think our path is working very well. We think the gradual 

rate increases are right, just about right. And we think the balance 

sheet normalization process is working very smoothly. 

Mr. EMMER. Has your committee devised a strategy for how and 

when to change the balance sheet roll-off schedule? I am taking 

you down this road because I understand your answer earlier is 

there is a lot of uncertainty and we learn as we go. But what is 

the strategy here or is it just that general, that we are going to see 

how this goes and we are going to leave ourselves the flexibility to 

jump in and change things? 

Mr. POWELL. We said we would continue the program as announced, unless there were—and we will get the exact terms, but 

it is really a significant economic downturn requiring a meaningful 

reduction in interest rates, words close to but not exactly that. 

Mr. EMMER. I don’t know if you will have time, but I do want 

to ask this. Do you think, Mr. Chairman, that market participants 

have the transparency they need to make productive investments 

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in our economy? And what data would persuade your committee to 

speed up, slow down, or even stop? 

Mr. POWELL. A significant downturn in the economy required 

meaningful reduction in the interest rates. I think the markets understand it very well. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Washington, Mr. 

Heck. 

Mr. HECK. Thank you, Mr. Chairman. And thank you, sir, for 

being here. 

So for over a year now, I have been helping to lead a task force 

trying to understand why home prices and rents, frankly, are soaring all over the country. And it turns out the answer is pretty simple: We are not building enough housing units, period. I looked this 

morning, and as it turns out, new home starts are lower than when 

you started at Treasury under the first President Bush. And a lot 

of time has passed and the population has grown considerably. 

Fewer home starts than way back then. 

So prices are rising because of the simple fact that we are missing millions of homes and we have too many people bidding for too 

few homes. And we are trying to understand why construction isn’t 

happening and what can be done about it. We feel pretty strongly 

about this because homeownership is still an integral part of the 

American Dream and, frankly, it is the number one source of retirement security for most Americans. But it also strikes me that 

it is pretty important to your work, sir. 

Now, in my mind, I have a simple model. When the economy 

goes bad, you all cut rates, and that means that more people buy 

more automobiles and more homes, and the workers in those industries work longer hours and get more wages, and it creates a virtuous cycle of economic growth. But what happens if home construction doesn’t or can’t respond? 

The weakness in housing in this last recovery was clearly a reason why it was at historic, some would say anemic levels. And if 

home construction continues to be broken, and there is every bit of 

evidence that it is, I am wondering what that means for the next 

recession and what your response can and should be. Does it mean 

you have to cut interest rates even more aggressively to get the 

economic response? Because it didn’t seem to work out very well 

that way this time. 

Mr. POWELL. So you are right, those back in the day, it was nothing to see—well, it was common to see 2 million housing starts in 

a year and more. And we don’t see that now. And part of that is 

just the population’s growing a lot less, like a lot more slowly now, 

much, much slower than it was, so there is less demand. 

And I am sure you talked to a lot of home builders and their representatives in your work, and what they say now is it is really 

supply side constraints. They can’t find electricians, plumbers, carpenters. Also, it is hard to get zoning, it is hard to get lots. Very 

difficult to do that. They are yelling loudly about materials prices, 

lumber in particular. And so that is what they are doing is they 

are building fewer homes and the prices are going up more quickly. 

We don’t really have the tools to deal with that. 

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53 

In terms of the importance of housing, though, the economy is so 

much bigger than it was before and housing is smaller than it was 

before. So it is a less important driver of economic activity at the 

aggregate level. It is still tremendously important for individuals. 

It is still part of the American Dream and part of what young families and folks want to have. 

But I don’t think it has—it doesn’t have—it is not the single 

most important factor driving monetary policy right now. I think 

these issues are really issues out in the labor market that we don’t 

directly affect. 

Mr. HECK. So would you agree, however, that historically, housing construction has played a much more important role in economic recovery? 

Mr. POWELL. It was a far bigger part of the economy and it was 

also—can be very cyclical. So yes. You go back to the seventies and 

eighties, it was, first in first out, first in the recession, first out. 

Mr. HECK. And before, during recoveries—and if you do the math 

on what the increase in GDP growth would be, if we simply had 

a housing market that was in balance, then it wouldn’t be too hard 

to calculate a material increase in GDP growth. Would you agree 

with that? 

Mr. POWELL. It would be bigger. If housing starts were 50 percent higher or something, yes, that would be meaningful, for sure. 

Mr. HECK. So some of what you said, not only do I agree with, 

but our study concludes as well, which is that these other inputs, 

land, labor, lending, lumber, or materials, are the key drivers here. 

But the takeaway I have from you today is that those inputs and 

whatever limitations and challenges that they are presenting is 

holding back housing construction may, in fact, be immune to interest rate reduction and so we better get to work on those factors. 

Mr. POWELL. Well said. 

Mr. HECK. Thank you, sir. 

Chairman HENSARLING. Time of the gentleman has expired. 

The Chair now recognizes the gentleman from Illinois, Mr. 

Hultgren. 

Mr. HULTGREN. Thank you, Chairman Hensarling. 

Chair Powell, welcome. Glad you are here. I would echo much of 

what my colleagues have said on both sides of the aisle of our gratitude for your openness and willingness to meet with us and hear 

from us, and that is so affirming. So thank you very much and I 

appreciate your work. 

I have shared some very specific concerns with you about how 

our current risk-based and leverage-based capital rules are damaging to liquidity and the listed options markets. Title 7 of DoddFrank requires central clearing for derivatives in case of options. 

This service is generally provided by bank clearing members. The 

Financial Services Committee reported a bill, with unanimous support, which recently passed the House directing bank regulators to 

adjust the capital rules. However, as I understand it, no change in 

law is necessary for the Fed to provide targeted capital relief. 

I wonder if you have thought any further about how the Fed can 

address this issue in an expeditious manner. And do you believe 

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derstand that there is not even a proposal out for comment yet, but 

we have an issue in the options markets right now. 

Mr. POWELL. We think SA-CCR is a good policy, and we are 

working on a rule on it now. And I hope it can get out before 8 

or 12 months. I will go back to the office and check in. But it is 

a priority. I know there is actual drafting going on and negotiation 

between agencies, so it will happen. 

Mr. HULTGREN. That is perfect. That is what we want to hear. 

I think you can see from even just the action yesterday and in the 

last couple weeks of very strong bipartisan support to make sure 

that these markets work well. 

I sent a letter to financial regulators with responsibility for the 

Volcker rule back just a couple weeks ago, July 6, requesting that 

they reconsider the definition of covered funds. That definition currently excludes venture capital. As my letter states, the Congressional Record clearly demonstrates, through a colloquy between 

Senator Boxer and then Chairman Franks, that investing in venture capital was never intended to be prohibited by the Volcker 

rule when section 619 was drafted by Congress. This prohibition restricts access to capital for startup companies. 

I wonder, do you believe the Volcker rule should be amended in 

a way that ends this prohibition on investment and venture capital? And have you discussed this issue with your peers at the 

other financial regulators? Any thoughts on odds that there could 

be change made here? 

Mr. POWELL. I am not directly handling those discussions now, 

but, we put a draft out for comment, and we are hearing on this 

point a lot, I believe. Although, I guess the comment period, the 

comments haven’t really come in yet. The comment period hasn’t 

started running yet because we haven’t published the notice. 

But our idea is that these activities are not ones generally that 

threaten safety and soundness. So consistent with the letter and 

intent of the law, we want to allow what flexibility there is and we 

look forward to getting input on how we can do that. 

Mr. HULTGREN. Great. Thanks. I recently sent your office a letter 

that I hope will draw your attention to the growing issue of wire 

fraud. This is something that we have heard testimony on in the 

Financial Services Committee last year. 

In general, since reviewing my letter, I wonder if you have any 

ideas for how to prevent wire fraud. And have you considered any 

recommendations, maybe some that I have made, of having financial institutions apply a payee matching system when initiating a 

wire transfer? 

Mr. POWELL. So we appreciate your letter. I was looking at it 

again this morning, as a matter of fact, and we are putting together a nice response. Some of the data in your letter is quite 

alarming. So I appreciate your bringing that to our attention. 

Mr. HULTGREN. Great. 

Mr. POWELL. So we will come back to you with something in detail. 

Mr. HULTGREN. That is great. Thank you so much. 

If there is anything else you need from us or that we can be helpful with, again, I think it is something that is so important for that 

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confidence, especially in home purchases and things that are being 

abused right now. 

Last question, last minute here, and a lot of my colleagues on 

both sides have talked about this, but over the last 18 months, by 

almost every measure, we have had a very strong economy and 

taken appropriate actions to allow this momentum to continue. We 

have seen a boost in consumer and business confidence following 

the recent tax cuts and continued regulatory relief efforts. 

That said, there are certainly issues that Congress must continue 

to address, like better training of our labor forces to meet labor demands of our expanding modern economy. I wonder, do you have 

concerns that protectionist trade measures may generate 

headwinds that counteract the recent stimulus provided by Congress and the Administration? And do you believe a trade deficit 

is somehow a measure of whether the U.S. is winning or losing in 

the global economy? In other words, do you believe trade is a zero 

sum game? 

Mr. POWELL. We have these discussions going on with basically 

all of our major trading partners, NAFTA, the EU, China. And we 

are not responsible for those. We are not even a participant. We 

are not consulted in any way. But it would be good if they resulted 

in lower tariffs broadly. If they resulted in higher tariffs, higher 

trade barriers, then that will be a bad thing for our economy, for 

our workers, and for incomes. 

Mr. HULTGREN. Thanks, Chair. I yield back. 

Chairman HENSARLING. The gentleman yields back. 

The Chair wishes to inform all members that I will be excusing 

the witness at 1:30. I anticipate clearing four more members. Currently in the queue are Mr. Gottheimer, Mr. Loudermilk, Mr. Davidson, and Mr. Budd. 

The Chair recognizes the gentleman from New Jersey, Mr. 

Gottheimer. 

Mr. GOTTHEIMER. Thank you, Mr. Chairman. 

Chairman Powell, thank you for being here today. 

Our economy is entering a phase of increasing technological disruption, including automation through artificial intelligence. These 

factors are expected to eventually increase our productivity, but 

also to significantly affect our workplace. 

McKinsey recently issued a report on automation and jobs that 

projects 16 million to 54 million Americans will have to find new 

occupations by 2030, depending on how quickly technology is adopted. 

If you take the taxi industry as an example, the use of ride-sharing apps has devalued assets like taxi medallions and transformed 

that industry. And it has pushed some drivers out and brought new 

entrants in. And as tech companies strive for more automation and 

leverage artificial intelligence, more drivers will likely be pushed 

out or transitioned. 

AI and automation will have the same effect on other spaces, like 

trucking and trading and a host of other industries. And I believe 

in tech, and I obviously don’t believe we should become Luddites. 

We need to look toward the future and constantly innovate. It is 

a big competitive advantage for our country, and obviously our foreign competitors are doing the same. 

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56 

I believe our government needs fiscal and monetary policy to 

ease the transition, or at least be aware of it and understand what 

we need to do in this process. And the Fed’s monetary policy is obviously a blunt tool, but given your dual mandate, are you monitoring automation’s impact on productivity and our labor? And 

what tools are you considering in this transition, sir? 

Mr. POWELL. We look very carefully at those issues. We have 

great researchers at the Fed. We don’t have a lot of tools to deal 

with it, but they do present really challenging issues for us in the 

future and now. 

Mr. GOTTHEIMER. Are there things that you believe that Congress should be considering to help minimize the effects of these 

transitions or make sure we are prepared as a workforce? 

Mr. POWELL. I think when I graduated from college, I think there 

was this sense that people would find a career and find an employer, and many of them would spend 30 years with that employer. I think that is not the world we are in so much anymore, 

not that some people won’t do that. 

So I really think the idea that education ends when you get out 

of college or grad school, we need to be thinking a lot about 

midcareer training and education so people can go on and have another leg to their careers rather than being let out to pasture at 

age 40. 

So I think that is a key thing we need to be doing, and Congress 

can certainly play a role there. 

Mr. GOTTHEIMER. Thank you, sir. 

And just to switch topics slightly, and I appreciate your response 

there, on the housing front, I wanted to speak to you about the 

market a bit, specifically, the change we have seen in the Federal 

Housing Administration’s (FHA) insured loans, but also the market 

as a whole. 

The mortgage market is now dominated by nonbank lenders. 

They are upwards of 75 percent of FHA loans. Prior to the housing 

crisis, in that frothy era, this number was flipped on its head. 

Banks made up more than 75 percent, if not more, of the housing 

market. 

What risks do you think this presents as the credit cycle turns? 

That is my first question, if you don’t mind. 

Mr. POWELL. So in housing now, we do see that most of the borrowers now have much higher credit scores, so it is a very different 

market. The question is, was that line drawn at the right place? 

But it is clear that most of the people who have access to mortgage credit now are people with fairly high credit scores, so it is 

quite different. And that is where the household borrowing is, 

again, from people who are well off. 

Mr. GOTTHEIMER. So you think if there is a downturn, we are 

better prepared for it? 

Mr. POWELL. We are better prepared for it, yes. 

Mr. GOTTHEIMER. Are there things that you think, as you look 

at this, that Congress should be doing to get banks back into the 

mortgage market more to ensure lending during economic 

downturns looking forward there? 

Mr. POWELL. Well, I think a good question for Congress is—and 

it is not one for us, but for you—is coming out of the crisis the one 

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place where we really changed credit availability was in mortgages, 

and that had to be done because we know that mortgage credit 

was—people were making loans that they may not have understood, but that really shouldn’t have been made, lots and lots of 

those. 

So, the question is, was that made at the right level? Are there 

still, at the margin—and there has been some work done on this— 

there are probably significant numbers of creditworthy borrowers 

who are not getting access to mortgage credit. And I would think 

part of it is that the banks know that they made these terrible mistakes and paid great prices for it, and so do the households. 

Still, I think it is worth looking at that. It is not too soon to be 

looking at that. 

Mr. GOTTHEIMER. I think you are right. 

Thank you, Mr. Chairman. I appreciate your time. 

Mr. POWELL. Thank you. 

Chairman HENSARLING. The gentleman yields back. 

The Chair recognizes now the gentleman from Georgia, Mr. 

Loudermilk. 

Mr. LOUDERMILK. Thank you, Mr. Chairman. 

Chairman Powell, thank you for spending the time with us 

today. 

I actually want to circle back to something that Chairman 

Luetkemeyer raised earlier today. And since that was probably a 

couple hours ago, refresh. 

He was talking about the banks that fall between the $150 and 

$250 billion in assets, and how after the 18-month period, they are 

relieved from SIFI regulation. After that the law allows the Fed the 

ability to restore the regulations if the bank chose to be a systemic 

risk. 

Regarding current conditions, recent CCAR (Comprehensive Capital Analysis and Review) results and GSIB surcharge risk data 

show, that banks with less than $250 billion do not present a systemic risk at this time. And I, as well as many others, believe that 

there should be exemption from the SIFI regulation for those. 

So I want to follow up, that when you testified back in February, 

I had asked similar questions. And you had said that banks under 

$250 billion are more engaged in traditional banking and less complex and generally do not pose a systemic risk to the economy. 

So my first question is, am I correct in assuming that since the 

CCAR results further confirm your view, that these firms don’t 

pose a systemic risk at this time? 

Mr. POWELL. It is interesting, as a general matter, yes, actually 

one of the eight SIFIs has less than $250 billion in assets and is 

still a SIFI. One of them does because of the nature of its activity. 

So we look at a range of things. I would stand by what I said, 

though. Under 250, these are institutions which generally are simpler, they are less complex, and they are engaged in traditional 

banking activities. So they are different from the very large ones 

that deserve and get the higher scrutiny. 

Mr. LOUDERMILK. OK. Well, I appreciate that. 

And at yesterday’s hearing you discussed a thorough rulemaking 

process, that you are going to make sure that these firms are strictly reviewed before receiving regulatory relief. 

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On that topic, some bankers who I have spoken with are concerned that your staff wants to tailor the regulations or partially 

apply them to firms that are not systemically risky. 

If this is true—which would be somewhat troubling—I think data 

and evidence should determine the outcome. Can you confirm that 

firms that don’t pose a systemic risk will be exempt from the SIFI 

regulations? 

Mr. POWELL. We are going to do exactly what the bill orders us 

to do, which is publish a framework for how we are going to think 

about risk to financial stability and safety and soundness. This is 

the language of the bill. We are going to put that out as soon as 

we can possibly get it thought through. We are going to get comment on it. And then we are going to go forward from there. 

And we very much take to heart the letter and spirit of the bill, 

and we will look forward to getting input when we finally propose 

something, I hope soon. 

Mr. LOUDERMILK. So am I right to interpret that we are going 

to let the data determine the outcome? 

Mr. POWELL. Yes, we are in the process now of identifying the 

factors that we will think about. The bill gives us a lot of flexibility, 

identifies some factors, and gives us other flexibility. 

We are going to publish a framework that says how we are going 

to look at activities and institutions below 250, and then we are 

going to hear back from the world about how we did and how we 

should think about these things. 

And it is a process that the statute orders us to undertake, and 

that is what we are doing. 

Mr. LOUDERMILK. So is it conceivable that—or maybe it isn’t— 

is it, I guess, possible that you have a regional bank, let’s say $150 

billion or so, that may have partial regulation of SIFI? Or is it 

going to be either they are systemically risky or not? 

Mr. POWELL. I really haven’t faced that question yet. We have always tailored, even when the limit was 50, we always tailored the 

application of the so-called enhanced prudential standards under 

165. We tailored those a lot in the prior world. So we will obviously 

do that, too. And we will certainly continue to do that. 

Mr. LOUDERMILK. OK. And probably don’t have time to get into 

my last question, so I will submit it to the record. And I will yield 

back the rest of my time to maybe allow somebody else to get in 

before the hard time. 

I yield back, Mr. Chairman. 

Chairman HENSARLING. The gentleman yields back. 

The Chair now recognizes the gentleman from Ohio, Mr. Davidson. 

Mr. DAVIDSON. Thank you, Chairman. 

Chairman, thanks for your testimony. Thanks for the work you 

are doing there. And I look forward to the Senate giving you some 

more colleagues soon hopefully. 

You have spoken a fair bit about trade. A lot of our colleagues 

are concerned about trade and the impact that bad trade practices 

have had on our economy. Frankly, some concern about the tactics 

that have been employed to engage in that. 

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I wanted to see if I have your quote right. ‘‘Trade is really the 

business of Congress, and Congress has delegated some of that to 

the Executive Branch.’’ 

Do you think it would be a positive development from the economy’s perspective to have collaboration across the entire cross section of the economy that Congress represents? 

Mr. POWELL. I think this is really—Congress—the Constitution 

gives this to you, authority, and you have over time delegated some 

of it to the Executive Branch. But it is your authority. 

Mr. DAVIDSON. Thank you. And we are working to reclaim it 

with the Global Trade Accountability Act, H.R. 5281. We are always looking for cosponsors. And this leaves the authority in the 

President’s hands to negotiate, but similar to the REINS Act, gives 

authority to Congress to review. And I think it would promote a 

more collaborative process than Peter Navarro has recommended 

and, in fact, persuaded folks to implement. 

Do you think that if we had practices that were more targeted 

in the effect that we could be able to focus on bad things then? 

Let’s just phrase it the other way. Do you think uniform action 

across all countries in all sectors is potentially more disruptive to 

the economy than targeted actions? 

Mr. POWELL. Mr. Davidson, we don’t have this authority. This is 

authority that— 

Mr. DAVIDSON. Correct. I am just asking about the impact on the 

economy, macroeconomically. 

Mr. POWELL. I think on issues like fiscal policy, trade policy, immigration policy that can affect the economy, I think we have a role 

there because we are responsible for the economy, but I think we 

need to stay at a higher level of principle. And what I am comfortable saying is that a more protectionist approach to trade, if it 

is sustained over a period of time, has not historically been good 

for economies. It has meant lower incomes, less opportunity for 

workers. 

Mr. DAVIDSON. On the economic principle of trade, it is the called 

trade because it is reciprocal in the sense both parties benefit in 

trade. Do you see trade as a zero-sum game? 

Mr. POWELL. No. I do think that trade needs to be fair as well 

as free, and I think it is very appropriate to have an internationally agreed set of rules, and when anybody breaks those rules, they 

have to face the other countries in that setting and change their 

policies. I think that is a healthy way to go. I don’t think a bilateral trade deficit is a good measure of trade between countries, 

though. 

Mr. DAVIDSON. Thank you very much. 

One of the things we have also dwelled on is workforce participation. And one of the big barriers to the growth rate in the economy 

is workforce participation. 

Without alluding to specific policy—and I don’t want to put you 

in that spot—we have tried to make some reforms on bills. 

Most notably, recently, the farm bill, which is really only about 

20 percent about farming, a very incremental change to expect that 

working-age adults, 18 to 59, able-bodied, no dependent kids at 

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fiers, that in order to continue to receive support through food 

stamps, that they would work. 

Would this, in your mind, policy tools that motivate people to 

participate be effective at workforce participation? 

Mr. POWELL. I can’t really take a position on that. I will say that 

there is not a lot you could do that would be more constructive 

than to find ways to support labor force participation that will 

work on a bipartisan basis and can be enacted. It is tremendously 

important. 

Mr. DAVIDSON. Thank you for that. Thank you. 

And so cryptocurrency is a big thing. And so without talking 

about specific things in our policy, we are working with Basel on 

a number of fronts. And some concern, we always protect our sovereignty in that. Where do you see Basel going with respect to 

cryptocurrency? 

Because essentially, the concern there is that even if the U.S. 

creates a better regulatory framework than we have today, there 

is still arbitrage in markets. 

So there is a desire to have some regulatory framework. Is Basel 

addressing that, particularly with respect to cryptocurrency? 

Mr. POWELL. I think anybody who owns—if a bank owns 

cryptocurrency, then it will be subject to capital. It will have to 

hold capital against that. I guess a good question is, should it be 

more than the normal level of capital, because it is a risky asset? 

Mr. DAVIDSON. Right. So to the extent that it is an asset, it 

would be treated, if it is a commodity, treated as if it is a commodity. If it is truly a currency, it would be treated as a currency 

based on its amount of volatility as a currency. For example, the 

pound sterling is probably a different reserve currency than the 

Thai baht. 

Mr. POWELL. Yes. And I don’t know that we—so it is not mainly 

a bank capital issue. Of course, I think the regulatory issues facing 

cryptocurrencies are big and broad and go way beyond banking. 

Mr. DAVIDSON. Thank you. My time has expired. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair will recognize one more member and then we will dismiss the witness and adjourn. 

The Chair recognizes the gentleman from North Carolina, Mr. 

Budd. 

Mr. BUDD. Thank you, Chairman Hensarling. 

Chairman Powell, again, welcome back. It is always good to be 

with you. I appreciate you being here today. 

So I want to start off with Volcker. I think a lot of us can at least 

appreciate the intent behind Volcker, which is to reduce risky activities in banks, in particular high risk prop trading, and that potentially makes sense. 

However, it seems to be odd results that under the current rule 

activities such as providing capital and loans to growth and startup 

companies, activities that we should be encouraging banks to engage in, are materially limited as a result of that rule. 

Your recent NPR is open-ended on covered funds and does not 

provide a lot of guidance about where the Fed may intend to go. 

Yet, these funds can be critical sources of capital for companies 

looking to grow their businesses. And the prohibition on funds is 

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fairly broad and even includes restrictions on venture capital 

funds. 

So, Chairman Powell, is there a way for the Fed to simplify the 

covered funds regime to help smaller companies obtain greater access to capital? 

Mr. POWELL. And we are looking for ways to simplify Volcker in 

ways that are faithful to the language and intent of the statute, 

and that is one particular provision. And we look forward to getting 

constructive comments on how we may do that better. 

Mr. BUDD. So you are just waiting through the NPR period, then, 

on that? 

Mr. POWELL. Yes, we are really looking for input here on—this 

is a notice of proposed rulemaking. We want a lot of input. Our job 

is to implement Congress’ wish, and that is the Volcker rule, but 

we want to use such flexibility as we have that doesn’t undermine 

safety and soundness. And there would clearly be some flexibility 

around the issue you are talking about. 

Mr. BUDD. Thank you. I want to switch topics to the ongoing negotiation of new international capital standards, or ICS. 

First, I want to thank you for such a quick and thorough response to questions I had after we met last time. We don’t always 

get quick responses, but you did, so thank you. We are genuinely 

grateful. 

And the following question, sir, it was originally intended for 

Vice Chairman Quarles, but a letter he sent back to my office on 

this question we received just yesterday and chose not to respond 

at this portion. So hopefully, I will pitch it to you for an answer. 

Governor Daniel Tarullo stated in a speech at the National Association of Insurance Commissioners’ International Insurance 

Forum—this is May 20 of 2016—he said, quote: 

‘‘There are, as you all know, a lot of ideas out there as to how 

we should construct the capital requirements we will apply to insurance companies. Some, such as variations on the Solvency II approach used in the European Union, strike us as unpromising. 

‘‘Evaluation frameworks for insurance liabilities adopted in Solvency II differ starkly from U.S. GAAP and may introduce excessive volatility. Such an approach would also be inconsistent with 

our preferred or strong preference for building a predominantly 

standardized risk-based capital rule that enables comparisons 

across firms without excessive reliance on internal models.’’ 

‘‘Finally’’—this is a mouthful, isn’t it—‘‘Finally, it appears that 

Solvency II could be quite pro-cyclical.’’ 

So do you agree with what Governor Tarullo said there? 

Mr. POWELL. It makes sense to me. I have to admit I don’t recall 

that speech and what issue he was talking about there. 

Mr. BUDD. About Solvency II, being used by the EU, being procyclical rather than countercyclical. 

Mr. POWELL. I would want to check with our insurance capital 

experts. But, yes, I do believe that, I think that reflects our view. 

Mr. BUDD. Good. Can you give us any explanation as to why the 

Federal Reserve staff participating in the Kuala Lumpur negotiations agreed to accede to the Europeans at the IAIS to mandate 

that the financial reporting for the referenced ICS be done using 

a Solvency II approach—what we just talked about—Solvency II 

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approach, and not something more suitable for the U.S. insurance 

industry, like GAAP or statutory accounting? 

Mr. POWELL. I will have to check up on this. I don’t have this 

kind of detail. 

Mr. BUDD. Pretty in the weeds, but I appreciate you thinking 

through it. And if we could give that back. Thank you. 

And finally, do you agree with Governor Tarullo that a Solvency 

II accounting approach introduces excessive volatility into the U.S. 

insurance markets? And if so, how do you plan on remedying this 

at the next IAIS negotiations on ICS? 

Mr. POWELL. I am really going to have to go— 

Mr. BUDD. We just delved further into these weeds. 

Well, if we could get a response it would be great, at another 

time. 

Thank you so much, again, for your time. 

Mr. Chairman, I yield back. Thank you. 

Mr. POWELL. Thank you. 

Chairman HENSARLING. The gentleman yields back. 

I would like to thank Chairman Powell for his testimony today. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

I would ask Chairman Powell that you respond as promptly as 

you are able. 

This hearing stands adjourned. 

[Whereupon, at 1:28 p.m., the committee was adjourned.] 

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A P P E N D I X 

July 18, 2018 

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For release at 

8:30 a.m. EDT 

July 18,2018 

Statement by 

Jerome H. Powell 

Chairman 

Board of Governors of the Federal Reserve System 

before the 

Committee on Financial Services 

U.S. House of Representatives 

July 18,2018 
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Good morning. Chairman Hensarling, Ranking Member Waters, and other members of 

the Committee, I am happy to present the Federal Reserve's semiannual Monetmy Policy Report 

to the Congress. 

Let me start by saying that my colleagues and I strongly support the goals the Congress 

has set for monetary policy--maximum employment and price stability. We also support clear 

and open communication about the policies we undertake to achieve these goals. We owe you, 

and the public in general, clear explanations of what we are doing and why we are doing it. 

Monetary policy affects everyone and should be a mystery to no one. For the past three years, 

we have been gradually retuming interest rates and the Fed's securities holdings to more normal 

levels as the economy strengthens. We believe this is the best way we can help set conditions in 

which Americans who want a job can find one, and in which inflation remains low and stable. 

I will review the current economic situation and outlook and then tum to monetary 

policy. 

Current Economic Situation and Outlook 

Since I last testified here in February, the job market has continued to strengthen and 

inflation has moved up. In the most recent data, inflation was a little above 2 percent, the level 

that the Federal Open Market Committee, or FOMC, thinks will best achieve our price stability 

and employment objectives over the longer run. The latest figure was boosted by a significant 

increase in gasoline and other energy prices. 

An average of215,000 net new jobs were created each month in the first half of this year. 

That number is somewhat higher than the monthly average for 2017. It is also a good deal 

higher than the average number of people who enter the work force each month on net. The 

unemployment rate edged down 0.1 percentage point over the first half of the year to 4.0 percent 
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in June, near the lowest level of the past two decades. In addition, the share of the population 

that either has a job or has looked for one in the past month--the labor force participation rate--

has not changed much since late 2013. This development is another sign oflabor market 

strength. Part of what has kept the participation rate stable is that more working-age people have 

started looking for a job, which has helped make up for the large number of baby boomers who 

are retiring and leaving the labor force. 

Another piece of good news is that the robust conditions in the labor market are being felt 

by many different groups. For example, the unemployment rates for African Americans and 

Hispanics have fallen sharply over the past few years and are now near their lowest levels since 

the Bureau of Labor Statistics began reporting data for these groups in 1972. Groups with higher 

unemployment rates have tended to benefit the most as the job market has strengthened. But 

jobless rates for these groups are still higher than those for whites. And while three-fourths of 

whites responded in a recent Federal Reserve survey that they were doing at least okay 

financially in 2017, only two-thirds of African Americans and Hispanics responded that way. 

Incoming data show that, alongside the strong job market, the U.S. economy has grown at 

a solid pace so far this year. The value of goods and services produced in the economy--or gross 

domestic product--rose at a moderate annual rate of 2 percent in the first quarter after adjusting 

for inflation. However, the latest data suggest that economic growth in the second quarter was 

considerably stronger than in the first. The solid pace of growth so far this year is based on 

several factors. Robust job gains, rising after-tax incomes, and optimism among households 

have lifted consumer spending in recent months. Investment by businesses has continued to 

grow at a healthy rate. Good economic performance in other countries has supported U.S. 
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exports and manufacturing. And while housing construction has not increased this year, it is up 

noticeably from where it stood a few years ago. 

I will tum now to inflation. After several years in which inflation ran below our 

2 percent objective, the recent data are encouraging. The price index for personal consumption 

expenditures, which is an overall measure of prices paid by consumers, increased 2.3 percent 

over the 12 months ending in May. That number is up from 1.5 percent a year ago. Overall 

inflation increased partly because of higher oil prices, which caused a sharp rise in gasoline and 

other energy prices paid by consumers. Because energy prices move up and down a great deal, 

we also look at core inflation. Core inflation excludes energy and food prices and generally is a 

better indicator of future overall inflation. Core inflation was 2.0 percent for the 12 months 

ending in May, compared with 1.5 percent a year ago. We will continue to keep a close eye on 

inflation with the goal of keeping it near 2 percent. 

Looking ahead, my colleagues on the FOMC and I expect that, with appropriate 

monetary policy, the job market will remain strong and inflation will stay near 2 percent over the 

next several years. This judgment reflects several factors. First, interest rates, and financial 

conditions more broadly, remain favorable to growth. Second, our financial system is much 

stronger than before the crisis and is in a good position to meet the credit needs of households 

and businesses. Third, federal tax and spending policies likely will continue to support the 

expansion. And, fourth, the outlook for economic growth abroad remains solid despite greater 

uncertainties in several parts of the world. What I have just described is what we see as the most 

likely path for the economy. Of course, the economic outcomes we experience often tum out to 

be a good deal stronger or weaker than our best forecast. For example, it is difficult to predict 

the ultimate outcome of current discussions over trade policy as well as the size and timing of the 
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economic effects of the recent changes in fiscal policy. Overall, we see the risk of the economy 

unexpectedly weakening as roughly balanced with the possibility of the economy growing faster 

than we currently anticipate. 

Monetary Policy 

Over the first half of2018 the FOMC has continued to gradually reduce monetary policy 

accommodation. In other words, we have continued to dial back the extra boost that was needed 

to help the economy recover from the financial crisis and recession. Specifically, we raised the 

target range for the federal funds rate by 1/4 percentage point at both our March and June 

meetings, bringing the target to its current range of 1-3/4 to 2 percent. In addition, last October 

we started gradually reducing the Federal Reserve's holdings of Treasury and mortgage-backed 

securities. That process has been running smoothly. Our policies reflect the strong performance 

of the economy and are intended to help make sure that this trend continues. The payment of 

interest on balances held by banks in their accounts at the Federal Reserve has played a key role 

in carrying out these policies, as the current Monetary Policy Report explains. Payment of 

interest on these balances is our principal tool for keeping the federal funds rate in the FOMC's 

target range. This tool has made it possible for us to gradually return interest rates to a more 

normal level without disrupting financial markets and the economy. 

As I mentioned, after many years of running below our longer-run objective of 2 percent, 

inflation has recently moved close to that level. Our challenge will be to keep it there. Many 

factors affect inflation--some temporary and others longer lasting. Inflation will at times be 

above 2 percent and at other times below. We say that the 2 percent objective is "symmetric" 

because the FOMC would be concerned if inflation were running persistently above or below our 

objective. 
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The unemployment rate is low and expected to fall further. Americans who want jobs 

have a good chance of finding them. Moreover, wages are growing a little faster than they did a 

few years ago. That said, they still are not rising as fast as in the years before the crisis. One 

explanation could be that productivity growth has been low in recent years. On a brighter note, 

moderate wage growth also tells us that the job market is not causing high inflation. 

With a strong job market, inflation close to our objective, and the risks to the outlook 

roughly balanced, the FOMC believes that--for now--the best way forward is to keep gradually 

raising the federal funds rate. We are aware that, on the one hand, raising interest rates too 

slowly may lead to high inflation or financial market excesses. On the other hand, if we raise 

rates too rapidly, the economy could weaken and inflation could run persistently below our 

objective. The Committee will continue to weigh a wide range of relevant information when 

deciding what monetary policy will be appropriate. As always, our actions will depend on the 

economic outlook, which may change as we receive new data. 

For l,'Uideposts on appropriate policy, the FOMC routinely looks at monetary policy rules 

that recommend a level for the federal funds rate based on the current rates of inflation and 

unemployment. The July Monetary Policy Report gives an update on monetary policy rules and 

their role in our policy discussions. I continue to find these rules helpful, although using them 

requires careful judgment. 

Thank you. I will now be happy to take your questions. 
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MoNETARY Poucv REPORT 

july 13, 2018 

Board of Governors of the Federal Reserve System 

For use at 11:00 a.m., EDT 

July13,2018 
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lETTER Of 

BOARD OF GOVERNORS OF THE 

FEDERAL RESERVE SYSTEM 

Washington, D.C., July 13,2018 

THE PRESIDENT OF THE SENATE 

THE SPEAKER OF THE HOUSE OF REPRESENTATIVES 

The Board of Governors is pleased to submit its Monetary Policy Report pursuant to 

section 2B of the Federal Reserve Act. 

Sincerely, 

Jerome H. Powell, Chairman 
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STATEMENT ON LoNGER-RuN GoALS AND MoNETARY PoucY STRATEGY 

/\doptecl etfective January 

The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory 

mandate from the Congress of promoting maximum employment, stable prices, and moderate 

long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public 

as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and 

businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary 

policy, and enhances transparency and accountability, which are essential in a democratic society. 

Inflation. employment, and long-term interest rates fluctuate over time in response to economic and 

financial disturbances. Moreover, monetary policy actions tend to influence economic activity and 

prices with a lag. Therefore, the Committee's policy decisions reflect its longer-run goals, its mediumterm outlook, and its assessments of the balance of risks, including risks to the financial system that 

could impede the attainment of the Committee's goals. 

The inflation rate over the longer run is primarily determined by monetary policy, and hence the 

Committee has the ability to specify a longer-run goal for inflation. The Committee reaffirms its 

judgment that inflation at the rate of 2 percent, as measured by the annual change in the price 

index for personal consumption expenditures, is most consistent over the longer run with the 

Federal Reserve's statutory mandate. The Committee would be concerned if inflation were running 

persistently above or below this objective. Communicating this symmetric inflation goal clearly to the 

public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability 

and moderate long-term interest rates and enhancing the Committee's ability to promote maximum 

employment in the face of signii!cant economic disturbances. The maximum level of employment 

is largely determined by nonmonetary factors that affect the structure and dynamics of the labor 

market. These factors may change over time and may not be directly measurable. Consequently, 

it would not be appropriate to specify a llxed goal for employment; rather, the Committee's policy 

decisions must be informed by assessments of the maximum level of employment, recognizing that 

such assessments are necessarily uncertain and subject to revision. The Committee considers a 

wide range of indicators in making these assessments. Information about Committee participants' 

estimates of the longer-run normal rates of output growth and unemployment is published four 

times per year in the FOMC's Summary of Economic Projections. For example, in the most 

recent projections, the median of FOMC participants' estimates of the longer-run normal rate of 

unemployment was 4.6 percent. 

In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its 

longer-run goal and deviations of employment from the Committee's assessments of its maximum 

level. These objectives are generally complementary. However, under circumstances in which the 

Committee judges that the objectives are not complementary, it follows a balanced approach in 

promoting them, taking into account the magnitude of the deviations and the potentially different 

time horizons over which employment and inflation arc projected to return to levels judged 

consistent with its mandate. 

The Committee intends to reallirm these principles and to make adjustments as appropriate at its 

annual organizational meeting each January. 
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Summary .................................................. 1 

Economic and Financial Developments ........................................ . 

Monetary Policy ........................................................... 2 

Special Topics ............................................................. 2 

Part 1: Recent Economic and Financial Developments ................ 5 

Domestic Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 

Financial Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....... 23 

International Developments ................................................. 30 

Part 2: Monetary Policy ....................................... 35 

Part 3: Summary of Economic Projections ......................... 47 

The Outlook for Economic Activity ............................................ 48 

The Outlook for Inflation ................................................... 50 

Appropriate Monetary Policy ................................................ 51 

Uncertainty and Risks ...................................................... 51 

Abbreviations .............................................. 63 

List of Boxes 

The Labor Force Participation Rate for Prime-Age Individuals ......................... 8 

The Recent Rise in Oil Prices ................................................ 16 

Developments Related to Financial Stability ..................................... 26 

Complexities of Monetary Policy Rules ......................................... 37 

Interest on Reserves and Its Importance for Monetary Policy ......................... 44 

Forecast Uncertainty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 62 

Non: This report reflects information that was publicly available as of noon EDT on july 12, 2018. 

Unless otherwise stated, the time series in the figures extend through, for daily data, July 11, 2018; for monthly data, 

June 2018; and, for quarterly data, 2018:Q1. In bar charts, except as noted, the change for a given period is measured to 

its final quarter from the final quarter of the preceding period. 

For figures 16 ,mel 34, note that the S&P 500 !nde>x and the Dow Jones B.mk !ndex are products of S&P Dow Jones !ndices LLC and/or its affiliates Jnd 

have been licensed for use by the J division of S&P Global, dnd/or its affitidtes. All 

Redistribution, reproduction, ond/o;;ohotocctov;,nQ 

in any included regardless of the cause and, ln no event, DTCC or any of 

indirt•ct, special or consequential damages, costs, expenses, legal f<'es, or lossC's (including lost income or lost profit 

in connection with this publication. 
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Economic activity increased at a solid pace 

over the first half of 20 18, and the labor 

market has continued to strengthen. Inflation 

has moved up, and in May, the most recent 

period for which data are available, inflation 

measured on a 12-month basis was a little 

above the Federal Open Market Committee's 

(FOMC) longer-run objective of 2 percent, 

boosted by a sizable increase in energy prices. 

In this economic environment, the Committee 

judged that current and prospective economic 

conditions called for a further gradual removal 

of monetary policy accommodation. In line 

with that judgment, the FOMC raised the 

target for the federal funds rate twice in the 

first half of 2018, bringing it to a range of 

I Yi to 2 percent. 

Economic and Financial 

Developments 

The labor market. The labor market has 

continued to strengthen. Over the first 

six months of 2018, payrolls increased an 

average of 215,000 per month, which is 

somewhat above the average pace of 180,000 

per month in 2017 and is considerably faster 

than what is needed, on average, to provide 

jobs for new entrants into the labor force. 

The unemployment rate edged down from 

4.1 percent in December to 4.0 percent in June, 

which is about :;, percentage point below the 

median of FOMC participants' estimates of 

its longer-run normal level. Other measures 

of labor utilization were consistent with a 

tight labor market. However, hourly labor 

compensation growth has been moderate, 

likely held down in part by the weak pace of 

productivity growth in recent years. 

Inflation. Consumer price inflation, as 

measured by the 12-month percentage change 

in the price index for personal consumption 

expenditures, moved up from a little below 

the FOMC's objective of 2 percent at the end 

of last year to 2.3 percent in May, boosted by 

a sizable increase in consumer energy prices. 

The 12-month measure of inflation that 

excludes food and energy items (so-called core 

inflation), which historically has been a better 

indicator of where overall inflation will be in 

the future than the total figure, was 2 percent 

in May. This reading was \12 percentage point 

above where it had been 12 months earlier. as 

the unusually low readings from last year were 

not repeated. Measures of longer-run inflation 

expectations have been generally stable. 

Economic growth. Real gross domestic product 

(GDP) is reported to have increased at an 

annual rate of 2 percent in the first quarter 

of 2018, and recent indicators suggest that 

economic growth stepped up in the second 

quarter. Gains in consumer spending slowed 

early in the year, but they rebounded in 

the spring, supported by strong job gains, 

recent and past increases in household 

wealth, favorable consumer sentiment, and 

higher disposable income due in part to the 

implementation of the Tax Cuts and Jobs Act. 

Business investment growth has remained 

robust, and indexes of business sentiment have 

been strong. Foreign economic growth has 

remained solid, and net exports had a roughly 

neutral eJTeet on real U.S. GDP growth in the 

first quarter. However, activity in the housing 

market has leveled off this year. 

Financial conditions. Domestic financial 

conditions for businesses and households 

have generally continued to support economic 

growth. After rising steadily through 2017. 

broad measures of equity prices are modestly 

higher, on balance, from their levels at the end 

of last year amid some bouts of heightened 

volatility in financial markets. While longterm Treasury yields, mortgage rates, and 

yields on corporate bonds have risen so far 

this year, longer -term interest rates remain 

low by historical standards, and corporate 

bond issuance has continued at a moderate 

pace. Moreover, most types of consumer loans 
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2 SUMMARY 

remained widely available for households with 

strong creditworthiness, and credit provided by 

commercial banks continued to expand. The 

foreign exchange value of the U.S. dollar has 

appreciated somewhat against the currencies 

of our trading partners this year, but it 

remains below its level at the start of 2017. 

Foreign financial conditions remain generally 

supportive of growth despite recent increases 

in financial stress in several emerging market 

economies. 

F'inancial stability. The U.S. financial system 

remains substantially more resilient than 

during the decade before the financial crisis. 

Asset valuations continue to be elevated 

despite declines since the end of 2017 in the 

forward price-to-earnings ratio of equities and 

the prices of corporate bonds. In the private 

nonfinancial sector, borrowing among highly 

levered and lower-rated businesses remains 

elevated, although the ratio of household 

debt to disposable income continues to be 

moderate. Vulnerabilities stemming from 

leverage in the financial sector remain low, 

reflecting in part strong capital positions 

at banks, whereas some measures of hedge 

fund leverage have increased. Vulnerabilities 

associated with maturity and liquidity 

transformation among banks, insurance 

companies, money market mutual funds, 

and asset managers remain below levels that 

generally prevailed before 2008. 

Monetary Policy 

Interest rate policy. Over the first half of 2018, 

the FOMC has continued to gradually increase 

the target range for the federal funds rate. 

Specifically, the Committee decided to raise 

the target range for the federal funds rate at 

its meetings in March and June, bringing it 

to the current range of I% to 2 percent. The 

decisions to increase the target range for the 

federal funds rate reflected the economy's 

continued progress toward the Committee's 

objectives of maximum employment and price 

stability. Even with these policy rate increases, 

the stance of monetary policy remains 

accommodative, thereby supporting strong 

labor market conditions and a sustained return 

to 2 percent inflation. 

The FOMC expects that further gradual 

increases in the target range for the federal 

funds rate will be consistent with a sustained 

expansion of economic activity, strong labor 

market conditions, and inflation ncar the 

Committee's symmetric 2 percent objective 

over the medium term. Consistent with this 

outlook, in the most recent Summary of 

Economic Projections (SEP), which was 

compiled at the time of the June FOMC 

meeting, the median of participants' 

assessments for the appropriate level for 

the federal funds rate rises gradually over 

the period from 2018 to 2020 and stands 

somewhat above the median projection for 

its longer-run level by the end of 2019 and 

through 2020. (The June SEP is presented 

in Part 3 of this report.) However, as the 

Committee has con tinned to emphasize, the 

timing and size of future adjustments to the 

target range for the federal funds rate will 

depend on the Committee's assessment of 

realized and expected economic conditions 

relative to its maximum-employment objective 

and its symmetric 2 percent inflation objective. 

Balance sheet policy. The FOMC has 

continued to implement the balance sheet 

normalization program described in the 

Addendum to the Policy Normalization 

Principles and Plans that the Committee issued 

about a year ago. Specifically, the FOMC has 

been reducing its holdings of Treasury and 

agency securities by decreasing, in a gradual 

and predictable manner, the reinvestment 

of principal payments it receives from these 

securities. 

Special Topics 

Prime-age labor force participation. Labor 

force participation rates (LFPRs) for men and 

women between 25 and 54 years old-that is, 

the share of these individuals either working 

or actively seeking work-trended lower 
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between 2000 and 2013. Those trends likely 

reflect numerous factors, including a long-run 

decline in the demand for workers with lower 

levels of education and an increase in the 

share of the population with some form of 

disability. By contrast, the prime-age LFPR 

has increased notably since 2013, and the 

share of nonparticipants who report wanting 

a job remains above pre-recession levels. Thus, 

some continuation of the recent increase in 

the prime-age LFPR may be possible if labor 

demand remains strong. (See the box "The 

Labor Force Participation Rate for Prime-Age 

Individuals" in Part 1.) 

Oil prices. Oil prices have climbed rapidly 

over the past year, reflecting both supply and 

demand factors. Although higher oil prices 

are likely to restrain household consumption 

in the United States, much of the negative 

effect on GDP from lower consumer spending 

is likely to be offset by im:reascd production 

and investment in the growing U.S. oil sector. 

Consequently, higher oil prices now imply 

much less of a net overall drag on the economy 

than they did in the past, although they will 

continue to have important distributional 

effects. The negative effect of upward moves 

in oil prices should get smaller still as U.S. oil 

production grows and net oil imports decline 

further. (See the box "The Recent Rise in Oil 

Prices" in Part 1.) 

Monetary policy rnlcs. Monetary policymakers 

consider a wide range of information on 

current economic conditions and the outlook 

MONETARY POLICY REPORT: JULY 201 B 3 

when deciding on a policy stance they deem 

most likely to foster the FOMC's statutory 

mandate of maximum employment and stable 

prices. They also routinely consult monetary 

policy rules that connect prescriptions for the 

policy interest rate with variables associated 

with the dual mandate. The use of such rules 

requires, among other considerations, careful 

judgments about the choice and measurement 

of the inputs into the rules such as estimates 

of the neutral interest rate, which are highly 

uncertain. (See the box "Complexities of 

Monetary Policy Rules" in Part 2.) 

Interest on reserves. The payment of interest 

on reserves-balances held by banks in 

their accounts at the Federal Reserve-is an 

essential tool for implementing monetary 

policy because it helps anchor the federal 

funds rate within the FOMC's target range. 

This tool has permitted the FOMC to achieve 

a gradual increase in the federal funds rate in 

combination with a gradual reduction in the 

Fed's securities holdings and in the supply 

of reserve balances. The FO M C judged that 

removing monetary policy accommodation 

through first raising the federal funds rate 

and then beginning to shrink the balance 

sheet would best contribute to achieving and 

maintaining maximum employment and 

price stability without causing dislocations in 

financial markets or institutions that could put 

the economic expansion at risk. (See the box 

"Interest on Reserves and Its Importance for 

Monetary Policy" in Part 2.) 
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5 

PART 1 

RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS 

Domestic 

Labor market conditions have continued to 

strengthen so far in 2018. According to the 

Bureau of Labor Statistics (BLS), gains in 

total nonfarm payroll employment averaged 

215,000 per month over the Jirst half of the 

year. That pace is up from the average monthly 

pace of job gains in 2017 and is considerably 

faster than what is needed to provide jobs for 

new entrants into the labor force (iigure I).' 

Indeed, the unemployment rate edged down 

from 4.1 percent in December to 4.0 percent 

in June (figure 2). This rate is below all 

Federal Open Market Committee (FOMC) 

participants' estimates of its longer-run 

normal level and is about 'h percentage point 

below the median of those estimates-' The 

unemployment rate in June is close to the lows 

last reached in 2000. 

The labor force participation rate (LFPR), 

which is the share of individuals aged 16 

and older who are either working or actively 

looking for work, was 62.9 percent in June 

and has changed little, on net, since late 

2013 (figure 3). The aging of the population 

is an iinportant contributor to a downward 

trend in the overall participation rate. In 

particular, members of the baby-boom 

cohort are increasingly moving into their 

retirement years, a time when labor force 

participation is typically low. Indeed, the 

share of the civilian population aged 65 

and over in the United States climbed from 

16 percent in 2000 to 19 percent in 2017 and 

is projected to rise to 24 percent by 2026. 

Given this trend, the flat trajectory of the 

l. Monthly job gains in the range of 130,000 to 

160.000 are consistent with an unchanged unemployment 

rate and an unchanged labor force participation rate. 

2. See the Summary of Economic Projections in Part 3 

of this report. 

1. Net change in payroll employment 

}-monlhmovingaverages !bottsandsofJobs ~~ ---~ ---~ -~-~~------------~ 

Private 400 

200 

200 

400 

600 

800 

SocRCf: Bureau of labor StallstJcs via Haver Anal)-tlcs. 
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6 PART 1: RECENT ECONOMIC AND EINANCIAL DEVELOPMENTS 

2. Measures of labor tmderutilization 

SOlJRCE: Bureau of Labor Statistics via Haver Analytics 

3. Labor force participation rates and 

employment-to-population ratio 

85 La\x:lrl(m;cpartlctpatwnm!c 68 

66 

LFPR during the past few years is consistent 

with strengthening labor market conditions. 

Similarly. the LFPR for individuals between 

25 and 54 years old--which is much less 

sensitive to population aging--has been rising 

for the past several years. (The box "The 

Labor Force Participation Rate for PrimeAge Individuals" examines the prospects for 

further increases in participation for these 

individuals.) The employment-to-population 

ratio for individuals 16 and over-the share 

of the total population who are workingwas 60.4 percent in June and has been 

gradually increasing since 20 II, reflecting the 

combination of the declining unemployment 

rate and the flat LFPR. 

Other indicators are also consistent with 

a strong labor market. As reported in the 

Job Openings and Labor Turnover Survey 

(JOLTS), the rate of job openings has 

remained quite elevated3 The rate of quits has 

3. Indeed, the number of job openings now about 

matches the number of unemployed individuals. 
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stayed high in the JOLTS, an indication that 

workers are able to successfully switch jobs 

when they wish to. In addition, the JOLTS 

layoJT rate has been low, and the number of 

people filing initial claims for unemployment 

insurance benel1ts has remained ncar its 

lowest level in decades. Other survey evidence 

indicates that households perceive jobs as 

plentiful and that businesses see vacancies as 

hard to fill. Another indicator, the share of 

workers who are working part time but would 

prefer to be employed full time---which is part 

of the U -6 measure of labor underutilization 

from the BLS--fell further in the first six 

months of the year and now stands close to its 

pre-recession level (as shown in figure 2) . 

. . . and unemployment rates have fallen 

for all major demographic groups 

The continued decline in the unemployment 

rate has been reflected in the experiences of 

multiple racial and ethnic groups (Jlgure 4). 

The unemployment rates for blacks or 

African Americans and Hispanics tend to 

rise considerably more than rates for whites 

and Asians during recessions but decline 

4. Unemployment rate by race and ethnicity 

MONETARY POLICY REPORT: jULY 2018 7 
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8 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS 

The labor Force Participation Rate for Prime-Age Individuals 

The overall labor force participation rate (LFPRJ has 

generally been trending lower since 2000, and while 

the aging of the baby-boom generation into retirement 

ages provides an important reason for that decline, 

it is not the only reason. Another contributing factor, 

as shown in figure A, is that the LFPRs of prime-age 

men and women (those between 25 and 54 years 

old) trended lower through 2013 even though primeage LFPRs are largely unaffected by the aging of 

the population: The prime-age male LFPR has been 

declining for six decades, and the prime-age female 

LFPR has drifted lower since 2000 after a multidecade 

increase. Nevertheless, prime-age LFPRs have moved 

up notably and consistently since 2013, as improving 

labor market conditions have drawn some individuals 

back into the labor force and encouraged others not to 

leave. These recent increases in the prime-age LFPR, 

in the context of the longer-run trend decline, raise the 

question of how much additional scope there is for 

further increases in prime-age labor force participation. 

To gauge whether further increases are possible, a 

useful starting point is understanding the factors behind 

the longer-run decline in the prime-age LFPR, as these 

factors may limit additional increases if they continue 

to exert some downward pressure. One factor may 

be a secular decline in the demand for workers with 

lower levels of education. Indeed, as shown in figure B, 

the long-run declines in prime-age LFPR are much 

larger among adults without a college degree than 

among college-educated adults. Research suggests that 

A. Prime-age labor force participation rates 

Research. 

SoLRn.: Bureau ofi.abor Statistics. 

increases in automation, such as the use of robotics, 

and various aspects of globalization have spurred 

the elimination of some types of jobs~in particular, 

some manufacturing jobs that have historically been 

held by workers without a college education-and 

emerging jobs may require a different set of skills. These 

developments may have led some workers to become 

discouraged over the lack of suitable job opportunities 

and drop out of the labor force. 1 The rising share of 

college-educated workers, which may partly reflect 

individuals responding over time to the declining 

demand for jobs that require less education, has likely 

prevented even steeper declines in the prime-age LFPR, 

as better-educated workers have higher LFPRs and 

may be more adaptable to unforeseen disruptions in 

particular jobs or industries. 

Another potential factor may be that an increasing 

share of the prime-age population has some difficulty 

working because of physical or mental disabilities. 

For example, figure C shows that about 5 percent of 

both prime-age men and women report that they are 

out of the labor force and do not want a job due to 

disability or illness; those shares have trended higher 

over the past several decades. Other research suggests 

that increased opioid use may be associated with a 

lower prime-age LFPR, although it is unclear how 

much of the decline in the prime-age LFPR can be 

directly explained by opioid use or whether increases 

(continued) 

1. For evidence on displacement from technological 

see David H. Autor, David Dorn, and Gordon H. 

"Untangling Trade and Technology: Evidence 

from local Markets," Economic journal, voL 125 (May), 

pp. 621-46; Oaron Acernog!u and Pascual Restrepo (201 n "Robots and Jobs: Evidence from U.S. labor Markets," NBER 

Working P<lper Series 23285 (Cambridge, Mass.: National 

Bureau of Economic Research, March), 

Daron Acemoglu and 

lntC'!!igence, Alltomation, 

24196 (Cambridge, Mass.: 

Research, january), ,vv,w.<me,c.oc:y 

For evidence on g!obalization~in 

2000s-see David 

Oorn, and Gordon H. Hanson (2013), 

Syndrome: Local Labor Market Effects of Import Competition 

in the United States/' American Economic Review, vo!. 103 

(October), pp. 2121-68. A discussion of these and other 

explanations is also provided in Katharine G. Abraham and 

Melissa S. Kearney (2018), "Explaining the Decline in the U.S. 

Employment-to-Population Ratio: A Review of the Evidence," 

NBER Working Paper Series 24333 (Cambridge, Mass.: 

National Bureau of Economic Research, February), ww\v.nlwr. 

PI g/pclperS.\\'2-1333. 
81 

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MONETARY POliCY REPOH JULY 2018 9 

B. Prime-age labor force participation rates by education 

Men Women 

Nun::: The data arc seasonally adjusted 12-month moving averages and extend through May 2018. The shaded bars indicate 

periods of business recession as defined by the National Bureau of Economic Research. 

SocRCE: U.S. Census Bureau. Current Population Survey. 

in opioid use are an indirect result of poor employment 

opportunities. 2 

Caregiving responsibilities play an important role in 

explaining why LFPRs for prime-age women are lower 

than for men, and they may play an increasing role in 

explaining declining prime-age LFPRs for men as well. 

As shown in figure C, roughly 15 percent of primeage women report being out of the labor force for 

caregiving reasons--by far the largest reason for primeage women to report not wanting a job----but this share 

has been fairly flat over time. ln contrast, while a much 

smaller fraction of men are out of the labor force for 

caregiving reasons, that share has trended up in recent 

decades, likely reflecting some shift in household 

2. Evidence that opioid use could be significant for 

understanding the declining LFPR is provided by Alan B. 

Krueger (2017), "Where Have A!! the Workers Gone? An 

Inquiry into the Decline of the U.S. Labor Force 

Rate," Brookings 

kruc~crtextfa17bpea.p<if, 

opioid prescriptions and employment at the county is 

found in janet Currie, Jonas Y. jln, and Molly Schnell (2018), 

''U.S. Employment and Opioids: Is There a Connection?" 

NBER Working Paper Series 24440 (Cambridge, Mass.: 

National Bureau of Economic Research, March), ww·w.nher. 

Some evidence on whether the opioid 

varies with local economic conditions is provided 

Larrimore, Alex Durante, Kimberly Kreiss, Ellen Merry, 

responsibilities as women participate in the workforce 

in greater numbers. For some--especially those for 

whom childcare costs are not a major concern~not 

participating in the labor force may represent an 

unconstrained choice to care for other members of their 

families. For others, however, this decision may reflect 

a lack of affordable childcare. 

Additionally, the shore of the populotion--

particularly black men---·with a history of incarceration 

has increased over time. Individuals who have 

previously been incarcerated often have trouble finding 

work, in part because many employers choose not to 

hire people with such "background and likely also 

in part because incarceration prevents people from 

accumulating work experience and developing skills 

valuable to employers. Discrimination could also help 

explain the lack of participation for some minority 

groups, as they recognize that such discrimination 

limits their job opportunities. 

lnternotional comparisons may help clarify the 

importance of some of those factors. Since 1990, the 

(continued on next page) 
82 

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1 () PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS 

The Labor Force Participation Rate (continued) 

C. Prime-age non participation by reason 

Men Women 

Percent Monthly Puccnt 

16 

1-l 

12 

10 

12-month moving averages and extend through May 2018. 

by the National Bureau of Economic Research. 

SocRcE: U.S. Census Bureau. Current Population Survey. 

prime-age LFPR in the United States has declined 

considerably for both men and women relative to other 

advanced countries. Some factors, like automation and 

globalization, have affected all advanced economies to 

some degree and for some time, yet diverging long-run 

trends in prime-age labor force participation have still 

occurred. Research suggests that part of the relative 

decline in the United States is explained by differential 

changes in work~family policies across countries. 

Other parts of the divergence may be explained by 

other policies, including policies designed toward 

keeping those affected by automation anrl globalization 

attached to the labor force, or other factors-such as 

incarceration or opioid use-that differ across those 

countries. 3 

Although many of the factors behind the 

multidecade decline in the prime-age LFPR may 

persist, some continuation of the increases in the LFPR 

over the past few years nevertheless seems possible, 

especially if labor market conditions remain favorable. 

Indeed, as shown in figure C, although the share of 

nonparticipating prime~age men and women who 

3. For recent trends on prime-age LFPRs in the United 

States compared with other developed countries, see 

Organisation for Economic Co-operation and Development 

(2018), OECD United States 2018 (Paris: 

OECD Publishing), 

en. For a description of policy differences across countries 

self-report as wanting a job (despite not having actively 

searched for a job recently) has been declining since 

2010, that share for men remains between 1f4 and 

1

h percentage point above its 2007 !eve! and earlier 

expansion peaks. Furthermore, prime-age men and 

women who had previously reported being out of the 

labor force and not wanting a job due to disability or 

illness have been entering the labor force at increasing 

rates in recent years. 

Looking forward, how can policymakers support 

additional improvements in the prime-age LFPR? 

Favorable labor markN conditions can likely help, 

and monetary policy can therefore play a role through 

supporting strong cyclical conditions as part of its 

maximum-employment objective. However, structural 

factors (in contrast with cyclical ones) are also 

important to address; policies to address such factors 

are beyond the scope of monetary policy. 

and how this may affect differences in LFPR, see International 

Monetary Fund (2018), "Labor Force Participation in Advanced 

Economies: Drivers and Prospects," chapter 2 in World 

Economic Outlook: Cyclical Upswing, Structural Change 

{Washington: IMF, April), pp. 71-128. For evidence on how 

work~family policies may affect prime~age lFPRs in the United 

States relative to other OECD st.>e Francine D. B!au 

and Lawrence M. Kahn (2013), Labor Supply: Why 

Is the United States Falling Behind?" American Economic 

Review, vol. 103 (May), pp. 251·-·56. 
83 

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more rapidly during expansions. Indeed, 

the declines in the unemployment rates for 

blacks and Hispanics have been particularly 

striking, and the rates have recently been at 

or near their lowest readings since these series 

began in the early 1970s. Although differences 

in unemployment rates across ethnic and 

racial groups have narrowed in recent years, 

they remain substantial and similar to prerecession levels. The rise in LFPRs for primeage individuals over the past few years has 

also been evident in each of these racial and 

ethnic groups, with increases again particularly 

notable for African Americans. Even so, the 

LFPR for whites remains higher than that for 

the other groups (figure 5) 4 

Increases in labor compensation have 

been moderate ... 

Despite the strong labor market, the available 

indicators generally suggest that increases 

in hourly labor compensation have been 

moderate. Compensation per hour in the 

business sector-a broad-based measure 

of wages, salaries, and bcnchts that is quite 

volatile-rose 2% percent over the four 

quarters ending in 2018:Ql, slightly more than 

the average annual increase over the preceding 

seven or so years (figure 6). The employment 

cost index-a less volatile measure of both 

wages and the cost to employers of providing 

bcnefits··-likewise was 2% percent higher in 

the first quarter of 2018 relative to its yearearlier level; this increase was \1, percentage 

point faster than its gain a year earlier. Among 

measures that do not account for benefits. 

average hourly earnings rose 2% percent in 

June relative to 12 months earlier, a gain in 

line with the average increase in the preceding 

few years. According to the Federal Reserve 

Bank of Atlanta, the median 12-month wage 

4. The lower levels of labor force participation for 

these other groups differ importantly by sex. For African 

Americans, men have a lower participation rate relative 

to white men. while the participation rate for African 

American women is as high as that of white women. By 

contrast, the lower LFPRs for Hispanics and Asians 

reflect lower participation among women. 

MONETARY POLICY REPORT: JULY 2018 11 

5. Prime-age labor force participation rate by race and 

cthnicity 

6. Measures of change in hourly compensation 

-· 6 

~- 5 

LL___: _L _ _L__L_L__L ___ L_ .. _L_ ... _LJ 

2010 2012 20!4 2016 2018 
84 

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12 PART 1 o RECENT ECONOMIC AND FINANCIAl DEVElOPMENTS 

7. Change in business-sector output per hour 

~-- 4 

growth of individuals reporting to the Current 

Population Survey increased about 3'1. percent 

in May, also similar to its readings from the 

past few years. 5 

... and likely have been restrained by 

slow growth of labor productivity 

Those moderate rates of compensation 

gains likely reflect the offsetting influences 

of a strong labor market and persistently 

weak productivity growth. Since 2008, labor 

productivity has increased only a little more 

than 1 percent per year. on average, well below 

the average pace from 1996 through 2007 of 

2.8 percent and also below the average gain in 

the 1974-95 period of 1.6 percent (figure 7). 

The weakness in productivity growth may 

be partly attributable to the sharp pullback 

in capital investment during the most recent 

recession and the relatively slow recovery 

that followed. However, considerable debate 

remains about the reasons for the recent 

slowdown in productivity growth and whether 

it will persist6 

Price inflation has picked up from !he 

low readings in 2017 

In 2017, inflation remained below the FOMC's 

longer-run objective of 2 percent. Partly 

because the softness in some price categories 

appeared idiosyncratic, Federal Reserve 

policymakers expected inflation to move 

higher in 20187 This expectation appears to be 

5. The Atlanta Fed's measure differs from others in 

that it measures the wage growth only of workers who 

were employed both in the current survey month and 

12 months earlier. 

6. The box "Productivity Developments in the 

Advanced Economies'' in the July 2017 Monetary 

Polic_v Report provides more information. Sec Board 

of Governors of the Federal Reserve System (20 17), 

Monetary Policy Report (Washington: Board of 

Governors, July), pp. 12-13, h!tps://v,. \\\\ Jcdcralr.-:scnt'. 

go\/monetar) policy!2017-07-mpr-part l.htm. 

7. Additional details can be found in the June 2017 

Summary of Economic Projections, an addendum to the 

minutes of the June 2017 FOMC meeting. See Board 

of Governors of the Federal Reserve System (20 17), 

·'Minutes of the Federal Open Market Committee, 
85 

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on track so far. Consumer price inflation, as 

measured by the 12-month percentage change 

in the price index for personal consumption 

expenditures (PCE), moved up to 2.3 percent 

in May (figure 8). Core PCE inflation, which 

excludes consumer food and energy prices that 

are often quite volatile and typically provides 

a better indication than the total measure of 

where overall inflation will be in the future, 

was 2 percent over the 12 months ending in 

May-0.5 percentage point higher than it 

had been one year earlier. The total measure 

exceeded core inllation because of a sizable 

increase in consumer energy prices. In 

contrast, food price inflation has continued to 

be low by historical standards--data through 

May show the PCE price index for food and 

beverages having increased less than Y, percent 

over the past year. 

The higher readings in both total and core 

inllation relative to a year earlier rellect faster 

price increases for a wide range of goods and 

services this year and the dropping out of the 

12-month calculation of the steep one-month 

decline in the price index for wireless telephone 

services in March last year. The 12-month 

change in the trimmed mean PCE price 

index-an alternative indicator of underlying 

inflation produced by the Federal Reserve 

Bank of Dallas that may be less sensitive 

than the core index to idiosyncratic price 

movements-slowed by less than core inflation 

over 2017 and has also increased a bit less 

this year. This index rose 1.8 percent over the 

12 months ending in May, up a touch from the 

increase over the same period last year. 8 

June 13-14, 2017," press release, July 5, llltps:// 

8. The trimmed mean index excludes whatever prices 

showed the largest increases or decreases in a given 

month; for example. the sharp decline in prices for 

wireless telephone services in March 2017 was excluded 

from this index. 

MONETARY POLICY REPORT: JULY 2018 13 

8. Change in the price index for personal consumption 

expenditures 

Monthly 11-monthpercentchange ----·-····---·-·-

Total 3.0 

2.5 

2.0 

1.5 

l 0 

.5 

NoTE: The data extend through May 20 18; changes arc from one year 

car her. 
86 

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1 4 PART 1: RECENT ECONOMIC AND FINANCIAl DEVELOPMENTS 

9. Brent spot and futures prices 

Week.l} -------·-· _ 

ICE Brent Futures via Bloomberg. 

100 

90 

80 

70 

·- 60 

50 

40 

30 

20 

10. Non fuel import prices and industrial metals indexes 

July2014 ·)0{) July20!4-l00 

--------·-

120 102 

110 

100 100 

9R 

80 96 

70 

94 60 --

Analytics. 

Oil prices have surged amid supply 

concerns ... 

As noted, the faster pace of total inflation 

this year relative to core inflation reflects a 

substantial rise in consumer energy prices. 

Retail gasoline prices this year were driven 

higher by a rise in oil prices. The spot price of 

Brent crude oil rose from about $65 per barrel 

in December to around $75 per barrel in early 

July (figure 9). Although that increase took 

place against a backdrop of continued strength 

in global demand, supply concerns have 

become more prevalent in recent months. (For 

a discussion of the reasons behind the oil price 

increases along with a review of the effects of 

oil prices on U.S. economic growth, see the 

box "The Recent Rise in Oil Prices.") 

... while prices of imports other than 

energy have also increased 

Nonfuel import prices rose sharply in early 

2018, partly reflecting the pass-through 

of earlier increases in commodity prices 

(figure J 0). In particular, metals prices posted 

sizable gains late last year due to strong 

global demand but have retreated somewhat 

in recent weeks. 

Survey-based measures oi inflation 

expectations have been stable ... 

Expectations of inflation likely influence actual 

inflation by affecting wage- and price-setting 

decisions. Survey-based n1easurcs of inflation 

expectations at medium- and longer-term 

horizons have remained generally stable so 

far this year. In the Survey of Professional 

Forecasters conducted by the Federal Reserve 

Bank of Philadelphia, the median expectation 

for the annual rate of increase in the PCE 

price index over the next I 0 years has been 

around 2 percent for the past several years 

(figure II). In the University of Michigan 

Surveys of Consumers, the median value 

for inflation expectations over the next 5 to 

I 0 years has been about 2 Y2 percent since 

the end of 2016, though this level is about 

V. percentage point lower than had prevailed 

through 2014. In contrast, in the Survey of 

Consumer Expectations conducted by the 
87 

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Federal Reserve Bank of New York, the 

median of respondents' expected inflation rate 

three years hence has been moving up recently 

and is currently at the top of the range it has 

occupied over the past couple of years. 

... while market-based measures of 

inflation have 

moved sideways this year 

Inflation expectations can also be gauged 

by market-based measures of inflation 

compensation. However, the inference 

is not straightforward, because marketbased measures can be importantly affected 

by changes in premiums that provide 

compensation for bearing inflation and 

liquidity risks. Measures of longer-term 

inflation compensation--derived either from 

differences between yields on nominal Treasury 

securities and those on comparable-maturity 

Treasury Inflation-Protected Securities 

(TIPS) or from inflation swaps-have moved 

sideways for the most part this year after 

having returned to levels seen in early 2017 

(figure 12).9 The TIPS-based measure of 

5-to-l 0-year-forward inflation compensation 

and the analogous measure of inflation swaps 

arc now about 2 percent and 2'1, percent 

respectively, with both measures below the 

ranges that persisted for most of the 10 years 

before the start of the notable declines in 

mid-2014. 10 

9. lnllation compensation implied by the TIPS 

hrcakeven inflation rate is based on the difference, at 

comparable maturities, between yields on nominal 

Treasury securities and yields on TIPS, which are indexed 

to the total consumer price index (CPI). Inflation swaps 

are contracts in which one party makes payments of 

certain fixed nominal amounts in exchange for cash 

flows that arc indexed to cumulative CPI inflation over 

some horizon. l-<Ocusing on inflation compensation 5 to 

10 years ahead is useful, particularly for monetary policy. 

because such forward measures encompass market 

participants' views about where inflation will settle in the 

long term after developments influencing inflation in the 

short term have run their course. 

10. As these measures are based on CPI inflation, 

one should probably subtract about ~ to 1

1'1 percentage 

point-the average differential \vith PCE inflation over 

the past two decades--to infer inJ1ation compensation on 

a PCE basis. 

MONETARY POLICY REPORT: JULY 2018 1 5 

11. Median inflation expectations 

--------- ----~~~----

--~ 

~ SPF expectations 

for next 10 years 

12. 5-to-lO~ycar-forward inflation compensation 

·-- 4 

35 

30 

2.5 

2.0 

1.5 

10 
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16 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS 

The Recent Rise in Oil Prices 

Oil prices have increased more than 50 percent 

over the past year, with the spot price of Brent crude 

oil rising from a bit below $50 per barrel to around 

$75 per barrel (figure A). For much of the period, 

further-dated futures prices remained relatively stable, 

in the neighborhood of $55 per barrel; however, since 

February, futures prices have moved up appreciably, 

reaching over $70 per barreL 

Both supply and demand factors have contributed 

to the oil price increase. In particular, the broad-based 

improvement in the outlook for the global economy 

was a key driver of the price increase in the second 

half of 2017. In recent months, supply concerns have 

become more prevalent, affecting both spot and furtherdated futures prices. Despite sharply rising U.S. oil 

production, markets have been attuned to escalating 

conflict between Saudi Arabia and Iran as well as the 

precipitous decline in Venezuelan oil production amid 

A. Brent spot and futures prices 

n,uly 

Jan Mar May 

SOURCE: ICE Brent Futures via Bloomberg 

July 

2017 

Sept 

the country's economic and political crisis. Prices also 

increased after President Trump announced on May 8 

that the United States was withdrawing from the !ran 

nuclear deal and that sanctions against Iranian oil 

exports would be reinstated. 

The pattern of spot and futures prices indicates 

that market participants generally anticipate that oil 

prices will decline slowly over the next few years, in 

part reflecting an expectation that supply, including 

U.S. shale oil production, will grow to meet demand. 

In addition, the higher prices put pressure on OPEC's 

November 2016 agreement with certain non-OPEC 

countries to restrain production. A stated aim of the 

agreement was to reduce the glut in global inventories, 

and, in recent months, inventory levels have fallen 

rapidly toward long-run averages. In response to both 

lower inventories and higher prices, OPEC leaders 

slightly relaxed the production agreement in june this 

I continued) 

DoJiaroperbarrd ---------------··· 

QO 

80 

70 

60 

50 

40 

--- -- :___ _____ ,_ _____ ,___ ___ [ __ --- _L_ J 

Nov. Mar May July 

201S 
89 

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year, reducing some of the upward pressure on prices. 

That said, futures prices have not returned to their early 

2018 levels, implying that market participants expect 

some of the recent increase in prices to be long lasting. 

What is the expected effect of the recent rise in oil 

prices on the U.S. economy? To begin with, higher oil 

prices are likely to restrain household consumption. 

In particular, the increase in oil prices since last year 

is estimated to have translated into a roughly $300 

increase in annual expenditures on gasoline for the 

average household, from about $2,100 to $2,400. 

However, as U.S. oil production has grown rapidly 

over the past decade, the ratio of net U.S. oil imports 

to U.S. gross domestic product (GDP) has declined 

substantially (figure B). As a result, higher oil prices 

now imply much less of a redistribution of purchasing 

B. Net oil import share 

Pertent<lfnomma!GDP 

3.5 

-- 3.0 

2.5 

2.0 

L5 

1.0 

MONETARY POLICY REPORT: JULY 2018 1 7 

power abroad than in the past, as much of the negative 

effect on GDP from lower household consumption 

is likely to be offset by increased production and 

investment in the growing U.S. oil sector. On net, the 

drag on GDP from higher oil prices is likely a small 

fraction of what it was a decade ago and should get 

smaller still if U.S. oil production continues to grow 

as projected-·flgure C-and the net oil import share 

shrinks toward zero. 

Indeed, if U.S. oil trade moves fully into balance, 

the offsetting effects of a change in the relative price of 

oil might be expected to net out within the domestic 

economy. However, even if the United States is no 

longer a net oil importer, to the extent that higher 

oil prices cause credit-constrained consumers to cut 

spending by more than oil producers expand their 

investment, this redistribution of purchasing power 

could still have negative effects on overall GDP. 

C. U.S. crude oil production 

Qtwrtcrly 

13 

12 

11 

10 
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18 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS 

13. Change in real gross domestic product and gross 

domestic income 

Pcr<:cnl,annua!rJ.tc 

QJ 

SOURCL Bureau of Economic Analysis via Haver Ana!ytics. 

14. Change in real personal consumption expenditures 

and disposable personal income 

15. Personal saving rate 

Momhly 

" 

10 

Real gross domestic product growth 

slowed in !he first quarter, bu! spending 

by households appears to have picked up 

in recent months 

After having expanded at an annual rate of 

3 percent in the second half of 2017, real gross 

domestic product (GDP) is now reported to 

have increased 2 percent in the first quarter of 

this year (figure 13). The step-down in growth 

during the first quarter was largely attributable 

to a sharp slowing in the growth of consumer 

spending that appears transitory, and gains in 

GDP appear to have rebounded in the second 

quarter. Meanwhile, business investment has 

remained strong, and net exports had little 

clfect on output growth in the first quarter. On 

balance, over the first half of this year, overall 

economic activity appears to have expanded at 

a solid pace. 

The economic expansion continues to be 

supported by favorable consumer and business 

sentiment, past increases in household 

wealth, solid economic growth abroad, and 

accommodative domestic financial conditions, 

including moderate borrowing costs and easy 

access to credit for many households and 

businesses. 

Gains in income and wealth continue to 

support consumer spending ... 

Following exceptionally strong growth in the 

fourth quarter of 2017, consumer spending 

in the lirst quarter of this year was tepid, 

rising at an annual rate of 0. 9 percent. The 

slowdown in growth was evident in outlays 

for motor vehicles and in retail sales more 

generally; moreover, unseasonably warm 

weather depressed spending on energy services. 

However, consumer spending picked up in 

more recent months as retail sales lirmcd, and 

PCE in April and May rose at an annual rate 

of 2Y.. percent relative to the average over the 

lirst quarter (!igure 14). 

Real disposable personal income (DPI), a 

measure of after-tax income adjusted for 

inflation, has increased at a solid annual rate 

of about 3 percent so far this year. Real DPI 
91 

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has been supported by the reduction in income 

taxes owing to the implementation of the 

Tax Cuts and Jobs Act (TCJA) as well as the 

continued strength in the labor market. With 

consumer spending rising just a little less than 

the gains in disposable income so far this year, 

the personal saving rate has edged up after 

having fallen for the past two years (figure 15). 

Ongoing gains in household net worth likely 

have also supported consumer spending. 

House prices, which are of particular 

importance for the balance sheet positions of 

a large set of households, have been increasing 

at an average annual pace of about 6 percent in 

recent years (figure 16). 11 Although U.S. equity 

prices have posted modest gains, on net, so far 

this year, this flattening followed several years 

of sizable gains. Buoyed by the cumulative 

increases in home and equity prices, aggregate 

household net worth was 6.8 times household 

income in the first quarter, down just slightly 

from its ratio in the fourth quarter--the 

highest -ever reading for that ratio, which dates 

back to 1947 (Jlgurc 17). 

... and borrowing conditions for 

consumers remain generally favorable ... 

Financing conditions for consumers are 

generally favorable and remain supportive 

of growth in household spending. However, 

banks have continued to tighten standards 

for credit cards and auto loans for borrowers 

with low credit scores, possibly in response 

to some upward moves in the delinquency 

rates of those borrowers. Mortgage credit has 

remained readily available for households with 

solid credit profiles. For borrowers with low 

credit scores, mortgage Jlnancing conditions 

have eased somewhat further but remain tight 

overall. In this environment, consumer credit 

continued to increase in the first few months 

of 2018, though the rate of increase moderated 

some from its robust pace in the previous year 

(figure 18). 

II. For the rnajmity of households. home equity 

makes up the largest share of their \Vealth. 

MONETARY POLICY REPORT: JULY 2018 19 

16. Prices of existing single-family houses 

Pcrcentchangcfromycarcarher 

15 

10 

15 

20 

17. Wealth-to-income ratio 

Quan~rly Ratto 

-- 7.0 

6.5 

6.0 

5.5 

5.0 

2000 2003 2006 

Non:: The series is the ratio of household net worth to disposable personal 

Ana!y~is via Haver Analytics 

18. Changes in household debt 

Mortgages 

D11 Consumer credit 

-Sum 

Bi!lionsofdoilaro,annualrnte 

--- !.000 

800 

600 

400 

200 

200 

4110 

600 
92 

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2 0 PART 1' RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS 

19. Indexes of consumer sentiment and income expectations 

I.MTus1onmdcx Index 

average. 

SOCR("F.· University of Michigan Surveys of Consumers 

20. Change in real private nonresidential fixed investment 

Percent, annual raw 

Structures 

II Equipment and intangible capital 

SouRer: Burcatl of Economic Analysis \'Ja Haver Ana!ytics. 

21. Selected components of net debt financing for 

nonfinancial businesses 

Ill Commercial paper 

1fj Bonds 

IIIII Bank loans 

Sum 

20 

!5 

10 

10 

80 

40 

20 

20 

40 

SOJJRl'E: Federal Reserve Board, Statistical Release Z.l, "Finannal 

Accounts of the United States." 

... while consumer confidence remains 

strong 

Consumers have remained upbeat. So far this 

year, the Michigan survey index of consumer 

sentiment has been near its highest level 

since 2000, likely reflecting rising income, job 

gains, and low inflation (figure 19). Indeed, 

households' expectations for real income 

changes over the next year or two now stand 

above levels preceding the previous recession. 

Business investment has continued 

to rebound ... 

Investment spending by businesses has 

continued to increase so far this year, with 

notable gains for spending, both on equipment 

and intangibles and on nonresidential 

structures (figure 20). Within structures, 

the rise in oil prices propelled another steep 

ramp-up in investment in drilling and mining 

structures-albeit not yet back to the levels 

recorded from 2012 to 2014---while investment 

in nonresidential structures outside of the 

energy sector picked up after declining in 

2017. Forward-looking indicators of business 

investment spending remain favorable on 

balance. Business sentiment and the profit 

expectations of industry analysts have been 

positive overall, while new orders of capital 

goods have advanced on net this year . 

. . . while corporate financing conditions 

have remained accommodative 

Aggregate flows of credit to large nonfinancial 

firms remained strong in the first quarter, 

supported in part by relatively low interest 

rates and accommodative financing conditions 

(figure 21). The gross issuance of corporate 

bonds stayed robust during the first half of 

2018, while yields on both investment- and 

speculative-grade corporate bonds moved 

up notably but remained low by historical 

standards (figure 22). Despite strong growth in 

business investment, outstanding commercial 

and industrial (C&I) loans on banks' books 

rose only modestly in the first quarter, 

although their pace of expansion in more 

recent months has strengthened on average. In 
93 

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April, respondents to the Senior Loan Officer 

Opinion Survey on Bank Lending Practices, 

or SLOOS, reported that demand for C&l 

loans weakened in the first quarter even as 

lending standards and terms on such loans 

eased." Respondents attributed this decline in 

demand in part to firms drawing on internally 

generated funds or using alternative sources of 

financing. Meanwhile, growth in commercial 

real estate loans has moderated some but 

remains strong. In addition, financing 

conditions for small businesses appear to 

have remained generally accommodative, with 

lending standards little changed at most banks 

and with most firms reporting that they arc 

able to obtain credit. Although small business 

credit growth has been subdued, survey data 

suggest this sluggishness is largely due to 

continued weak demand for credit by small 

businesses. 

But activity in the housing sector has 

leveled ofl 

Residential investment, which rose a modest 

2\-i percent in 2017, appears to have largely 

moved sideways over the first five months of 

the year. The slowing in residential investment 

likely is partly a result of higher mortgage 

interest rates. Although these rates are still 

low by historical standards, they have moved 

up and are near their highest levels in seven 

years (figure 23). In addition, higher lumber 

prices and tight supplies of skilled labor 

and developed lots reportedly have been 

restraining home construction. While starts 

of both single-family and multifamily housing 

units rose in the fourth quarter, single-family 

starts have been little changed, on net, since 

then, whereas multifamily starts continued 

to climb earlier this year before flattening 

out (figure 24). Meanwhile, over the first five 

months of this year, new home sales have 

held at around the rate of late last year, but 

sales of existing homes have eased somewhat 

(figure 25). Despite the continued increases 

in house prices, the pace of construction has 

12. The SLOOS is available on the Board's website at 

h tt ps: 1/W\\ \V. fed era ln:~cn c. gov/da tah-loos;\loo-.. ht m. 

MONETARY POLICY REPORT: JULY 2018 21 

22. Corporate bond yields, by securities rating 

pcnnisswn. 

23. Mortgage rates and housing affordability 

Pcr>:cnt lnde;.; 

205 

JRS 

165 

145 

125 

105 

85 

24. Private housing starts and permits 

Millionsofumts,annualralc 

20 

1.6 

.8 
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22 PART 1: RECENT ECONOMIC AND FINANCIAl DEVELOPMENTS 

25. New and existing horne sales 

75 

26. Change in real imports and exports of goods 

and services 

16 

~~~ ~---~--~--~-" :'r :c~cnt annual rate 

Ill Imports 

Exports 

2012 2013 2014 

&luRCE: Bureau ofEconomJC Analys1s v1a Ha·vcr Ana!ytK'S 

27. U.S. trade and current account balances 

Pcrccntuf n"mm~l GDl' 

--- 2 

not kept up with demand. As a result, the 

months' supply of inventories of homes for 

sale has remained at a relatively low level, and 

the aggregate vacancy rate stands at the lowest 

level since 2003. 

Net exports had a neutral effect on GOP 

growth in !he first quarter 

After being a small drag on U.S. real GDP 

growth last year, net exports had a neutral 

effect on growth in the first quarter. Real 

U.S. exports increased about 3'1, percent at 

an annual rate, as exports of automobiles 

and consumer goods remained robust. Real 

import growth slowed sharply following 

a surge late last year (figure 26). Nominal 

trade data through May suggest that export 

growth picked up in the second quarter, Jed 

by agricultural exports, while import growth 

was tepid. All told, the available data suggest 

that the nominal trade deficit likely narrowed 

relative to GOP in the second quarter 

(figure 27). 

Fiscal policy became more expansionary 

this year ... 

Federal fiscal policy will likely provide a 

moderate boost to GDP growth this year. The 

individual and corporate tax cuts in the TCJA 

should lead to increased private consumption 

and investment, while the Bipartisan Budget 

Act of 2018 (BBA) enables increased federal 

spending on goods and services. As the effects 

of the BBA had yet to show through, federal 

government pnrchases posted only a modest 

gain in the first quarter (figure 28). 

After narrowing significantly for several years, 

the federal unified deficit widened from about 

2'/, percent of GDP in fiscal year 2015 to 

3'/, percent in fiscal2017, and it is on pace 

to move up further in fisca120 18. Although 

expenditures as a share of GDP in 2017 

were relatively stable at 21 percent, receipts 

moved lower to roughly I 7 percent of GDP 

and have remained at about the same level so 

far this year (figure 29). The ratio of federal 
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debt held by the public to nominal GDP was 

76'h percent at the end of fiscal2017 and is 

quite elevated relative to historical norms 

(figure 30). 

... and the fiscal of mos! state 

and local governments is stable 

The fiscal position of most state and local 

governments remains stable, although there is a 

range of experiences across these governments 

and some states are still struggling. After 

several years of slow growth. revenue gains of 

state governments have strengthened notably 

as sales and income tax collections have picked 

up over the past few quarters. In addition, 

house price gains have continued to push up 

property tax revenues at the local level. But 

expenditures by state and local governments 

have been restrained. Employment growth 

in this sector has been moderate, while real 

outlays for construction by these governments 

have largely been moving sideways at a 

relatively low level. 

Financial Developments 

The expected path of the federal funds 

rate has moved up 

Market-based measures of the path of the 

federal funds rate continue to suggest that 

market participants expect further gradual 

increases in the federal funds rate. Relative 

to the end of last year, the expected policy 

rate path has moved up, boosted in part by 

investors' perception of a strengthening in 

the domestic economic outlook (figure 31). 

In particular, the policy path moved higher 

in response to incoming economic data so far 

this year. especially the employment reports, 

which were seen as supporting expectations for 

a solid pace of growth in domestic economic 

activity. In addition, investors reportedly 

interpreted FOMC communications in the first 

half of 2018 as signaling an upbeat economic 

outlook and as reinforcing expectations for 

further gradual removal of monetary policy 

accommodation. 

MONETARY POLICY REPORT: JULY 2018 23 

28. Change in real government expenditures on 

consumption and investment 

l'ercent,annua!ratc 

Federal 

1111 State and local 

SoLRn: Bureau of Econ()mic Analysis 

29. Federal receipts and expenditures 

26 

14 

30. Federal government debt he!J by the public 

Pncentofno:nina!GDI' 

so 

70 

60 

50 

40 

JO 

20 
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2 4 PART 1: RECENT ECONOMIC AND FINANCI,\L DEVELOPMENTS 

31. Market-implied federal fUnds rate 

Quartdy Percent 

3.0 

1.5 

2.0 

Dec. 29.2017 

1.5 

10 

32. Yields on nominal Treasury securities 

Pcrccm 

Survey-based measures of the expected path 

of the policy rate over the next few years have 

also increased modestly since the end of last 

year. According to the results of the most 

recent Survey of Primary Dealers and Survey 

of Market Participants, both conducted by 

the Federal Reserve Bank of New York just 

before the June FOMC meeting, the median 

of respondents' projections for the path of the 

federal funds rate shifted up about 25 basis 

points for 2018 and beyond, compared with 

the median of assessments last December. 13 

Market-based measures of uncertainty about 

the policy rate approximately one to two years 

al1ead increased slightly, on balance, from their 

levels at the end of last year. 

The nominal Treasury yield curve has 

shifted up 

The nominal Treasury yield curve has shifted 

up and flattened somewhat further during the 

first half of 2018 after flattening considerably 

in the second half of 2017. In particular, the 

yields on 2- and l 0-year nominal Treasury 

securities increased about 70 basis points and 

45 basis points, respectively, from their levels 

at the end of 2017 (flgurc 32). The increase 

in Treasury yields seems to largely reflect 

investors' greater optimism about the domestic 

growth outlook and firming expectations for 

further gradual removal of monetary policy 

accommodation. Expectations for increases 

in the supply of Treasury securities following 

the federal budget agreement in early February 

also appear to have contributed to the increase 

in Treasury yields, while increased concerns 

about trade policy both domestically and 

abroad, political developments in Europe, 

and the foreign economic outlook weighed on 

longer-dated Treasury yields. Yields on 30-year 

agency mortgage-backed securities (MBS}-an 

important determinant of mortgage interest 

13. The results of the Survey of Primary Dealers 

and the Survey of Market Participants are available 

on the Federal Reserve Bank of New York's website at 

https:!/wv;w.nc\\yorkfcd.org/markds/primarydeakr~ 

"'-Y'""'"""·"""'and nm""'""." 
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rates--increased about 60 basis points over the 

first half of the year, a bit more than the rise in 

the 10-year nominal Treasury yield, but remain 

low by historical standards (figure 33). Yields 

on corporate debt securities--both investment 

grade and high yield-rose more than Treasury 

yields, leaving the spreads on corporate bond 

yields over comparable-maturity Treasury 

yields notably wider than at the beginning of 

the year. 

Broad equity indexes rose modestly amid 

some bouts of market volatility 

After surging as much as 20 percent in 2017, 

broad stock market indexes rose modestly, 

on balance, so far this year amid some bouts 

of heightened volatility in financial markets 

(figure 34). The boost to equity prices from 

first-quarter earnings reports that generally 

beat analysts' expectations was reportedly 

offset by increased uncertainty abont trade 

policy, rising interest rates, and concerns 

about political developments abroad. While 

stock prices for companies in the technology 

and consumer discretionary sectors rose 

notably, those of companies in the industrial 

and financial sectors declined modestly. After 

spiking considerably in early February, the 

implied volatility for the S&P 500 indexthe VIX--declined and ended the period 

slightly above the low levels that prevailed in 

2017. (For a discussion of financial stability 

issues, sec the box "Developments Related to 

Financial Stability.") 

Markets for Treasury securities, mortgagebacked securities, and municipal bonds 

have functioned well 

On balance, indicators of Treasury market 

functioning remained broadly stable over 

the first half of 2018. A variety of liquidity 

metrics---including bid-ask spreads, bid sizes, 

and estimates of transaction costs--have 

displayed nlinimal signs of liquidity pressures 

overall, with the exception of a brief period 

of reduced liquidity in early February amid 

elevated financial market volatility. Liquidity 

conditions in the agency MBS market were 

MONETARY POLICY REPORT: )UlY 2018 25 

33. Yield and spread on agency mortgage-backed securities 

Percent 

300 

250 

200 

150 

100 

Sm·Rc~o: Department of the Treasury; Bardays 

34. Equity prices 
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26 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS 

Developments Related to Financial Stability 

The U.S. findncial system remains substantially more 

resilient than during the decade before the financial 

crisis. 1 Valuations continue to be elevated for a range 

of assets. In the private nonfinancial sector, the ratio of 

total debt to gross domestic product (GDP) is about in 

line with an estimate of its trend, and vulnerabilities 

associated with debt remain moderate on balance. 

While borrowing among highly levered and lowerrated firms is elevated and a future weakening in 

economic activity could amplify some vulnerabilities 

in the corporate sector, the ratio of household debt to 

disposable income has remained stable in recent years. 

Vulnerabilities associated with leverage in the financial 

sector appear low, reflecting in part strong capital 

positions of banks. However, some measures of hedge 

fund leverage have increased. Vulnerabilities associated 

with maturity and liquidity transformation continue to 

be low compared with levels that generally prevailed 

before 2008. 

Valuation pressures in various asset markets 

remain elevated by historical standards, although 

they have declined somewhat since the start of the 

year, as corporate bond prices have fallen and higher 

earnings have helped rationalize equity prices. Market 

movements were outsized in February, around the time 

of the previous Monetary Policy Report. Since then, 

volatility has receded, although it has ended up slightly 

above the low levels seen in 2017. Even with higher 

expected earnings due in part to changes in tax law, the 

forward equity price-to-earnings ratio for the S&P 500 

remains in the upper end of its historical distribution 

(figure A). Treasury term premiums have increased 

modestly from the beginning of the year but remain 

low relative to historically observed values. Corporate 

bond yields and their spreads to yields on comparablematurity Treasury securities have increased notably, 

but they continue to be low by historical standards. In 

particular, speculative-grade yields and spreads lie in 

the bottom fifth and bottom fourth of their respective 

historical distributions. In leveraged loan markets, 

issuance has been robust, spreads have reached their 

lowest levels since the financial crisis, and the presence 

of loan covenants has decreased further. In real estate 

1. An overview of the framework for assessing financial 

stability in the United States is provided in lac! Brainard 

(2018), "An Update on the Federal Reserve's Financial Stabl!ity 

Agenda,'' speech delivered at the Center for Global Economy 

and Business, Stern Schoo! New York 

New York, Apri I 

i•w•:l20 180-lOlJ.hlc 

A. Forward price-to-earnings ratio of S&P 500 firms 

So~mrr Staff estimates based on Thomson Reuters, IllES. 

markets, commercial property valuations continue to 

be stretched. Capitalization rates (computed as the ratio 

of net operating income relative to property values) 

remain low, and, in recent quarters, their spreads to 

yields on 1 0-year Treasury securities have moved down 

considerably. Finally, valuation pressures in residential 

real estate markets increased modestly. Aggregate priceto-rent ratios, adjusted for an estimate of their long-run 

trend and the carrying cost of housing, are approaching 

the cycle peaks of the early 1980s and early 1990s but 

remain well below the levels observed on the eve of 

the financial crisis. 

With households and businesses taken together, the 

ratio of total debt to GOP is about in line with estimates 

of its trend, although pockets of stress are evident. !n 

the household sector, the net expansion of household 

debt has been in line with income growth and is 

concentrated among prime-rated borrowers. However, 

delinquency rates for some forms of consumer credit 

have moved up, suggesting rising strains among riskier 

borrowers even with unemployment very low. Banks 

are reportedly tightening standards on credit card and 

auto loans. In the nonfinancial business sector, leverage 

of corporate businesses remains high, as indicated by 

a positive sectoral credit-to-GDP gap. Net issuance of 

risky debt has risen in recent quarters, mainly driven by 

the growth in leveraged loans (figure 8). While current 

(continued) 
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B. Total net issuance of risky debt 

80 

40 

corporate credit conditions are favorable overall, 

with low interest expenses and defaults, the elevated 

leverage in this sector could result in higher future 

default rates. In addition, weak protection from loan 

covenants could reduce early intervention by lenders 

and lower recovery rates for investors on default. 

Investors may also be exposed to significant repricing 

risks because bond yields and credit risk premiums are 

both low. 

Vulnerabilities from financial-sector leverage 

continue to be relatively tow. Core financial 

intermediaries, including large banks, insurance 

companies, and broker-dealers, appear well positioned 

to weather economic stress. Regulatory capital ratios for 

the global systemically important banks have remained 

well above the fully phased-in enhanced regulatory 

requirements and are close to historical highs. Capital 

levels at insurance companies and broker~dealers 

also remain relatively robust by historical standards. 

However, some indicators of hedge fund leverage in 

the equity market, such as the provision of total margin 

credit to equity investors, have risen to historically 

elevated levels, and in the past few quarters dealers 

have reportedly eased, on net, price terms to their 

hedge fund clients. 

The results of supervisory stress tests released In June 

by the Federal Reserve Board confirm that the nation's 

largest banks are strongly capitalized and would be 

able to lend to households and businesses even during 

MONETARY POLICY REPORT: JUlY 2018 27 

a severe global recession.' The hypothetical "severely 

adverse'1 scenario---the most stringent scenario 

yet used in the Board's stress tests, with the U.S. 

unemployment rate rising almost 6 percentage points to 

10 percent-projects $578 billion in total losses for the 

35 participating banks during the nine quarters tested. 

Since 2009, these firms have added about $800 billion 

in common equity capital. The Board also evaluates the 

capital planning processes of the participating banks, 

including the firms' planned capital actions, such as 

dividend payments and share buybacks. 3 The Board did 

not object to the capital plans of 34 iirms. Although 

the recent U.S. tax legislation is expected to increase 

banks' post-tax earnings, and hence their ability 

to accrete capital, it did lead to one-time losses, 

decreasing banks' capital ratios at the end of 2017, the 

jumping-off point of the stress tests. In part because 

of these effects, evident in text tlgure 36, two firms 

were required to maintain their capital distributions 

at the levels they paid in recent Separately, one 

firm will be required to address management and 

analysis of its counterparty exposure under stress. The 

Board objected to the capital plan of one bank because 

of qualitative concerns. 

Vulnerabilities associated with liquidity and 

maturity transformation----that is, the financing of 

illiquid assets or long-maturity assets with shortmaturity debt~continue to be low, owing in part to 

liquidity regulations for banks and money market 

reform. Large banks have strong liquidity positions, 

because their use of core deposits as a source of 

funding and their holdings of high-quality liquid 

assets remain near historical highs, while their use of 

short-term wholesale funding as a share of liabilities 

is near historical lows. Since the money market fund 

reforms implemented in October 2016, assets under 

management at prime funds, institutions that proved 

vulnerable to runs in the past, have remained far below 

pre-reform levels. In addition, the growth in alternative 

short-term investment vehicles, which may have some 

(continued on next page) 

See Board of Governors of the Federal Reserve System 

"Federal Reserve Board RelE'ases Results of Supervisory 

june 21. 

bcn.'g20l G0629d.htm. 
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2 8 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS 

Financial Stability (continued) 

similar vulnerabilities, continues to be limited, as 

investors have shifted primarily from prime funds into 

government funds. 

Risks from abroad are moderate overall. Advanced 

foreign economies (AFEs), many of which have 

significant financial and real linkages to the United 

St.1tes, continue to have notable or elevated valuations 

in some asset markets and, in a few countries, high 

levels of household debt relative to GOP. These 

factors have contributed to some AFEs announcing 

or implementing macroprudential actions, including 

increases in countercyclical capital buffers, over the 

past couple of years. More generally, AFE financial 

sectors continue their slow pace of deleveraging 

that started after the global financial and euro-area 

sovereign debt crises. In addition, low corporate debt 

spreads in the past few years have yet to translate 

into any marked increase in leverage in most of these 

countries' nonfinancial corporate sectors. Some major 

emerging market economies continue to harbor 

more pronounced vulnerabilities, reflecting some 

combination of the following: subslantial corporate 

leverage, fiscal concerns, or excessive reliance on 

foreign funding. Globally, potential downside risks to 

international financial markets and financial stability 

include political uncertainty, an intensification of trade 

tensions, and challenges posed by rising interest rates. 

The countercyclical capital buffer (CCyB) is a 

macroprudential tool the Federal Reserve Board can 

usc to increase the resilience of the financial system 

by raising capital requirements on the largest banks. 

Activating the CCyB is appropriate when systemic 

vulnerabilities are meaningfully above normal. 4 The 

Board is closely monitoring the level and configuration 

of systemic vulnerabilities described earlier. 

4. See Board of Governors of the Federal Reserve System 

(2016), "Regulatory Capital Rules: The Federal Reserve Board's 

Framework for Implementing the U.S. Basel Ill <..o<J<n<Xc)'U"'"' 

Buffer," final policy statement (Docket No. 

vol. 81 (Septt'mbt'r 16), pp. 63682-llS. 
101 

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also generally stable. Overall, the functioning 

of Treasury and agency MBS markets has not 

been materially affected by the implementation 

of the Federal Reserve's balance sheet 

normalization program, including the 

accompanying reduction in reinvestment of 

principal payments from the Federal Reserve's 

securities holdings. Credit conditions in 

municipal bond markets have remained stable 

since the tnrn of the year. Over that period, 

yield spreads on 20-year general obligation 

municipal bonds over comparable-maturity 

Treasury securities edged up a bit. 

Money market rates have moved up in 

line with increases in the FOMC's target 

range 

Conditions in domestic short-term funding 

markets have also remained generally stable 

so far in 2018. Yields on a broad set of money 

market instruments moved higher in response 

to the FOMC's policy actions in March and 

June. Some money market rates rose during 

the first quarter more than what would 

normally occur with monetary tightening. 

For example, the spreads of certificates of 

deposit and term London interbank offered 

rates relative to overnight index swap (OIS) 

rates increased notably, reportedly reflecting 

increased issuance of Treasury bills and 

perhaps also the anticipated lax-induced 

repatriation of foreign earnings by U.S. 

corporations. The upward pressure on shortterm funding rates, beyond that driven by 

expected monetary policy, eased in recent 

months, leading to a narrowing of spreads 

of some money market rates to OIS rates. 

However, the spreads remain wider than at the 

beginning of the year. 

Bank credit continued to expand and 

bank nr.nllt:>lul 

Aggregate credit provided by commercial 

banks continued to increase through the first 

quarter of 2018 at a pace similar to the one 

seen in 2017. Its pace was slower than that of 

nominal GDP, thus leaving the ratio of total 

commercial bank credit to current-dollar 

MONETARY POLICY REPORT: jULY 2018 29 
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30 PART 1: RECENT ECONOMIC AND EINANCIAL DEVELOPMENTS 

35. Ratio of total commercial bank credit to nominal gross 

domestic product 

36. Protitability of bank holding companies 

2.0 

LO 

.5 

t 

0 

.5 

LO 

LS 

37. Equity indexes for selected foreign economies 

Per~cnt 

75 

70 

65 

60 

55 

30 

10 

20 

Weekly Weckcndmglanuary7,2015m J(lf) 

140 

130 

120 

110 

100 

90 

80 

GDP slightly lower than in the previous year 

(figure 35). Available data for the second 

quarter suggest that growth in banks' core 

loans continued to be moderate. Measures of 

bank profitability improved in the first quarter 

of 2018 after having experienced a temporary 

decline in the last quarter of 2017. Weaker 

fourth-quarter measures of bank profitability 

were partly driven by higher write-downs of 

deferred tax assets in response to the U.S. tax 

legislation (figure 36). 

International Developments 

Political developments and signs of 

moderating growth weighed on advanced 

foreign economy asset prices 

Since February, political developments 

in Europe and moderation in economic 

growth outside of the United States weighed 

on some risky asset prices in advanced 

foreign economies (AFEs). Interest rates on 

sovereign bonds in several countries in the 

European periphery rose notably relative to 

core countries, and European bank shares 

came under pressure, as investors focused 

on the formation of the ltalian government. 

Nonetheless, peripheral bond spreads 

remained well below their levels at the height 

of the euro-area crisis, and the moves partly 

retraced as a government was put in place. 

Broad stock price indexes were little changed 

on net (figure 37). In contrast to the United 

States. long-term sovereign yields and marketimplied paths of policy rates in the core euro 

area as well as the United Kingdom declined 

somewhat, and rates were little changed in 

Japan (figure 38). 

Heightened investor focus on 

vulnerabilities in emerging market 

economies led asset prices to come under 

pressure 

Investor concerns about financial 

vulnerabilities in several emerging market 

economics (EMEs) intensified this spring 

against the backdrop of rising U.S. interest 

rates. Broad measures of EME sovereign 
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bond spreads over U.S. Treasury yields 

widened notably, and benchmark EME equity 

indexes declined, as investors scrutinized 

macroeconomic policy approaches in several 

countries. Turkey and Argentina, which faced 

persistently high inflation, expansionary fiscal 

policies, and large current account deficits, 

were among the worst performers. Trade 

policy developments between the United 

States and its trading partners also weighed on 

EME asset prices, especially on stock prices 

in China and some emerging Asian countries. 

EME mutual funds saw net outnows in May 

and June after generally solid inllows earlier 

in the year (figure 39). While movements in 

asset prices and capital flows were notable for 

a number of economies, broad indicators of 

financial stress in EMEs remained low relative 

to levels seen during other periods of stress in 

recent years. 

The dollar appreciated 

After depreciating during 2017, the broad 

exchange value of the U.S. dollar has 

appreciated moderately in recent months 

(ligure 40). Factors contributing to the 

appreciation of the dollar likely include 

moderating growth in some foreign economies 

combined with continued output strength 

and ongoing policy tightening in the United 

States, downside risks stemming from political 

developments in Europe and several EMEs, 

and the recent developments in trade policy. 

Several currencies appeared particularly 

sensitive to trade policy developments, 

including the Canadian dollar and the 

Mexican peso, related to the North American 

Free Trade Agreement negotiations, as well 

as the Chinese renminbi, which fell notably 

against the dollar in June. 

The pace of economic activity moderated 

in the AFEs 

In the first quarter, real GOP growth 

decelerated in all major AFEs and turned 

negative in Japan, down from robust rates of 

activity in 2017 (figure 41 ). Part of this slowing 

is a result of temporary factors, though, 

MONETARY POliCY REPORT JULY 2018 31 

38. Nominal 1 0-year government bond yields in 

selected advanced economies 

Weekly 

United States 

Pen-en1 

3.0 

2.5 

2.0 

1.5 

1.0 

39. Emerging market mutual fund flows and spreads 

500 60 

450 "" 400 20 

350 

300 20 

250 ~- 40 

200 60 
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32 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS 

40. U.S. dollar exchange rate indexes 

Wt'£'kly WeekendingJanuary7,20!5 !00 - ----~~---~--~--------

Dollar appreciation !50 

41. Real gross domestic product growth in selected 

advanced foreign economics 

IIIII United Kingdom 

Wit Canada 

including unusually cold weather in Japan 

and the United Kingdom, labor strikes in the 

euro area, and disruptions in oil production in 

Canada. In most AFEs, economic indicators 

for the second quarter, including purchasing 

manager surveys and exports, are generally 

consistent with solid economic growth. 

Despite tight labor markets, 

inflation pressures remain subdued in 

mostAFEs ... 

Sustained increases in oil prices provided 

upward pressure on consumer price inflation 

across all AFEs in the first half of the year 

(figure 42). However, core intlation has 

generally remained muted in most AFEs, 

despite further improvement in labor market 

conditions. In Canada, in contrast, core 

intlation picked up amid solid wage growth, 

pushing the total intlation rate above the 

central bank target. 

... prompting central banks to maintain 

highly accommodative monetary policies 

With underlying inflation still subdued, the 

Bank of Japan and the European Central 

Bank (ECB) kept their policy rates at 

historically low levels, although the ECB 

indicated it would again reduce the pace of 

its asset purchases starting in October. The 

Bank of England and the Bank of Canada, 

which both began raising interest rates last 

year, signaled that fnrther rate increases will 

be gradual, given a moderation in the pace of 

economic activity. 

In emerging Asia, growth remained 

solid ... 

Economic growth in China remained solid 

in the first quarter of 2018, as a rebound in 

steel production and strong external demand 

bolstered a recovery in industrial activity 

and overall growth (figure 43). Indicators 

of investment and retail sales have slowed 

in recent months, however, suggesting that 

the authorities' effort to rein in credit may 

have softened domestic demand. Most other 
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emerging Asian economies registered strong 

growth in the tirst quarter of 2018, partly 

reflecting solid external demand. 

... while growth in some latin American 

economies was mixed 

In Mexico, real GDP surged in the first quarter 

as economic activity rebounded from two 

major earthquakes and a hurricane last year. 

Following a brief recovery in the first half of 

2017, Brazil's economy stalled in the fourth 

quarter and grew tepidly in the first quarter, 

and a truckers' strike paralyzed economic 

activity in late May. 

MONETARY POLICY REPORT: JULY 2018 33 

42. Consum.cr price inflation in selected advanced foreign 

cconom1es 

\1onth!y 12-monthpcrc<:utdmngc 

43. Real gross domestic product growth in selected 

emerging market economics 

!Ill China 

![® Korea 

• Mexico 

Percent, annual rate 

12 
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PART 2 

MoNETARY Poucy 

The federal 

continued to 

federa I funds 

of the year ... 

Market Committee 

increase !he 

range in the first half 

Since December 2015, the Federal Open 

Market Committee (FOMC) has been 

gradually increasing its target range for 

the federal funds rate as the economy has 

continued to make progress toward the 

Committee's congressionally mandated 

objectives of maximum employment and 

price stability. In the first half of this year, the 

Committee continued this gradual process of 

scaling back monetary policy accommodation, 

increasing its target range for the federal funds 

rate '!4 percentage point at its meetings in both 

March and June. With these increases, the 

federal funds rate is currently in the range of 

1% to 2 percent (figure 44). 14 The Committee's 

decisions reflected the continued strengthening 

14. Sec Board of Governors of the Federal 

Reserve System (2018), "Federal Reserve Issues 

FOMC Statement," press release, March 21, https:// 

and of Governors of 

the Federal Reserve System (2018), "Federal Reserve 

Issues FOMC Statement.'' press release, June 13. https:/1 

44. Selected interest rates 

2008 2009 2010 JOll 2012 2013 

of the labor market and the accumulating 

evidence that, after many years of runni;g 

below the Committee's 2 percent longerrun objective, inflation had moved close to 

2 percent. 

... but monetary policy continues to 

support economic growth 

35 

Even after the gradual increases in the federal 

funds rate over the first half of the year, the 

Cormnittee judges that the stance of monetary 

policy remains accommodative, thereby 

supporting strong labor market conditions 

and a sustained return to 2 percent inflation. 

In particular, the federal funds rate remains 

somewhat below most FOMC participants' 

estimates of its longer-run value. 

The Committee expects that a gradual 

approach to increasing the target range for 

the federal funds rate will be consistent with 

a sustained expansion of economic activity, 

strong labor market conditions, and inflation 

near the Committee's symmetric 2 percent 

objective over the medium term. Consistent 

with this outlook, in the most recent 

Summary of Economic Projections (SEP), 

which was compiled at the time of the June 

FOMC meeting, the median of participants' 

2014 2015 2016 2017 20!8 
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36 PART 2: MONETARY POLICY 

assessments for the appropriate level of the 

target range for the federal funds rate at 

year-end rises gradually over the period from 

2018 to 2020 and stands somewhat above the 

median projection for its longer-run level by 

the end of 2019 and through 2020.1' 

future changes in the federal funds rate 

will depend on the economic outlook as 

informed by incoming data 

The FOMC has continued to emphasize 

that, in determining the timing and size of 

future adjustments to the target range for 

the federal funds rate, it will assess realized 

and expected economic conditions relative 

to its maximum-employment objective and 

its symmetric 2 percent inflation objective. 

This assessment will take into account a wide 

range of information, including measures 

of labor market conditions, indicators of 

inflation pressures and inflation expectations, 

and readings on financial and international 

developments. 

In evaluating the stance of monetary policy, 

policymakers routinely consult prescriptions 

from a variety of policy rules, which can serve 

l5. See the June SEP, which appeared as an addendum 

to the minutes of the June 12~13, 2018, meeting of the 

FOMC and is presented in Part 3 of this report. 

45. Principal payments on SOMA securities 

·rreasury securities 

Mo11thly 

Redemptions 

Reinvestments 

- Monthly cap 

Btlhon\ufdullars 

80 

70 

60 

50 

40 

30 

20 

as useful benchmarks. However, the use and 

interpretation of such prescriptions require, 

among other considerations, careful judgments 

about the choice and measurement of the 

inputs to these rules such as estimates of the 

neutral interest rate, which are highly uncertain 

(see the box "Complexities of Monetary 

Policy Rules"). 

The FOMC has continued to implement 

its program to gradually reduce the 

Federal Reserve's balance sheet 

The Committee has continued to implement 

the balance sheet normalization program 

described in the June 2017 Addendum to the 

Policy Normalization Principles and Plans." 

This program is gradually and predictably 

reducing the Federal Reserve's securities 

holdings by decreasing the reinvestment of the 

principal payments it receives from securities 

held in the System Open Market Account. 

Since the initiation of the balance sheet 

normalization program in October of last year, 

such payments have been reinvested to the 

extent that they exceeded gradually rising caps 

(figure 45). 

Agency debt and mortgage-backed securities 

Monthly 

Ill Redemptions 

Reinvestments 

Monthly cap 

80 

70 

60 

50 

40 

30 

20 

10 

NOTE: Reinvestment and redemption amounts of agency mortgage~backed securities are projections starting in June 2018. The data 

extend through December 2019. 

SOURCE: Federal Reserve Bank of New York; Federal Reserve Board staff calculations. 
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MONETARY POLICY REPORT: JULY 2018 3 7 

Complexities of Monetary Policy Rules 

Overview 

Monetary policy rules Jre mathematical formulas 

that relate a policy interest rate, such as the federal 

funds rate, to a small number of other economic 

variables-typically including the deviation of inflation 

from its target value along with an estimate of resource 

slack in the economy. Policy rules can provide helpful 

guidance for policymakers. Indeed, since 2004, 

prescriptions from policy rules have been included 

in written materials that are routinely sent to the 

Federal Open Market Committee (FOMC). However, 

interpretation of the prescriptions of policy rules 

requires careful judgment about the measurement of 

the inputs to the rules and the implications of the many 

considerations that the rules do not take into account. 

Policy rules can incorporate key principles of good 

monetary policy. 1 One key principle is that monetary 

policy should respond in a predictable way to changes 

in economic conditions. A second key principle is 

that monetary policy should be accommodative when 

inflation is below the desired level and emp!oymE'nt 

is below its maximum sustainable level; conversely, 

monetary policy should be restrictive when the 

opposite holds. A third key principle is that, to stabilize 

inflation, the policy rate should be adjustC'd by more 

than one~for-one in response to persistent increases or 

decreases in inflation. 

Economists have analyzed many monetary policy 

rules, including the well-known Taylor (1993) rule. 

Other rules include the "balanced approach" rule, the 

"adjusted Taylor (1993)" rule, the "price level" rule, and 

the "first difference" rule (figure A).' These policy rules 

1. For discussion regarding principles for the conduct of 

monetary policy and monetary policy rules, see Board of 

Governors of the Federal Reserve System (2018), 

and Practice," Board of Governors, 

in John 

in Practice," 

Rochester Conference Series on vaL 39 

(December), pp. 195-214. The balanced-approach 

analvzed in John B. Taylor (1999), "A Historical 

Mon'etary Policy Rules," in John B. Taylor, ed., 

Rules {Chicago: University of Chicago Press), pp. 

adjusted Taylor (1993) rule was studied in David Reifschneider 

and John C Williams (2000), "Three lessons for Monetary 

a Low-Inflation l::ra," Journal of Money_, Credit and 

vo!. 32 (November), pp. 936-66. A price-!eve! rule 

in Robert E. Hall (1984), "Monet.1ry 

with an Elastic Price Standi!rd," in 

reflect the three key principles of good monetary policy 

noted earlier. Each rule takes into account estimates 

of how far the economy is from achieving the Federal 

Reserve's dual-mandate goals of maximum employment 

and price stability. 

Four of the five rules include the difference 

between the rate of unemployment that is sustainable 

in the longer run and the current unemployment 

rate (the unemployment rate the first-difference 

rule includes the change in unemployment gap 

rather than its leveL' In addition, four of the five rules 

include the difference between recent inflation and the 

FOMC's longer-run objective (2 percent as measured 

by the annual change in the price index for personal 

consumption expenditures, or PCE), while the pricelevel rule includes the gap between the level of prices 

today and the level of prices that would be observed 

if inflation had been constant at 2 percent from a 

specified starting year (Plgap,).' The price-level rule 

thereby tak<'s account of the deviation of inflation from 

(continued on next page) 

Policy, proceedings of a symposium sponsored by the Federdl 

Reserve Bank of Kansas City, held in Jackson Hole, Wyo., 

(Kansas Federal Reserve Bank of Kansas 

137~59, ll[[[JSJ""·"·'''"''''" Finally, r;,_,_d;lfNenceru!e was 

by Athanasios Orphanides (2003), "Historical 

Monetary Po !Icy Analysis and the Taylor Rule," JournJI 

of Monetary Economics, vol. 50 Ou!y), pp. 983-1022. A 

comprehensive review of policy rules is in John B, Taylor 

and John C. Williams (2011), "Simple and Robust Rules for 

Monetary Policy," in Benjamin M. Friedman and Michael 

Woodford, eds., I iandbook of Monetary Economics, vol. JB 

(Amsterdam: North~Holland), pp. 829-59. The same volume 

of the Handbook of Monetary Economics also discusses 

approaches other than policy rules for deriving policy rate 

prescriptions. 

The Taylor (1993) rule represented slack in resource 

using an output gap (the difference between the 

current !eve! of real gross domestic product (GOP) and what 

GOP would be if the economy was operating at maximum 

('mployrnent). The rules in figure A represent slack in resource 

uti!izatlon using the unemployment gap instead, because that 

gap better captures the FOMC's statu~ory goal to pro~ote 

maximum employment. Movements m these a!ternat1ve 

measures of resource utilization are highly correlated. For 

more information, see the note below figure A 

4. Calculating the prescriptions of the price-level rule 

requires selecting a starting year for the price level from which 

to cumulate the 2 percent annual inflation. Figure Buses 1998 

as the starting year. Around that time, the underfying trend 

of inflation and longer-term inflation expectations stabilized 

at a level consistent with PCE price inflation being close to 

2 percent. 
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38 PART 2: MONETARY POLICY 

Monetary Policy Rules (continued! 

A. Monetary policy rules 

Taylor (1993) rule 

Balanced-approach rule 

Taylor (1993) rule, adjusted 

Price-level rule R[L = maximum {rt"R + rr, + (uiR- u,) + 05(PLgap,), 0} 

First-difference rule 

NOTE: R/"J, R, 8A, R/wwf.', R/z·, and R/0 represent the values of the nominal federal funds rate prescribed by the Taylor ( !993), 

balanced-approach. adjusted Taylor (1993). price-leveL and iirst-diJTerence rules. respectively. 

R1 denotes the actual nominal federal funds rate for quarter t, n, is four-quarter price inflation for quarter t, u, is the 

unemployment rate in quarter!, and r/" is the level of the neutral real federal funds rate in the longer run that, on average, is 

expected to be consistent with sustaining maximum employment and inflation at the FOMCs 2 percent Jong:er~run o[:jective. 

n.u. In addition, u/R is the rate of unemployment in the longer run. Z is the cumulative sum of past deviations of the federal 

funds rate from the prescriptions of the Taylor (1993) rule when that rule prescribes settjng the federal funds rate below zero. 

PLgap1 is the percent deviation of the actual level of prices from a price level that rises 2 percent per year from its level in a 

specified starting period. 

The Taylor (1993) rule and other poJjcy rules are generally written in terms of the deviation of real output from its full 

capacity level. In these equations, the output gap has been replaced with the gap between the rate of unemployment in the 

longer run and its actual level (using a relationship known as Ohm's law) in order to represent the rules in terms of the 

FOMCs statutory goals. Historically, movements in the output and unemployment gaps have been highly correlated. Box 

note 2 provides references for the policy rules. 

lhe long-run objective in earlier periods as well as 

the current period. Thus, if inflation had been running 

persistently above 2 percent, the price-level rule would 

prescribe a higher level for the federal funds rate than 

rules that use the current inflation gap. Likewise, 

if inflation had been running persistently below 

2 percent, the price-level rule would prescribe setting 

the policy rate lower than rules that use the current 

inflation gap. 

The adjusted Taylor (1993) rule recognizes that 

the federal funds rate cannot be reduced materially 

below zero, and that following the prescriptions 

of the standard Taylor (1993) rule after a recession 

during which interest rates have fallen to their lower 

bound may, for a time, not provide enough policy 

accommodation. To make up for the cumulative 

shortfall in accommodation (Z), the adjusted rule 

prescribes only a gradual return of the policy rate to 

the (positive) levels prescribed by the standard Taylor 

(1993) rule after the economy begins to recover. 

The particular price-level rule specified in figure A 

also recognizes that the federal funds rate cannot be 

reduced materially below zero. If inflation runs below 

the 2 percent objective during periods when the rule 

prescribes setting the federal funds rate well below 

zero, the price-level rule wilt over time, provide 

accommodation to make up for the past inflation 

shortfalL 

The U.S. economy is complex, and the monetary 

policy rules shown in figure A do not capture many 

elements that are relevant to the conduct of monetary 

policy. Moreover, as shown in figure B, different 

monetary policy rules often offer quite different 

prescriptions for the federal funds rate. s In practice, 

there is no unique criterion for favoring one rule over 

another. In recent years, almost all of the policy rules 

(continued) 

5. These prescriptions are calculated using (1) published 

data for inflation and the unemployment rate and (2l 

survey-based estimates of the longer-run value of the 

neutral real interest rate and the longer-run value of the 

unemployment rate. 
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MONETARY POLICY REPORT: JULY 2018 39 

R Historical federal funds rate prescriptions from simple policy rules 

Quarterly 

vc.ar 

Sot:RtT Federal Reserve Rank of Philadelphia; Wolters Kluwcr, R!ue Chip Economic Indicators; Federal Reserve Board staff estimate~ 

shown have called for rising values of the federal funds 

rate, but the pace of tightening that the rules prescribe 

has varied widely. 

Uncertainty about the neutral interest rate 

in the longer run 

The Taylor (1993), balanced-approach, adjusted 

Taylor (1993), and price-level rules provide 

prescriptions for the level of the federal funds rate; 

all require an estimate of the neutral real interest rate 

in the longer run (r,")-that is, the level of the real 

federal funds rate that is expected to be consistent, in 

the longer run, with maximum employment and stable 

inflation. 6 The neutral real interest rate in the longer 

run is determined by structural features of the economy 

and is not observable. In addition, its value may vary 

over time because of fluctuations in trend productivity 

6. The first-difference rule shown in figure A does not 

require an estimate of the neutral real interest rate in the 

longer run. However, this rule has its own shortcomings. For 

suggests that this sort of rule wi!! result in 

in employment and inflation rdative to what 

be under the Taylor {1993) and balancedapproach rules unless the estimates of the neutral real federal 

funds rate In the longer run and the rate of unemployment in 

the longer run thJ.t are included in those rules J.re sufficiently 

far from their true values. 

growth, changing demographics, and other shifts in the 

structure of the economy. As a result, estimates of the 

neutral rea! interest rate in the longer run made today 

may differ substantially from estimates made later. 

Academic studies have estimated the longerrun value of the neutral real interest rate using 

statistical techniques to capture the variations among 

inflation, interest rates, real gross domestic product, 

unemployment, and other data series. The range of 

estimates is wide but suggests that the neutral real rate 

has declined since the turn of the century (figure C).' 

There is substantial statistical uncertainty surrounding 

each estimate of the longer-run value of the neutral 

rea! rate, as evidenced by the width of the 95 percent 

(continued on next page) 

journal of lnternalional Economics, supp. 1, vo!. 108 

(May), pp. Benjamin K. Johannsen and E!mar 

Mertens (2016), Expected Rea! Interest Rate in the 

long Run: Time Series Evidence with the Effective lower 

Bound," FEDS Notes (Washington: Board of Governors 
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40 PART 2; MONETARY POLICY 

Monetary Policy Rules !continued! 

uncertainty bands for the estimated values in the first 

quarter of 2018 (figure D). 

The longer-run normal level of the federal funds 

rate under appropriate monetary policy--equal to 

the sum of the neutral real interest rate in the longer 

run and the FOMC's 2 percent inflation objective-is 

one benchmark for evaluating the current stance 

of monetary policy. Uncertainty about the longerrun value of the neutral real interest rate leads to 

uncertainty about how far the current federal funds 

rate is from its !onger~run normal level. For the Taylor 

(1993), balanced-approach, adjusted Taylor (19931, and 

price-level rules, different estimates of the neutral real 

interest rate in the longer run translate one-for-one to 

differences in the prescribed setting of the federal funds 

rate. As a result, the substantial statistical uncertainty 

accompanying estimates of the neutral rate in the 

longer run implies substantial uncertainty surrounding 

the prescriptions of each policy rule. Following the 

prescriptions of a policy rule with an incorrect value of 

the neutral rate could lead to poor economic outcomes. 

If the longer-run value of the neutral real interest rate 

is currently at the low end of the range of estimates, 

C. Range of selected estimates for the neutral real federal 

funds rate in the longer run 

then monetary policy is more likely to be constrained 

by the lower bound on nominal interest rates in the 

future. Historically, the FOMC has cut the federal 

funds rate by 5 percentage points, on average, during 

downturns in the economy. Cutting the federal funds 

rate by this much in response to a future economic 

downturn may not be feasible if the neutral federal 

funds rate is as low as most of the estimates suggest. 

(continued) 
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MONETARY POLICY REPORT: JULY 2018 41 

D. Point estimates and uncertainty bands for neutral real rate in the longer run as of 2018:QI 

Point estimate band 

Del Negro and others (20 17) 1.3 

Holston and others .6 

Johannsen and Mertens (20 I 6) .7 (-1.3,2.5) 

Kiley (2015) .4 (-.6. 1.6) 

Laubach and Williams (2015) .I (-5.4, 5.6) 

Lewis and Vazquez-Grande (20 17) 1.8 (.5, 3.1) 

Lubik and Matthes (2015) 1.0 (-2.3, 4.5) 

SouRcE: Federal Reserve Board staff calculations, along with references listed in box note 7. 

As a result, it may not be feasible to provide the levels 

of accommodation prescribed by many policy rules, 

potentially leading to elevated unemployment and 

inflation averaging below the Committee's 2 pE>rcE'nt 

objective.' Rules that try to offset the cumulative 

shortfall of accommodation posed by the !ower bound 

on nominal interest rates, such as the adjusted Taylor 

(1993) rule, or make up the cumulative shortfall in 

the level of prices, such as the price-level rule, are 

intended to mitigate the effects of the lower bound 

on the economy by providing more accommodation 

than prescribed by rules that do not have these 

makeup features. 9 

8. For further discussion of these issues, see Michael T. 

Kiley and John M. Roberts in a low 

Interest 

In the years following the financial crisis, with the 

federal funds rate close to zero, the FOMC recognized 

that it would have limited scope to respond to an 

unexpected weakening in the economy by lowering 

short-term interest rates. This risk has, in recent years, 

provided a sound rationale for following a more 

gradual path of rate increases than that prescribed by 

some policy rules. In these circumstances, increasing 

the policy rate quickly in order to have room to 

cut rates during an economic downturn could be 

counterproductive because it might make a downturn 

more likely to happen. 
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42 PART 2: MONETARY POliCY 

In the first quarter, the Open Market Desk 

at the Federal Reserve Bank of New York, 

as directed by the Committee, reinvested 

principal payments from the Federal Reserve's 

holdings of Treasury securities maturing 

during each calendar month in excess of 

S12 billion. The Desk also reinvested in agency 

mortgage-backed securities (MBS) the amount 

of principal payments from the Federal 

Reserve's holdings of agency debt and agency 

MBS received during each calendar month in 

excess of $8 billion. Over the second quarter, 

payments of principal from maturing Treasury 

securities and from the Federal Reserve's 

holdings of agency debt and agency MBS were 

reinvested to the extent that they exceeded 

S 18 billion and $12 billion, respectively. At 

its meeting in June, the FOMC increased the 

cap for Treasury securities to $24 billion and 

the cap for agency debt and agency MBS 

to $16 billion, both effective in July. The 

Conunittee has indicated that the caps for 

Treasury securities and for agency securities 

will increase to $30 billion and $20 billion per 

month, respectively, in October. These terminal 

caps will remain in place until the Committee 

judges that the Federal Reserve is holding no 

more securities than necessary to implement 

monetary policy eflicicntly and effectively. 

46. Federal Reserve assets and liabilities 

The implementation of the program has 

proceeded smoothly without causing disruptive 

price movements in Treasury and MBS 

markets. As the caps have increased gradually 

and predictably, the Federal Reserve's total 

assets have started to decrease, from about 

$4.4 trillion last October to about $4.3 trillion 

at present, with holdings of Treasury securities 

at approximately $2.4 trillion and holdings 

of agency and agency MBS at approximately 

$1.7 trillion (figure 46). 

The Federal Reserve's implementation of 

monetary policy has continued smoothly 

To implement the FOMC's decisions to raise 

the target range for the federal funds rate in 

March and June of 2018, the Federal Reserve 

increased the rate of interest on excess reserves 

(IOER) along with the interest rate offered 

on overnight reverse repurchase agreements 

(ON RRPs). Specifically, the federal Reserve 

increased the IOER rate to 1 Y. percent and 

the ON RRP offering rate to 1 'h percent in 

March. In June, the Federal Reserve increased 

the IOER rate to 1.95 percent-5 basis points 

below the top of the target range--and the 

ON RRP offering rate to 1 Y. percent. In 

addition, the Board of Governors approved 

Weekly Tnlhonsordollar5 

--Assets 

=Liabilities and capital 

D__"L_L_L..l_.i.......L.....---.L-L .. L..L._LJ'-.l_L--LJ_L-L.l--L_ 

2008 2009 20!0 201 t 2012 20\3 2014 2015 2016 2017 2018 

NoTE: ''Credit and liquidity facilities" consists: of primary, secondary, and seasonal credit; tenn auction credit; central hank liquidity swaps; support for 

Maiden Lane, Bear Stearns, and AIG; and other credit facilities, including the Primary Dealer Credit Facility, the Asset~ Backed Commercial Paper Money 

Market Mutual Fund Liquidity Facility. the Commercial Paper Funding and the Tenn Asset-Backed Securities Loan Facility, "Other assets" 

includes unamortized premiums and discounts on securities held outright. reverse repurchase agreements, the US 

Treasury General Account, and the U.S. Treasury Supplementary Financing Account. 

SocRno: Federal Rescn'e Board, Statistical Release H.4.1, "Factors Affecting Reserve Balances." 
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a'!. percentage point increase in the discount 

rate (the primary credit rate) in hoth March 

and June. Yields on a broad set of money 

market instruments moved higher, roughly in 

line with the federal funds rate, in response 

to the FOMC's policy decisions in March 

and June. Usage of the ON RRP facility 

has declined, on net, since the turn of the 

year, reflecting relatively attractive yields on 

alternative investments. 

The effective federal funds rate moved up 

toward the IOER rate in the months before 

the June FOMC meeting and, therefore, 

MONETARY POliCY REPORT: JUlY 2018 43 

was trading near the top of the target range. 

At its June meeting, the Committee made a 

small technical adjustment in its approach 

to implementing monetary policy by setting 

the IOER rate modestly below the top of the 

target range for the federal funds rate. This 

adjustment resulted in the effective federal 

funds rate running closer to the middle of the 

target range since mid-June. In an environment 

of large reserve balances, the I 0 ER rate has 

been an essential policy tool for keeping the 

federal funds rate within the target range set by 

the FOMC (see the box "Interest on Reserves 

and Its Importance for Monetary Policy"). 
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44 PART 2: MONETARY POLICY 

Interest on Reserves and Its Importance for Monetary Policy 

The financial crisis that began in 2007 triggered the 

deepest recession in the United States since the Great 

Depression. In response, the Federal Open Market 

Committee (FOMC) cut its target for the federal funds 

rate to nearly zero by late 2008. Other short-term 

interest rates declined roughly in line with the federal 

funds rate. Additional monetary stimulus was necessary 

to address the significant economic downturn and 

the associated downward pressure on inflation. The 

FOMC undertook other monetary policy actions to 

put downward pressure on longer-term interest rates, 

including large-scale purchases of longer-term Treasury 

securities and agency-guaranteed mortgage-backed 

securities. 

These policy actions made financial conditions more 

accommodative and helped spur an economic recovery 

that has become a long-lasting economic expansion. 

The unemployment rate has declined from 10 percent 

to less than 4 percent over the course of the recovery 

and expansion, and inflation has been low and fJirly 

stable. The FOMC's actions were critical to fostering 

progress toward maximum employment and stable 

prices-the statutory goals for the conduct of monetary 

policy established by the Congress. 

The Federal Reserve's large-scale asset purchases 

had the side effect of generating a sizable increase in 

the supply of reserve balances, which are the balances 

that banks maintain in their accounts at the Federal 

Reserve, 1 From the onset of the financial crisis in 

August 2007 until October 2014, when the FOMC 

ended the last of its asset purchase programs, the 

supply of reserve balances rose from about $15 billion 

to about $21fl trl1lion. 1 Reserve balances rose well 

above the level necessary to meet reserve requirements, 

thus swelling the quantity of excess reserves held by the 

banking system. 

1. A!! depository institutions (commercial banks, savings 

banks, thrift institutions, credit unions, and most U.S. branches 

and agencies of foreign banks) that maintain reserve balances 

are eligible to earn interest on those balances. We refer to 

these institutions as "banks." 

2. For a detailed discussion of how the changes in Federal 

Reserve securities holdings affect the Federal Reserve's 

balance sheet and sectors of the U.S. economy, see Jane 

Ihrig, lawrence Mize, and Gretchen C. Weinbach (2017), 

"How Does the Fed Adjust Its Securities Holdings and Who Is 

Affected?" Finance and Economics Discussion Series 2017-

099 Board of Governors of the Federal Reserve 

'1-\'\'> \v.fedt:r ,l:re:;('rve .gov/ecnnr es/ 

As the economic expansion continued and 

unemployment declined-and with labor market 

conditions projected to continue improving·-·-the 

FOMC decided that it would scale back policy 

support by increasing the level of short-term interest 

rates and by reducing the Federal Reserve's securities 

holdings. To that end, the Committee began gradually 

raising its target range for the federal funds rate in 

December 2015. Later, in October 2017, it began 

gradually reducing holdings of Treasury and agency 

securities; this gradual reduction results in a decline in 

the supply of reserve balances. The FOMC judged that 

removing monetary policy stimulus through this mix of 

first raising the federal funds rate and then beginning 

to shrink the balance sheet would best contribute to 

achieving and maintaining maximum employment and 

price stability without causing dislocations in financial 

markets or institutions that could put the economic 

expansion at risk. 

Interest on reserves-the payment of interest on 

balances held by banks in their accounts at the Federal 

Reserve-has been an essential policy tool that has 

permitted the FOMC to achieve a gradual increase in 

the federal funds rate in combination with a gradual 

reduction in the Fed's securities holdings and in the 

supply of reserve balances.' Interest on reserves is a 

monetary policy tool used by all of the world's major 

central hanks. 

Interest on reserves is the principal tool the FOMC 

uses to anchor the federal funds rate in the target range. 

The federal funds rate, in turn, establishes an important 

benchmark for the borrowing and lending decisions 

in the banking sector (figure A). When the Federal 

Reserve increases the target range for the federal funds 

rate and the interest rate it pays on reserve balances, 

banks bid up the rates in short-term funding markets 

to levels consistent with those increases; rates in other 

short-term funding markets-such as commercial 

paper rates, Treasury bill rates, and rates on repurchase 

(continued) 

3. The Financial Services Regulatory Relief Act of 2006 

authorized the Federal Reserve Banks to pay interest on 

balances held by or on behalf of depository institutions at 

Federal Reserve Banks, subject to of the Board of 

Governors, effective October 1, date of this 

authority was changed to October 1, 2008, by the Emergency 

Economic Stabilization Act of 2008. The Congress authorized 

the payment of interest on reserves to help minimize the 

incentives for costly reserve avoidance schemes and 1o provide 

the Federal Reserve with a policy tool that could be useful for 

monetary policy implementation more broadly. 
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MONETARY POLICY REPORTo JULY 2018 45 

A. Overnight money market rates B. Term money market rates 

Target range 250 

225 

200 

!75 

!50 

125 

100 

75 

50 

25 

agreements-all tend to move higher as well (figure B), 

This increase in the general level of short-term rates, 

together with the expected future path of short-term 

rates, then influences the level of other financial asset 

prices and overall financial conditions in the economy. 

Thus, changing the interest rate on reserves has proven 

to be an effective tool for transmitting changes in the 

FOMC's target range for the federal funds rate to other 

interest rates in the economy. 

The rate of interest the Federal Reserve pays on 

banks' reserve balances is far lower than the rate that 

banks can earn on alternative safe assets, including 

most U.S. government or agency securities, municipal 

securities, and loans to businesses and consumers. 4 

Indeed, the bank prime rate---the base rate that banks 

use for loans to many of their customers-is currently 

around 300 basis points above the level of interest on 

reserves. Banks continue to find !ending attractive, 

and bank lending has been expanding at a solid pace 

since 2012. Households have begun to see interest 

rates on retail deposits rising as well. Moreover, the 

configuration of interest rates implies that the return 

the Federal Reserve earns on its holdings of securities 

4. The Congress's authorization allows the Federal 

Reserve to pay interest on deposits maintained by depository 

institutions at a rate not to exceed the "general !eve! of 

short~term interest rates." The Federal Reserve Board's 

150 

125 

200 

175 

150 

l2:'i 

100 

75 

50 

25 

is higher than the interest it pays on reserve balances. 

Each the Federal Reserve remits its earningsthat its income net of expenses-to the Treasury 

Department; in 2017, remittances totaled more than 

$80 billion. 

Had the Federal Reserve not been able to pay 

interest on reserve balances at the same time that 

excess reserves in the banking system were large, it 

would not have been able to gradually raise the federal 

funds rate and other short-term interest rates while 

reserve balances were abundant; the FOMC would 

have had to take a different approach to scaling back 

monetary policy accommodation. This approach likely 

would have involved a rJpid and sizable reduction 

in the Federal Reserve's securities holdings in order 

to put sufficient upward pressure on interest rates. 

(continued on next page) 

Reguldtion D defines short-term interest rdtcs fur tht• 

of this authority as "rates on obligations with 

no more than one year, such as the primary 

rates on term federal funds, term repurchase agreements, 

commercial paper, term Eurodollar deposits, and other simifar 

instruments." The rate of interest on reserves has been well 

within a of :.hort-term interest rates as defined in Board 

regulations. rJtes on a numbf'r of short-term money 

market instruments, see Board of Governors of the Federal 

Reserve Statistical Release "Selected Interest 

Rates," ;:current. 
117 

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46 PART 2c MONETARY POliCY 

Interest on Reserves (continued) 

Getting the pace of asset sales just right for achieving 

the Federal Reserve's objectives would have been 

extremely challenging. Such an approach to removing 

accommodation would have run the risk of disrupting 

financial markets, with adverse effects on the economy. 

Indeed, as observed during the early summer of 

2013, market reactions to changes in the outlook for 

the Federal Reserve's holdings of long-term securities 

can have outsized effects in bond markets. At that time, 

FOMC communications that pointed to the eventual 

cessation of asset purchases seemed to alarm investors 

and reportedly contributed to a rise in longer-term rates 

of 1 SO basis points over just a few months. That rise in 

rates quickly pushed up the cost of mortgage credit and 

rates on other forms of borrowing for households and 

businesses. 

Thus, Federal Reserve policymakers judged that 

the best strategy for adjusting the stance of monetary 

policy would be gradual increases in the target range 

for the federal funds rate, supplemented later on by 

gradual reductions in the Federal Reserve's securities 

holdings. The ongoing, gradual reduction in the Federal 

Reserve's securities holdings that the FOMC set in 

motion in 2017 will bring the !eve! of reserve balances 

down substantially over the next few years. The size 

of reserves that banks eventually want to hold will 

reflect balances held to meet reserve requirements and 

payments needs as well as balances held to address 

regulatory and structural changes in the banking system 

since the financial crisis. 5 Although the level of reserve 

balances that banks will eventually want to hold is not 

yet known, that level is likely to be much lower than it 

is today, though appreciably higher than it was before 

the crisis.6 In addition, the amount of U.S. currency~ 

Federal Reserve notes~that people in the United States 

and elsewhere want to hold has increased substantially 

since the crisis. If banks want to hold more reserve 

balances and the public wants to hold more U.S. 

currency than before the crisis, the Federal Reserve will 

need to supply the reserves and currency, so the Federal 

Reserve's securities holdings also will have to be larger 

than before the financial crisis. 7 

Interest on reserves will remain an important policy 

tool for keeping the federal funds rate within the target 

range set by the FOMC and thus managing the level of 

short-term interest rates, even as the ongoing reduction 

in the Federal Reserve's securities holdings generates a 

gradual decline in the amount of reserve balances on 

which the Federal Reserve pays interest. In June 2018, 

the Federal Reserve made a small technical adjustment 

to de-link the rate of interest on reserves from the top 

of the Committee's target range for the federal funds 

rate. At the june 2018 FOMC meeting. the Committee 

increased the federal funds target range by 25 basis 

points, while the rate of interest on reserve balances 

was increased by 20 basis points. This change is 

intended to ensure that the federal funds rate continues 

to trade well within the Committee's target range. The 

spread between the effective federal funds rate and the 

rate of interest on reserves could continue to narrow 

over time as the Federal Reserve's securities holdings 

and the supply of reserve balances gradually decline. 

6. Uncertainty about the eventual level of reserve balances 

is another reason that the FOMC has been reducing the 

Federal Reserve's holdings of securities, and the supply of 

reserve balances, gradually. 

7. Currency grows roughly in fine with nominal 

domestic product. ln December 2008, currency in 

WJS around $850 billion, compared with $1.6 trillion at 

end of June 2018. 
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47 

PART 3 

SuMMARY OF EcoNOMIC PROJECTIONS 

The following material appeared as an addendum to the minutes of the june 12-13,2018, 

meeting of the Federal Open Market Committee. 

In conjunction with the Federal Open 

Market Committee (FOMC) meeting held 

on June 12··13, 2018, meeting participants 

submitted their projections of the most likely 

outcomes for real gross domestic product 

(GDP) growth, the unemployment rate, and 

inflation for each year from 2018 to 2020 

and over the longer run. 17 Each participant's 

projections were based on information 

available at the time of the meeting, together 

with his or her assessment of appropriate 

monetary policy-including a path for the 

federal funds rate and its longer-run valueand assumptions about other factors likely 

to affect economic outcomes. The longerrun projections represent each participant's 

assessment of the value to which each variable 

would be expected to converge, over time, 

under appropriate monetary policy and in the 

absence of further shocks to the economy.'' 

"Appropriate monetary policy" is defined as 

the future path of policy that each participant 

deems most likely to foster outcomes for 

economic activity and inflation that best 

satisfy his or her individual interpretation of 

the statutory mandate to promote maximum 

employment and price stability. 

All participants who submitted longer-run 

projections expected that, in 2018, real GDP 

would expand at a pace exceeding their 

individual estimates of the longer-run growth 

rate of real GDP Participants generally saw 

real GDP growth moderating somewhat in 

each of the following two years but remaining 

above their estimates of the longer-run rate. 

17. Three members of the Board of Governors were in 

office at the time of the June 2018 meeting. 

18. One participant did not submit longer-run 

projections for real GDP growth, the unemployment rate, 

or the federal funds rate, 

All participants who submitted longer-run 

projections expected that, throughout the 

projection period, the unemployment rate 

would run below their estimates of its longerrun level. All participants projected that 

inflation, as measured by the four-q uartcr 

percentage change in the price index for 

personal consumption expenditures (PCE), 

would run at or slightly above the Committee's 

2 percent objective by the end of 2018 and 

remain roughly flat through 2020. Compared 

with the Summary of Economic Projections 

(SEP) from March, most participants slightly 

marked up their projections of real GDP 

growth in 2018 and somewhat lowered their 

projections for the unemployment rate from 

2018 through 2020; participants indicated 

that these revisions reflected, in large part, 

strength in incoming data. A large majority of 

participants made slight upward adjustments 

to their projections of inflation in 2018. 

Table 1 and figure 1 provide summary statistics 

for the projections. 

As shown in figure 2, participants generally 

continued to expect that the evolution of 

the economy relative to their objectives 

of maximum employment and 2 percent 

inflation would likely warrant further gradual 

increases in the federal funds rate. The central 

tendencies of participants' projections of the 

federal funds rate for both 2018 and 2019 

were roughly unchanged, but the medians 

for both years were 25 basis points higher 

relative to March. Nearly all participants who 

submitted longer-run projections expected 

that, during part of the projection period, 

evolving economic conditions would make it 

appropriate for the federal funds rate to move 

somewhat above their estimates of its longerrun level. 
119 

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48 PART 3: SUMMARY OF ECONOMIC PROJECTIONS 

Table l. Economic projections of Federa1 Reserve Board members and Federal Reserve Bank presidents, 

under their individual assessments of projected appropriate monetary policy, June 2018 

Percent 

2.1 2.1 

2.0 2J 

2.1 2.1 

2.1 2.1 

3.1 3.4 

In general, participants continued to view 

the uncertainty attached to their economic 

projections as broadly similar to the 

average of the past 20 years. As in March, 

most participants judged the risks around 

their projections for real GDP growth, the 

unemployment rate, and inflation to be 

broadly balanced. 

The Outlook for Economic Activity 

The median of participants' projections for 

the growth rate of real GDP, conditional on 

their individual assessments of appropriate 

monetary policy, was 2.8 percent for this year 

and 2.4 percent for next year. The median 

was 2.0 percent for 2020, a touch above the 

median projection of longer-run growth. Most 

participants con tinned to cite fiscal policy as 

a driver of strong economic activity over the 

next couple of years. Many participants also 

3.4-3.7 4.3-4.6 3.5-3.8 3.3~3.8 .1.3--4.0 4.1-4.7 

4.3--4.7 3.6-4.0 3.3--4.2 3.3--4.4 4.2~4.8 

2.0 2.0.·2.2 1.9-2.3 2.0.·2.3 2.0 

2.0 1.8 2.1 1.9-2.3 2.0-·2.3 2.0 

1.9-2.1 2.0--2.3 2.0-2.3 

1.8-2.1 1.9-2.3 2.0-2.3 

mentioned accommodative monetary policy 

and financial conditions, strength in the global 

outlook, continued momentum in the labor 

market, or positive readings on business and 

consumer sentiment as important factors 

shaping the economic outlook. Compared with 

the March SEP, the median of participants' 

projections for the rate of real GDP growth 

was 0.1 percentage point higher for this year 

and unchanged for the next two years. 

Almost all participants expected the 

unemployment rate to decline somewhat 

further over the projection period. The 

median of participants' projections for the 

unemployment rate was 3.6 percent for the 

final quarter of this year and 3.5 percent 

for the final quarters of 2019 and 2020. The 

median of participants' estimates of the 

longer-run unemployment rate was unchanged 

at 4.5 percent. 
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MONETARY POLICY REPORT: IULY 2018 49 

Figure 1. Medians, central tendencies, and ranges of economic projections, 2018 · 20 and over the longer run 

Change in real GDP 

- Median of projections 

Central tendency of projections 

Range of projections 

2013 2014 2015 

Unemployment rate 

2013 2014 2015 

PCE inflation 

2013 2014 2015 

Core PCE inflation 

2013 2014 2015 

2016 2017 

2016 2017 

2016 2017 

2016 2017 

~ 

2018 2019 2020 Longer 

run 

2018 2019 2020 Longer 

run 

2018 2019 2020 Longer 

run 

a;a ~ 

2018 2019 2020 Longer 

run 

NOTE: Ddinitions of variables and other explanations arc in the notes to table l. The data for the actual vaJu~s of 

the variables arc annual. 

l\.'1"\:eut 

.LJ 

Percent 

- 7 

- 6 

- 5 

- 4 

- 3 

Percent 

- 3 

Percent 

-- 3 

- I 
121 

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50 PART 3o SUMMARY OF ECONOMIC PROJECTIONS 

Figure 2. FOMC participants' assessments of appropriate monetary policy: Midpoint of target range or target level 

for the federal funds rate 

Percent 

5.0 

4.5 

·····~··· 

40 

3.5 

3.0 

............... _ 2.5 

............... J .............. -~" •• 

2.0 

.. ·········~·· 1.5 

1.0 

......... ···- 0.5 

0.0 

2018 2019 2020 Longer run 

Non:: Each shaded circle indicates the value (rounded to the nearest 118 percentage point) of an individual participant's 

judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal 

funds rate at the end of the specified calendar year or over the longer run. One participant did not submit longer-run projections 

for the federal funds rate. 

Figures 3.A and 3.B show the distributions of 

participants' projections for real GDP growth 

and the unemployment rate from 2018 to 2020 

and over the longer run. The distribution of 

individual projections for real GDP growth 

this year shifted up noticeably from that in the 

March SEP. By contrast, the distributions of 

projected real GDP growth in 2019 and 2020 

and over the longer run were little changed. 

The distributions of individual projections for 

the unemployment rate in 2018 to 2020 

shifted down relative to the distributions 

in March, while the downward shift in the 

distribution of longer-run projections was 

very modest. 

The Outlook for Inflation 

The medians of participants' projections for 

total and core PCE price inflation in 2018 were 

2.1 percent and 2.0 percent, respectively, and 

the median for each measure was 2.1 percent 

in 2019 and 2020. Compared with the March 

SEP, the medians of participants' projections 

for total PCE price inflation for this year and 

next were revised up slightly. Some participants 

pointed to incoming data on energy prices 

as a reason for their upward revisions. The 

median of participants' forecasts for core PCE 

price inflation was up a touch for this year and 

unchanged for subsequent years. 
122 

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Figures 3.C and 3.0 provide information on 

the distributions of participants' views about 

the outlook for inflation. The distributions 

of both total and core PCE price inf1ation 

for 2018 shifted to the right relative to the 

distributions in March. The distributions of 

projected inf1ation in 2019, 2020, and over 

the longer run were roughly unchanged. 

Participants generally expected each measure 

to be at or slightly above 2 percent in 

2019 and 2020. 

Appropriate Monetary Policy 

Figure 3.E provides the distribution of 

participants' judgments regarding the 

appropriate target--or midpoint of the target 

range-for the federal funds rate at the end 

of each year from 2018 to 2020 and over the 

longer run. The distributions of projected 

policy rates through 2020 shifted modestly 

higher, consistent with the revisions to 

participants' projections of real GOP growth, 

the unemployment rate, and inf1ation. As 

in their March projections, a large majority 

of participants anticipated that evolving 

economic conditions would likely warrant 

the equivalent of a total of either three or 

fonr increases of 25 basis points in the target 

range for the federal funds rate over 2018. 

There was a slight reduction in the dispersion 

of participants' views. with no participant 

regarding the appropriate target at the end of 

the year to be below 1.88 percent. For each 

subsequent year. the dispersion of participants' 

year-end projections was somewhat smaller 

than that in the March SEP. 

The medians of participants' projections 

of the federal funds rate rose gradually to 

2.4 percent at the end of this year, 3.1 percent 

at the end of 2019, and 3.4 percent at the end 

of 2020. The median of participants' longerrun estimates, at 2. 9 percent, was unchanged 

relative to the March SEP. 

In discussing their projections, many 

participants continued to express the view 

that the appropriate trajectory of the federal 

MONETARY POLICY REPORT: jULY 2018 51 

funds rate over the next few years would 

likely involve gradual increases. This view 

was predicated on several factors, including a 

judgment that a gradual path of policy firming 

likely would appropriately balance the risks 

associated with, among other considerations, 

the possibilities that U.S. liscal policy could 

have larger or more persistent positive effects 

on real activity and that shifts in trade policy 

or developments abroad could weigh on 

the expansion. As always, the appropriate 

path of the federal funds rate would depend 

on evolving economic conditions and their 

implications for participants' economic 

outlooks and assessments of risks. 

Uncertainty and Risks 

In assessing the path for the federal funds rate 

that, in their view, is likely to be appropriate, 

FOMC participants take account of the range 

of possible economic outcomes, the likelihood 

of those outcomes, and the potential benefits 

and costs should they occur. As a reference. 

table 2 provides measures of forecast 

uncertainty, based on the forecast errors of 

various private and government forecasts 

over the past 20 years, for real GOP growth, 

the unemployment rate, and total PCE price 

inflation. Those measures are represented 

Table 2. Average historical projection error ranges 

Percentage points 
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52 PART 3: SUMMARY OF ECONOMIC PROJECTIONS 

Figure 3.A. Distribution of participants' projections for the change in real GDP, 2018--20 and over the longer run 

2018 

[J 

2019 

2020 

1.4 

!.5 

!.4-

!.5 

14-· 

1.5 

Longer run 

1.6 

1.7 

1.6-

1.7 

1.8 

1.9 

1.8·· 

19 

Percent range 

2.3 

Percent range 

2.3 

Percent ran~.: 

2.2-

23 

Percent range 

1.5 

2.4-

2.5 

1_4~ 

2.5 

NoTE: Definitions of variables and other explanations are in the notes to table 1. 

" 2.7 

2.6-

2.7 

2.8-

2.9 

:-.lumber of participants 

-IS 

-16 

14 

12 

-l() 

-4 

~umhcrofparticipants 

3.0 

}_1 

-18 

16 

-14 

12 

-10 

Number of participants 

3.0 

3.1 

-IS 

-16 

-14 

-12 

JO 

8 

-6 

-4 

l\'umbcrofpmticipants 

-18 

-16 

-14 

-12 

-10 

-8 
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MONETARY POliCY REPORT: jUlY 2018 53 

Figure 3.B. Distribution of participants' projections for the unemployment rate, 2018-20 and over the longer run 

2018 

D 

'-

3.(}.. 4.(~ 4.2- 4.+- 3.1 4.1 4.3 4.5 

Percent range 

2019 

3 0~ H 

:u " Percent range 

2020 

44 

4.5 

Pt.!rccnt range 

Longer run 

Percent range 

NoTE: Definitions of variables and other explanations arc in the notes to table 1. 

4.6· 4.8 

4.7 4.9 

4.6" 4.8~ 

4.7 " 

4.6 4.8· 

4.7 4.9 

1\'umberofpartJdpants 

5.0~ 

5.1 

18 

16 

-14 

-12 

-10 

!\"umber of participants 

18 

-16 

-14 

12 

-10 

- 4 

5.(~ 

51 

Number of participants 

18 

-16 

-14 

-12 

-10 

8 

6 

- 4 

5.(} 

5.1 

;.:umber of participants. 

18 

-16 

-14 

12 

-10 

8 

6 
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54 PART 3: SUMMARY OF ECONOMIC PROJECTIONS 

Figure 3.C. Distribution of participants' projections for PCE inflation, 2018·--20 and OYer the longer run 

2018 

0 

2019 

2020 

Longer run 

1.7 

18 

1.7 

18 

r 

L9~ 

2.0 

1.9 

:::.n 

Percent range 

Percent range 

Percent range 

2.2 

21-

NOTE: Definitions of variables and other explanations arc in the notes to table 1. 

2,3-

24 

2.3 

24 

23 

24 

23-

24 

Numberofpart!dpants 

IK 

16 

-14 

-12 

-10 

- 4 

Number nf partk!pant~ 

18 

16 

-14 

-12 

-10 

- 6 

Numhcrorp;<rtidp,mts 

-IS 

-16 

-14 

-12 

-10 

8 

- 6 

1'\umhcrt>fparticipants. 

18 

-16 

-14 

-12 

10 
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MONETARY POLICY REPORT: JULY 2018 55 

Figure 3.D. Distribution of participants' projections for core PCE infia1ion. 2018-20 

2018 

2019 

2020 

1.7--

1! 

Ul! 

r 

2.0 

:.n 

1.9· 

2U 

2.1--

Percent range 

Percent range 

Percent range 

Non-e: Definitions of variables and other explanations arc in the notes to table I. 

2.:'1----

24 

Numbcrotpart!cipants 

-18 

16 

14 

12 

10 

-8 

-4 

:-\umbcrnfparticip;mts 

18 

16 

-14 

-12 

10 

Number 0f partidpanL~ 

18 

16 

-14 

12 

10 
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56 PART 3: SUMMARY OF ECONOMIC PROJECTIONS 

Figure 3.E. Distribution of participants' judgments of the midpoint of the appropriate target range for the federal 

funds rate or the appropriate target level for the federal funds rate, 2018-20 and over the longer run 

2018 

Percent range 

2019 

2020 

Percent range 

Longer run 

!.63--. !.88- 2.13- :us- 187 212 2.:n 2.62 

Percent range 

NOTE: Definitions of variables and other explanations are in the notes to table !. 

Numbcrofp<~rticlpants 

4.~8·· 4.63. 4.83· 

4.62 4.87 5.12 

-18 

16 

14 

-12 

-10 

Numhi:rofpnrticipants 

-18 

-10 

-14 

12 

-10 

8 

18 

16 

14 

Number of participants 

4.38-

5.12 

-18 

-·-16 

-14 

-12 

10 

8 

6 

-4 
128 

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graphically in the "fan charts" shown in 

the top panels of figures 4.A, 4.B, and 4.C. 

The fan charts display the median SEP 

projections for the three variables surrounded 

by symmetric confidence intervals derived 

from the forecast errors reported in table 2. 

If the degree of uncertainty attending these 

projections is similar to the typical magnitude 

of past forecast errors and the risks around the 

projections are broadly balanced, then future 

outcomes of these variables would have about 

a 70 percent probability of being within these 

confidence intervals. ror all three variables, 

this measure of uncertainty is substantial and 

generally increases as the forecast horizon 

lengthens. 

Participants' assessments of the level of 

uncertainty surrounding their individual 

economic projections are shown in the 

bottom-left panels of flgures 4.A, 4.B, 

and 4.C. Nearly all participants viewed 

the degree of uncertainty attached to their 

economic projections for real GDP growth, 

the unemployment rate, and inflation as 

broadly similar to the average of the past 

20 years, a view that was essentially unchanged 

from March. 19 

Because the fan charts are constructed to be 

symmetric around the median projections, 

they do not reflect any asymmetries in the 

balance of risks that participants may see 

in their economic projections. Participants' 

assessments of the balance of risks to their 

economic projections are shown in the 

bottom-right panels of figures 4.A, 4.B, and 

4.C. Most participants judged the risks to 

their projections of real GDP growth, the 

unemployment rate, total inflation, and core 

inflation as broadly balanced-in other words, 

as broadly consistent with a symmetric fan 

chart. Compared with March, even more 

19. At the end of this summary. the box "Forecast 

Uncertainty" discusses the sources and interpretation 

of uncertainty surrounding the economic forecasts and 

explains the approach used to assess the uncertainty and 

risks attending the participants' projections. 

MONETARY POLICY REPORT: JULY 2018 57 

participants saw the risks to their projections 

as broadly balanced. Specifically, for GDP 

growth, only one participant viewed the risks 

as tilted to the downside, and the number of 

participants who viewed the risks as tilted 

to the upside dropped from four to two. 

For the unemployment rate, the number of 

participants who saw the risks as tilted toward 

low readings dropped from four to two. For 

inflation, all but one participant judged the 

risks to either total or core PCE price inflation 

as broadly balanced. 

In discussing the uncertainty and risks 

surrounding their projections, several 

participants continued to point to tlscal 

developments as a source of upside risk, 

many participants cited developments related 

to trade policy as posing downside risks to 

their growth forecasts, and a few participants 

also pointed to political developments in 

Europe or the global outlook more generally 

as downside-risk factors. A few participants 

noted that the appreciation of the dollar 

posed downside risks to the inflation outlook. 

A few participants also noted the risk of 

inflation moving higher than anticipated as the 

unemployment rate falls. 

Participants' assessments of the appropriate 

future path of the federal funds rate were also 

subject to considerable uncertainty. Because 

the Committee adjusts the federal funds 

rate in response to actual and prospective 

developments over time in real GOP growth, 

the unemployment rate, and inflation, 

uncertainty surrounding the projected path 

for the federal funds rate importantly reflects 

the uncertainties about the paths for those 

key economic variables. Figure 5 provides a 

graphical representation of this uncertainty, 

plotting the median SEP projection for the 

federal funds rate surrounded by confidence 

intervals derived from the results presented 

in table 2. As with the macroeconomic 

variables, forecast uncertainty surrounding the 

appropriate path of the federal funds rate is 

substantial and increases for longer horizons. 
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58 PART 3o SUMMARY OF ECONOMIC PROJECTIONS 

Figure 4.A. Uncertainty and risks in projections of GDP growth 

Median projection and confidence interval based on historical forecast errors 

2013 2014 2015 201fi 2017 2018 2019 

FOMC participants' assessments of uncertainty and risks around their economic projections 

Uncertainty about GDP growth 

0 

Lower Broadly 

Similar 

Numbcrofpar1K1pan1~ 

Higher Weighted to 

downside 

Broadly 

hal anced 

-3 

-I 

2020 

Numhcrofparticipant~ 

Weighted to 

upside 

18 

16 

14 

12 

10 

NOTE: The blue and red Jines in the top panel show actual values and median projected values.. rcspcctivc!y, of the percent change 

in real (GOP) from the fourth quarter of the previous year to the fourth quarter of the year indicated. The 

the median projected values is assumed to be symmetric and is based on ront mean squared errors of 

various private and government forecasts made over the previous :20 years: more information about these data is available in table 2. Because current conditions may dilfer from those that prevailed, on average. over the previous 20 years, the width and shape of the 

confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants' current assessments 

of the uncertainty and risks around their projections: these current assessments are «ummarized in tbe lower panels. Generally 

speaking. participants who judge the uncertainty about their projections as .. broadly similar .. to the average levels of the past 

20 years would view the width of the confidence interval shown in the historical fan chart as largely consistent with their assessments 

or the uncertainty about their projections. Likewise. participants who judge the risks to their projections as "broadly balanced .. 

would view the conHdence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in 

economic projections, sec the box "Forecast Uncertainty." 
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MONETARY POLICY REPORTo JULY 2018 59 

Figure 4.B. Uncertainty and risks in projections of the unemployment rate 

Median projection and confidence interval based on historical forecast errors 

20!3 2014 2015 2016 2017 2018 2019 

FOMC participants' assessments of uncertainty and risks around their economic projections 

Numlxr of partinpanl~ 

Uncertainty about the unemployment rate 

EJ 

Lower Broadly 

Similar 

Higher 

18 

16 

-14 

12 

10 

8 

- 6 

Weighted to 

downside 

Broadly 

balanced 

2020 

Percent 

10 

-9 

-8 

-6 

-4 

Numhernrparticipants 

Weighted to 

upside 

18 

-16 

14 

NoTE: The blue and red lines in the top panel show actual values and median projected values. of the average 

um:m.,1oymcJtlt rate in the fourth the year indicated. The confidence interval the median projected 

root mean squared errors of various private and government forecasts made 

more information about these data is available in table 2. Because current conditions 

those on average, over the previous 20 years. the width and on the basis 

of the historical forecast errors may not reflect fOMC participants' current assessments of the uncertainty and risks around 

their projections; these current assessments arc summarized in the lower panels. Generally speaking, participants who judge the 

uncertainty about their projections as "broadly similar" to the average levels of the past 20 years would v1ew the width of the 

confidence interval shown in the historical fan chart as largely consistent with their assessments of the uncertainty about their 

projections. Likewise, participants who judge the risks to their projections as "broadly balanced .. would view the confidence 

interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic projections. 

see the box '·Forecast Uncertainty."' 
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60 PART 3o SUMMARY OF ECONOMIC PROJECTIONS 

Figure 4.C. Uncertainty and risks in projections of PCE inflation 

Median pwjection and confidence interval based on historical forecast errors 

PCE inflation 

2013 2014 2015 2016 2017 2018 

FOMC participants' assessments of uncertainty and risks around their economic projections 

Uncertainty about PCE inflation 

G:l 

Lower Broadly 

Similar 

Uncertainty about core PCE inflation 

0 

Lower Broadly 

Similar 

Number of pari!C!pants 

Higher 

-18 

16 

14 

12 

-10 

- 8 

6 

Numbcrrli'p<~rticipants 

Higher 

IS -16 

14 

- 12 

-10 

- 8 

Risks to PCE inflation 

0 

Weighted to 

downside 

Broadly 

balanced 

Risks to core PCE inflation 

0 

Percent 

- 0 

NumhcrofpaliKipants 

Weighted to 

uPside 

-18 

16 

14 

12 

10 

Number of panldpanL> 

-18 

-16 

-14 

-12 

10 

8 

- 6 

Non: The blue and red lines in the top panel show actual values and median projected values., respectively, of the percent change 

in the price index for personal consumption expenditures (PCE) from the fourth quarter of the previous year to the fourth quarter 

of the year indicated. The confidence interval around the median projected \'alues is assumed to be symmetric and is based on root 

mean squared errors of various private and government forecasts made over the previous 20 years; more information about these 

data is available in table 2. Because current conditions may differ from those that prevailed, on average, over the previous 

20 years, the \vidth and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect 

FO:MC participants' current assessments of the uncertainty and risks around their projt->ctions; these current assessments are 

summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as ''broadly 

similar'' to the average levels of the past 20 years would view the width of the confidence interval shown in the historical fan 

chart as largely consistent with their assessments of the uncertainty about their projections. Likewise. participants who judge 

the risks to their projections as ''broadly balanced" would view the confidence interval around their projections as approximately 

symmetric. For definitions of uncertainty and risks in economic projections, sec the box ·'Forecast Uncertainty .. , 
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MONETARY POLICY REPORT: )LILY 2018 61 

Figure 5. Uncertainty in projections of the federal funds rate 

Median projection and confidence interval based on historical forecast errors 

------------------------------------------------------------------------~Pe~r~nt 

Federal funds rate 

-6 

-5 

-3 

20D 2014 2015 2016 2017 2018 2019 2020 

NoTE: The blue and red lines are based on actual values and median projected values, respectively, of the Committee's target for 

the federal funds rate at the end of the year indicated. The actual values are the midpoint of the target range; the median projected 

values are based on either the midpoint of the target range or the target level. The confidence interval around the median projected 

values is based on root mean squared errors of various private and government forecasts made over the previous 20 years. The 

confidence interval is not strictly consistent with the projections for the federal funds rate. primarily because these projections are 

not forecasts of the likeliest outcomes for the federal fllllds rate. but rather projections of participants' individual assessments of 

appropriate monetary policy. StilL historical forecast errors provide a broad sense of the uncertainty around the future path of the 

federal funds rate generated by the uncertainty about the macroeconomic variables as well as additional adjustments to monetary 

policy that may be appropriate to offset the effects of shocks to the economy. 

The confidence interval is assumed to be symmetric except vJ1en it is truncated at zero-,the bottom of the lowest target range 

for the federal funds rate that has been adopted in the past by the Committee This truncation would not be intended to indicate 

the likelihood of the use of negative interest rates to provide additiona1 monetary policy accommodation if doing so was judged 

appropriate. In such situations, the Committee could also employ other tools, including forward guidance and largc~scale asset 

purchases. to provide additional accommodation. Because current conditions may differ from those that prevailed, on average. 

over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors 

may not reflect FOMC participants· current assessments of the uncertainty and risks around their projections. 

*The cnnfidencc interval is derived of short-rerm interest rates in the fourth quarter of the year 

indicated: more information about these data The shaded area cncPmpasscs less than a 70 percent confidence 

interval if the confidence interval has been truncated at zero. 
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62 PART 3: SUMMARY OF ECONOMIC PROJECTIONS 

Forecast Uncertainty 

The economic projections provided by the members of 

the Board of Governors and the presidents of the Federal 

Reserve Banks inform discussions of monetary policy 

among policymakers and can aid public understanding 

of the basis for policy actions. Considerable uncertainty 

attends these projections, however. The economic and 

statistical models and relationships used to help produce 

economic forecasts are necessarily imperfect descriptions 

of the real world, and the future path of the economy 

can be affected by myriad unforeseen developments and 

events. Thus, in setting the stance of monetary policy, 

participants consider not only what appears to be the 

most likely economic outcome as embodied in their 

projections, but also the range of alternative possibilities, 

the likelihood of their occurring, and the potential costs to 

the economy should they occur. 

Table 2 summarizes the average historical accuracy 

of a range of forecasts, including those reported in past 

Monetary Policy Reports and those prepared by the 

Federal Reserve Board's staff in advance of meetings of the 

Federal Open Market Committee (FOMC). The projection 

error ranges shown in the table illustrate the considerable 

uncertainty associated with economic forecasts. For 

example, suppose a participant projects that real gross 

domestic product (GDP) and total consumer prices will 

rise steadily at annual rJtes of, respectively, 3 percent and 

2 percent. If the uncertJinty attending those projections 

is similar to that experienced in the past and the risks 

around the projections are broadly balanced, the numbers 

reported in table 2 would imply a probability of about 

70 percent that actual GOP woutd expand within a range 

of 1.7 to 4.3 percent in the current year, 1.0 to 5.0 percent 

in the second year, and 0.9 to 5.1 percent in the third 

year. Tiu.~ corresponding 70 percent confidence intervals 

for overall inflation would be 1.3 to 2.7 percent in the 

current year and 1.0 to 3.0 percent in the second and third 

years. Figures 4.A through 4.C illustrate these confidence 

bounds in "fan charts" that are symmetric and centered on 

the medians of FOMC participants' projections for GDP 

growth, the unemployment rate, and inflation. However, 

in some instances, the risks around the projections may 

not be symmetric. In particular, the unemployment rate 

cannot be negative; furthermore, the risks around a 

particular projection might be tilted to either the upside or 

the downside, in which case the corresponding fan chart 

would be asymmetrically positioned around the median 

projection. 

Because current conditions may differ from those that 

prevailed, on average, over history, participants provide 

judgments as to whether the uncertainty attached to 

their projections of each economic variable is greater 

than, smaller than, or broadly similar to typical levels 

of forecast uncertainty seen in the past 20 years, as 

presented in table 2 and reflected in the widths of the 

confidence intervals shown in the top panels of figures 

4.A through 4.C. Participants' current assessments of the 

uncertainty surrounding their projections are summarized 

in the bottom-left panels of those figures. 1'-articipants 

also provide judgments as to whether the risks to their 

projections are weighted to the upside, are weighted to 

the downside, or are broadly balanced. That is, while the 

symmetric historical fan charts shown in the top panels of 

figures 4.A through 4.C imply that the risks to participants' 

projections are balanced, participants may judge that 

there is a greater risk that a given variable will be above 

rather than below their projections. These judgments 

are summarized in the lower-right panels of figures 4./\ 

through 4.C. 

As with real activity and inflation, the outlook for 

the future path of the federal funds rate is subject to 

considerable uncertainty. This uncertainty arises primarily 

because each participant's assessment of the appropriate 

stance of monetary policy depends importantly on 

the evolution of real activity and inflation over time. If 

economic conditions evolve in an unexpected manner, 

then assessments of the appropriate setting of the federal 

funds rate would change from that point forward. The 

final line in table 2 shows the error ranges for forecasts of 

short-term interest rates. They suggest that the historical 

confidence intervals associated with projections of the 

federal funds rate are quite wide. It should be noted, 

however, that these confidence intervals are not strictly 

consistent with the projections for the federal funds 

rate, as these projections are not forecasts of the most 

likely quarterly outcomes but rather are projections 

of participants' individual assessments of appropriate 

monetary policy and are on an end-of-year basis. 

However, the forecast errors should provide a sense of the 

uncertainty around the future path of the federal funds rate 

generated by the uncertainty about the macroeconomic 

variables as well as additional adjustments to monetary 

policy that would be appropriate to offset the effects of 

shocks to the economy. 

If at some point in the future the confidence interval 

around the federal funds rate were to extend below zero, 

it would be truncated at zero for purposes of the fan chart 

shown in figure 5; zero is the bottom of the lowest target 

range for the federal funds rate that has been adopted 

by the Committee in the past. This approach to the 

construction of the federal funds rate fan chart would be 

merely a convention; it would not have any implications 

for possible future policy decisions regarding the use of 

negative interest rates to provide additional monetary 

policy accommodation if doing so were appropriate. In 

such situations, the Committee could also employ other 

tools, including forward guidance and asset purchases, to 

provide additional accommodation. 

White figures 4.A through 4.C provide information on 

the uncertainty around the economic projections, figure 1 

provides information on the range of views across FOMC 

participants. A comparison of figure 1 with figures 4.A 

through 4.C shows that the dispersion of the projections 

across participants is much smaller than the average 

forecast errors over the past 20 years. 
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ABBREVIATIONS 

AFE 

BBA 

BLS 

C&I 

Desk 

DPI 

ECB 

EME 

FOMC 

GDP 

IOER 

JOLTS 

LFPR 

MBS 

Michigan survey 

OIS 

ONRRP 

PCE 

SEP 

SLOOS 

S&P 

TCJA 

TIPS 

VIX 

advanced foreign economy 

Bipartisan Budget Act of 2018 

Bureau of Labor Statistics 

commercial and industrial 

Open Market Desk at the Federal Reserve Bank of New York 

disposable personal income 

European Central Bank 

emerging market economy 

Federal Open Market Committee; also, the Committee 

gross domestic product 

interest on excess reserves 

Job Openings and Labor Turnover Survey 

labor force participation rate 

mortgage-backed securities 

University of Michigan Surveys of Consumers 

overnight index swap 

overnight reverse repurchase agreement 

personal consumption expenditures 

Summary of Economic Projections 

Senior Loan Olliccr Opinion Survey on Bank Lending Practices 

Standard & Poor's 

Tax Cuts and Jobs Act 

Treasury Inflation-Protected Securities 

implied volatility for the S&P 500 index 

63 
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- 1 -

Questions for The Honorable Jerome H. Powell, Chairman, Board of Govemors of the 

Federal Reserve System, from Representative Beatty: 

1. Title III of the Dodd-Frank Wall Stt·eet Reform and Consumer Protection Act, P.L. 111-

203, ("Dodd-Frank") transferred to the Board of Governors of the Federal Reserve System 

supervisory and examination authority of savings and loan holding companies and their 

non-depository subsidiaries in 2011. This included supervisory and examination authority 

of savings and loan holding companies primarily engaged in insurance underwriting 

activities. According to the 1 04th Annual Report of the Board of Governors of the Federal 

Reserve System, the Fed supervised 11 insurance savings and loan holding companies in 

2017, including two Ohio-based companies. 

Please describe the Fed's history of regulating insurance companies. 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) gave the 

Federal Reserve supervisory and regulatory responsibilities for insurance companies that either 

own a federally insured thrift as pmt of a savings and loan holding company (SLHC) or are 

designated as systemically important by the Financial Stability Oversight Council (FSOC). This 

responsibility extends to the functionally regulated subsidiaries of these companies. Prior to the 

Dodd-Frank Act, the Federal Reserve supervised insurance companies that were part of a bank 

holding company stmcture. In developing its regulatory framework for supervised insurance 

companies, the Federal Reserve Board (Board) has sought to adapt and tailor its overall statutory 

responsibility for supervised institutions and to appropriately incorporate considerations for the 

different material characteristics of insurance companies. While the Board has developed rules 

specifically for supervised insurance companies, the Federal Reserve does not regulate the 

business of insurance, including for its supervised institutions. 

As patt of the Dodd-Frank Act's authorization to develop a regulatory and supervisory 

framework for its supervised insurance companies, the Federal Reserve has pursued several 

initiatives. These initiatives include the establishment of capital requirements for supervised 

insurance companies and the establishment of enhanced prudential standards for institutions that 

have been desit;;nated as systemically important. On June 3, 2016, the Board approved and 

invited comment on an advance notice of proposed rulemaldng (ANPR) on two tailored 

conceptual frameworks for capital stm1daxds for supervised insurance companies. One of the 

proposed frameworks was tailored for insurance companies designated as systemically 

important, while the other was tailored for insurance companies that own a depository institution. 

The Federal Reserve is continuing to develop consolidated capital requirements for supervised 

insurance companies. The Board also approved a proposed 1ule on June 3, 2016, to apply 

enhanced prudential standards to systemically important insurance companies designated by the 

FSOC. These rulemakings would apply consistent liquidity, corporate governance, and riskmanagement standards to these firms. In addition, the Board regularly reviews new and existing 

guidance and regulations to determine the appropriate applicability for insurance savings and 

loan holding companies (ISLHCs) while continuing to develop appropriate regulations. 
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-2 

2. Currently, how many insurance savings and loan holding companies does the Fed 

supervise? 

The Federal Reserve currently supervises 11 ISLIICs. 

3. Do you believe that you have the authority to tailor supervisory regulations with regards 

to insurance savings and loan holding companies? If so: 

a. Can you provide a complete list and short description of every instance where the Fed 

has explicitly tailored supervisory and examination regulations, guidance or supervisory 

letters to insurance savings and loan holding companies since July 21, 2011? 

The Home Owners' Loan Act of 1933 (via the Dodd-Frank Act) provides the Federal Reserve 

the flexibility to tailor appropriately its regulations and guidance for ISLHCs, to ensure each 

firm's safety and soundness without imposing bank-centric standards. 

As part of the general supervisory process, the Federal Reserve tailors the application of 

supervisory letters (i.e., guidance) and regulations to ISLHCs based on the finn's size, risk 

profile, structure, and business model. Federal Reserve supervisors work closely with state 

insurance regulators and other relevant functional regulators of material business lines to ensure 

the Federal Reserve's supervisory expectations are appropriately aligned with eaeh firm's 

business and risk profiles. 

Below is a sample list and summary of significant supervisory guidance and regulations that the 

Federal Reserve has tailored or exempted ISLHCs from since July 21, 2011. 

Exemption from Dodd-J:<'rank Act Capital, Stress Testing, and Liquidity Requirements: 

The expectations in Supervision and Regulation (SR) Letter 12-7, "Supervisory Guidance on 

Stress Testing tor Banking Organizations with More Than $10 Billion in Total Consolidated 

Assets," and in the Comprehensive Capital Analysis and Review/Dodd-Frank Aruma! Stress 

Testing have not been applied to ISLHCs to date but do apply to bank holding companies that 

meet the same asset thresholds. In addition, the Federal Reserve did not apply Dodd-Frank Act 

bank liquidity requirements (e.g., liquidity coverage ratio) and Basel III regulatory capital 

standards to ISLHCs, as those specific capital and liquidity standards are too bank-centric. 

Applicability of the Federal Reserve's Holding Company Rating System: In 2016, the Board 

issued a Notice for Public Comment regarding the view that the petmanent application of the 

RFI Rating System (Risk Management, Financial Condition, and Impact) to SLHCs would not 

apply to ISLHCs. This notice stated the Board's intent to review "whether a modified version of 

the lU'l rating system or some other supervisory rating system is appropriate for these firms on a 

permanent basis." Similarly, in a 2017 Notice of Proposed Rulemaking, the proposed Large 

Financial Institution (LFf) Rating System to be used at large firms supervised by the Federal 

Reserve would not apply to large ISLHCs. If the LFI Rating System is implemented, the Board 

intends to review the potential application and/or modification for ISLHCs. ISLHCs will 

continue to be rated uoder the RFI rating system on an indicative basis while the Board considers 

rating system options. 
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The Federal Reserve has tailored the application of indicative RFI ratings to ISLHCs through 

intcmal guidance, which are called Advisory Letters. Intemal guidance provides Federal 

Reserve examiners direction on how to tailor their analysis of the financial conditions ofiSLHCs 

to reflect the differences associated with the business of insurance. It also directs examiners to 

rely, to the fullest extent possible, on the work of an ISLHC's state insnrance regulator(s) when 

assessing the risk management of insurance-specific activities at an ISLHC. Internal guidance 

requires Federal Reserve examiners to incorporate an ISLHC's Own Risk Solvency Assessments 

(ORSAs), a state insurance regulator requirement, in their evaluations and to discuss results from 

the ORSA with the appropriate state insurance regulator(s). 

Supervisory Guidance Applicable to SLHCs prior to July 21,2011: SR Letter 14-9, 

"Incorporation of Federal Reserve Policies into the Savings and Loan Holding Company 

Supervision Program," lists guidance that was applicable to SLHCs prior to the transfer of 

supervisory authority from the Office of1nrift Supervision to the Federal Reserve. Internal 

guidance issued on general supervision allows for tailoring for ISLHCs, if necessary. For 

example, SR Letter 12-17, "Consolidated Supervision for Large Financial Institutions," is 

applicable to ISLHCs with $50 billion or more in assets (now $100 billion following enactment 

of S. 2155), and addresses generally the supervision program for large firms. Guidance issued 

on specific topics addressed in SR Letter 12-17, however, will have insurance-specific tailoring. 

The Board is in the process of developing guidance that outlines the Federal Reserve's 

supervisory framework for ISLHCs. This guidance will also discuss how supervisory guidance 

is applied and tailored, as well as the Federal Reserve's interagency coordination activities with 

state insurance regulators and other functional regulators of ISLHCs. 

h. Does the Fed have any additional plans to tailor new and/or existing regulations, 

guidance, or supervisory letters to insurance savings and loan holding companies in the 

future? If so: 

i. Please describe those plans with specificity to the fullest extent possible. 

ii. When does the Fed expect to undertal<e these actions? 

Board staff is emTently developing guidance that provides an overview of its supervisory 

framework for ISLHCs. This guidance will clarify the Federal Reserve's supervisory objectives 

and approach; articulate the Federal Reserves's process for applying and tailoring supervisory 

guidance; and demonstrate how the Federal Reserve relies on, and coordinates with, tl1e primary 

functional regulators (i.e., state insurance regulators, federal and state banking regulators, and 

any other domestic or foreign supervisors) ofiSLHCs and their regulated subsidiaries. In 

addition, this guidance will describe the Board's process for reviewing the applicability of 

guidance and regulations to ISLHCs and its oversight duties ofiSLHC supervisory activities. 

The Board expects to issue this guidance in the near future. The Board will continue to assess 

new guidance and regulations for applicability to ISLHCs and tailor applicable guidance, when 

appropriate. 
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Questions for The Honorable Jerome H. Powell, Chairman, Board of Governors of the 

Federal Reserve System, from Representative Gottheimer: 

1. In the 2015 rulemaking for the risk-based capital surcharges for Global Systemically 

Important Bank Holding Companies (GSIBs), the Federal Reserve Board (FRB) notes the 

need to periodically review the coefficients to update its GSIB Method 2 in relation to 

economic growth. The FRB rule states, "To ensure changes in economic growth do not 

unduly affect firms' systemic risk scores, the Board will periodically review the coefficients 

and make adjustments as appropriate." 

Are there any discussions or plans to update or re-examine the GSIB coefficients, 

particularly given recent economic growth? 

Docs the FRB plan to periodically review coefficient or are there economic factors 

that will trigger such a review? If periodically, how frequently will the reviews be 

conducted? 

How has recent economic growth impacted scores under the GSIB methodology? 

The Federal Reserve Board's (Board) capital rules have been designed to significantly reduce the 

likelihood and severity of future financial crises by reducing both the probability of failure of a 

large banking organization and the consequences of such a failure were it to occur. Capital rules 

and other prudential requirements for large banking organizations should be set at a level that 

protects financial stability and maximizes long-term, through-the-cycle, credit availability and 

economic growth: Consistent with these principles, the Board originally calibrated the GSIB 

surcharge so that-given the circumstances of the financial system--each GSIB would hold 

enough capital to lower its probability of failure so that the expected impact of its failure on the 

fmancial system would be approximately equal to that of a large non-GSIB. 

The bulk of post-crisis regulation is largely complete, with the important exception of the U.S. 

implementation of the recently concluded Basel Committee agreement on bank capital standards. 

It is therefore a natural and appropriate time to step back and assess those efforts. The Board is 

conducting a comprehensive review of the regulations in the core areas of post-crisis reform, 

including capital, stress testing, liquidity, and resolution. The objective of this review is to 

consider the effect of those regulatory frameworks on the resiliency of the financial system, 

including improvements in the resolvability of banking organizations, and on credit availability 

and economic growth. 

In general, I believe overall capital for our largest banking organizations is at about the right 

level. Critical elements of onr capital structure for these organizations include stress testing, the 

stress capital buffer, and the enhanced supplementary ratio. Work is underway to finalize the 

calibration of these fundamental building blocks, all of which form part of the system in which 

the GSIB surcharge has an effect. In this regard, I would note that the GSIB surcharge rule does 

not take full effect until January 2019. 
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Questions for The Honorable Jerome H. Powell, Chairman, Board of Governors of the 

Federal Reserve System, from Representative Huizenga: 

1. When the GSIB surcharge was finalized in 2015, the FRB recognized that the GSIB 

surcharge "may be affected by economic growth that docs not represent an increase in 

systemic risk." Accordingly, the FRB committed, "[t)o ensure changes in economic growth 

do not unduly affect firms' systemic risk scores, the Board will periodically review the 

coefficients and make adjustments as appropriate." Do you continue to believe, as you have 

testified, that the United States has experienced significant economic growth in recent 

years? Accordingly, is the FRB monitoring and prepared to update the requirement 

accordingly? 

The Federal Reserve Board's (Board) capitalmles have been designed to significantly reduce the 

likelihood and severity of future financial crises by reducing both the probability of failure of a 

large banking organization and the consequences of such a failure were it to occur. Capitalmles 

and other pmdential requirements for large banking organizations should be set at a level that 

protects financial stability and maximizes long-term, through-the-cycle, credit availability and 

economic growth. Consistent with these principles, the Board originally calibrated the GSIB 

surcharge so that-given the circumstances of the financial system--each GSIB would hold 

enough capital to lower its probability of failure so that the expected impact of its failure on the 

financial system would be approximately equal to that of a large non-GSIB. 

The bulk of post-crisis regulation is largely complete, with the important exception of the U.S. 

implementation of the recently concluded Basel Committee agreement on bank capital standards. 

It is therefore a natural and appropriate time to step back and assess those efforts. The Board is 

conducting a comprehensive review of the regulations in the core areas of post-crisis reform, 

including capital, stress testing, liquidity, and resolution. The objective of this review is to 

consider the effect of those regulatory frameworks on the resiliency of the financial system, 

including improvements in the resolvability of banking organizations, and on credit availability 

and economic growth. 

In general, I believe overall capital for our largest banking organizations is at about the right 

level. Critical elements of our capital structure for these organizations include stress testing, the 

stress capital buffer, and the enhanced supplementary ratio. Work is underway to finalize the 

calibration of these fundamental building blocks, all of which form pati of the system in which 

the GSIB surcharge has an effect. In this regard, I would note that the GSIB surcharge mle does 

not take full effect until January 2019. 
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Questions for The Honorable Jerome H. Powell, Chairman, Board of Governors of the 

Federal Reserve System, from Representative Messer: 

1. Chairman Powell, thank you for testifying before the House Financial Services 

Committee on July 18, 2018. On May 24, 2018, President Trump signed S. 2155, the 

Economic Growth, Regulatory Relief, and Consumer Protection Act, into law. I am 

concerned about the implementation of Section 403 of the Act, which is entitled "Treatment 

of Certain Municipal Obligations." Specifically, subsection (b) of that section states: 

Not later than 90 days after the date of the enactment of this Act, the Federal 

Deposit Insurance Corporation, the Board of Governot·s of the Federal Reserve 

System, and the Comptroller ofthe Currency shall amend the final rule entitled 

"Liquidity Coverage Ratio: Liquidity Risk Measurement Standards" (79 Fed. Reg. 

61439 (October 10, 2014)) and the final rule entitled "Liquidity Coverage Ratio: 

Treatment of U.S. Municipal Securities as High-Quality Liquid Assets" (81 Fed. 

Reg. 21223 (Aprilll, 2016)) to implement the amendments made by this section. 

Can you detail the steps the Federal Reserve has taken to work with the FDIC and OCC to 

amend the relevant rules relating to the Liquidity Coverage Ratio to meet the August 22, 

2018, deadline as established by the Act? 

Following the enactment of S. 2155, the Economic Growth, Regulatory Relief, and Consumer 

Protection Act (EGRRCPA), stafffrom the f'ederal Reserve, FDIC, and OCC (the agencies) took 

action to comply with the requirements of the statute. Section 403 of the EGRRCP A required 

the agencies, within 90 days of enactment, to treat municipal obligations as high-quality liquid 

assets (HQLA) under their liquidity coverage ratio (LCR) mles if the municipal obligations are 

investment grade and considered liquid and readily marketable. 

On August 22, 2018, the agencies jointly issued an interim final rule (IFR) to treat eligible 

municipal obligations as HQLA. The IFR took effect upon publication in the Federal Register 

on August 31,2018, and public comments on the IFR were accepted by the agencies until 

October 1, 2018. 
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Questions for The Honorable Jerome J>owell, Chairman, Board of Governors of the 

Federal Reserve System from Representative Sherman: 

1. Home price and rent growth are driving inflation. Are there measures the Federal 

Reserve could take to stimulate single family and apartment construction and thereby ease 

inflation? 

The Federal Open Market Committee (FOMC or Committee) monitors the housing market 

carefully as it is an important sector of the economy. However, monetary policy affects the 

economy as a whole and carroot be used to stimulate single family and apat1ment construction in 

isolation. To the extent that there are supply constraints in the housing sector, addressing them is 

well beyond the responsibility of the Federal Reserve. Rather, the Federal Reserve aims to 

promote an economic environment with stable inflation and sustainable economic growth, which 

helps support investment in all sectors of the economy, including housing. 

2. With low unemployment, how does the Federal Reserve plan to curb inflation? 

The Federal Reserve conducts monetary policy in order to promote maximum employment and 

low and stable inflation at the rate of2 percent per year. While there exists an economic 

relationship between slack in the labor market and inflation, this relationship appears to be much 

weaker than in previous decades. In the latest Summary of Economic Projections, the median 

projection ofFOMC pm1icipants indicates that, under appropriate monetary policy, the 

unemployment rate will remain low and inflation will stay close to 2 percent. That said, the 

Committee is always monitoring inflation developments carefully and is ready to adjust the 

course of monetary policy to achieve its objectives. 

3. To the extent the Federal Reserve decides to continue to raise interest rates to combat 

signs of increasing inflation, are you concerned that these steps could lead to a slower 

economy, or possibly a recession? 

As I discussed in remarks I gave at a symposium hosted by the Federal Reserve Bank of Kansas 

City in Jackson Hole in August, there are two main risks confronting policymakers currently: 

moving too fast and needlessly shortening the expansion, versus moving too slowly and risking a 

destabilizing overheating. Minutes ofFOMC meetings and other Federal Reserve 

communications infonn the general public that our discussions focus keenly on the relative 

salience of these risks. 

I see the emrent path of gradually raising interest rates as the FOMC's approach to taking 

seriously both of these risks. While the unemployment rate is below the Committee's estimate of 

the longer-run natural rate, estimates of this rate are quite unce11ain. The same is true of 

estimates of the neutral interest rate. We therefore refer to many indicators when judging the 

degree of slack in the economy or the degree of accommodation in the current policy stance. We 

are also aware that, over time, inflation has become much less responsive to changes in resource 

utilization. 
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-2-

While inflation has recently moved up near 2 percent, we have seen no clear sign of an 

acceleration above 2 percent, and there does not seem to be an elevated risk of overheating. This 

is good news, and we believe that this good news results in part from the ongoing nmmalization 

process, which has moved the stance of policy gradually closer to the FOMC's rough assessment 

of neutral as the expansion has continued. As the most recent FOMC statement indicates, if the 

strong grov.th in income and jobs continues, further gradual increases in the target range for the 

federal funds rate will likely be appropriate. 

My colleagues and I are carefully monitoring incoming data, and we are setting policy to do 

what monetary policy can do to support continued growth, a strong labor market, and inflation 

near 2 percent. 

4. Are you concerned at all about the possibility of "stagflation"? In addition, are you 

concerned that with interest rates still being relatively low, you would have limited tools to 

combat a recession when one occurs? 

"Stagflation" is typically defined as involving a combination of substandard growth or abovenormal unemployment, and higher-than-desired inflation. There are many risks in the 

macroeconomy at any given time, and the future course of the economy is always difficult to 

discern. My colleagues and I are carefully monitoring incoming data, and are on alert for 

unforeseen developments of any kind. However, at present, the risk of stagflation appears to be 

quite low. 

6. How concerned are you about the risks of an inverted yield curve, which historically 

leads to a recession? Will you let the yield curve invert? 

The Federal Reserve does not control or target the Treasury yield curve. The shape of the yield 

curve is one of many financial and economic indicators that we consider in assessing the 

economic outlook and the appropriate course of monetary. policy. It is normal for the yield curve 

to flatten over the course of an economic expansion as the FOMC scales back monetary policy 

accommodation. The FOMC's policies reflect the strong performance of the U.S. economy and 

are intended to help make sure that this trend continues. Currently, the risks to the economic 

outlook appear roughly balanced. In other words, when weighing a wide range of relevant 

infonnation, it does not appear that there is an elevated risk of a recession. The FOMC will 

continue to make its monetary policy decisions to best promote its maximum employment and 

price stability objectives. 

Based on historical data, there is a statistical relationship between an inverted yield curve and the 

probability of a subsequent recession. However, research is not conclusive as to whether an 

inverted yield curve causes recessions. Since the financial crisis, longer-term yields have been 

held down by many factors other than policy rate expectations, so it is uncertain whether the 

historical predictive relationship is still a reliable guide. 

9. What is your goal for the 10-year Treasury note by the end of2019? 
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The Federal Reserve does not control or target the yield on the ten-yeaT Treasury note. To fulfill 

its congressional mandate of maximum employment and price stability, the FOMC adjusts the 

stance of monetary policy primarily by changing the target range for the federal funds rate. The 

yield on the ten-year Treasury note is one of many indicators that the Committee considers in its 

policy deliberations. 

10. Do you see the economy staying strong for the next 2 years or do yon see a possible 

recession in 2019 or 2020? 

As I noted in remarks in Jackson Hole, over the course of a long recovery, the U.S. economy has 

strengthened substantially. The unemployment rate has declined steadily for almost nine years 

and, at 3.9 percent, is now near a 20-year low. Most people who want jobs can find them. 

Inflation has moved up and is now ncar the FOMC's objective of2 percent after rum1ing 

generally below that level for six years. With solid household and business confidence, healthy 

levels of job creation, rising incomes, and fiscal stimulus arriving, there is good reason to expect 

that this strong performance will continue. 

11. What are you going to do to keep stimulating business growth, which ultimately 

stimulates the economy for individuals? 

To support the ongoing growth of the economy, my colleagues and I will focus intently on 

pursing the dual mandate given to us by the Congress --to promote price stability and maximum 

employment. We strongly believe that pursuing that dual mandate is the best means available to 

us to set a positive backdrop for decision-making by businesses and households, consistent with 

their long-term wellbeing. 
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Questions for The Honorable Jerome H. Powell, Chairman, Board of Governors of the 

Federal Reserve System, from Representative Sherman: 

5. What effect do you think the President's trade policies will have on the economy? 

As you know, trade policy is the responsibility of Congress and the Administration. The Federal 

Reserve's statutory mandate is to formulate monetary policy to achieve price stability and 

maximum sustainable employment. 

In general, trade and access to global markets provide many benefits for businesses and the 

people they employ, including larger and deeper markets for their products and a wider selection 

of inputs for production. Consumers also benefit through a greater variety of goods and more 

competitive prices. That said, the benefits of trade are not shared equally by all people and all 

sectors ofthe economy. Policymakers and economists alike are increasingly cognizant of the 

need to design policies to support workers and families so that the benefits of trade can be more 

widely shared. 

In pursuit of our statutory objectives, we monitor the effects of various developments, including 

trade policy, on the economy. Tariff increases, by both the United States and other countries, 

have already affected individual businesses and industries. Although the direct effects of 

announced measures on the overall U.S. economy are likely to be fairly modest, there is a 

possibility that trade tensions could disrupt supply chains and undermine business confidence. 

As indicated in the Federal Open Market Committee's (FOMC or Committee) minutes and the 

Beige Book, our business contacts increasingly report that trade policy developments are raising 

input costs and creating policy uncertainty, which is causing some fi1ms to delay investments. 

The Administration's current trade policy process is still ongoing. If the end result is a world 

with higher tariffs in many countries, then experience suggests there will be significant negative 

effects for the U.S. economy. On the other hand, if the end result is a world with lower trade 

barriers and a more level playing field, then the U.S. economy will benefit. 

7. How concerned are yon about the danger of a crisis in emerging market economies with 

their currencies losing value and with the ·Federal Open Market Committee raising rates? 

How concerned are you about risks of contagion to the United States if there is a crisis in 

emerging market economies? 

Emerging market countries are an important part of the global economy, accounting for about 

half of U.S. trade and over half of global economic growth. Accordingly, developments in 

emerging markets matter for the U.S. economy. 

The Federal Reserve adjusts its policy to achieve its congressionally mandated objectives of 

price stability and maximum employment in the United States. Rising U.S. interest rates largely 

reflect the strength of the U.S. economy, which is good news for the rest of the world, and 

emerging markets arc no exception. 
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Higher U.S. interest rates and a rising dollar may exert some financial pressure on emerging 

markets, especially those that have borrowed considerably in U.S. dollars. Only a few emerging 

market economies have faced substantial financial distress this year, and those are countries with 

particular vulnerabilities, such as high debt, CU!Tent account deficits, and inflation. Still, we 

continue to monitor emerging market developments, as more-widespread economic difficulties 

could lead to heightened volatility in global financial markets and reduce demand for U.S. 

exports. 

The Federal Reserve strives to communicate its thinking about monetary policy as clearly and 

transparently as possible, which should limit the likelihood of market ove!Teaction to its 

decisions. We have signaled for some time that we expect to raise interest rates only gradually 

as the U.S. economy strengthens. Ultimately, sustaining the economic expansion and domestic 

financial stability will help suppmt prosperity and growth abroad as well. 

8. How will diverging rate paths between the United States and the European Union play 

out? Is there anything in the data that suggests rising inflation will become a significant 

issue? 

The Federal Reserve's monetary policy is focused on our congressionally mandated objectives of 

maximum employment and price stability in the United States. In pursuing those objectives, we 

monitor developments abroad, which can affect U.S. economic activity and inflation through a 

number of channels. For instance, if the path of foreign interest rates falls shmt of expectations, 

that will likely put some upward pressure on the dollar and also could weigh on U.S. long-te1m 

bond yields. With those effects offsetting each other to some extent, lower foreign interest rates 

should have only a marginal impact on the U.S. economy. 

Economies vary in terms of their inflation perfmmance and the degree of labor market slack. It 

should be expected that monetary policy will also vary across economies in response to local 

conditions. Currently, the U.S. labor market is very strong and U.S. inflation has moved to near 

2 percent. In the euro area, the economic recovery continues to be sluggish compared to the 

United States, and inflation has persisted well below their 2 percent target, so the European 

Cenu·al Bank has only recently begun to signal a gradual reduction in monetary accommodation. 

The divergence between U.S. and euro-area interest rates has contributed the U.S. dollar's 

appreciation against the euro. 

An appreciating dollar makes our exports more expensive abroad and makes imports more 

competitive relative to domestic production. All else equal, that circumstance would reduce net 

exports and be a drag on U.S. economic growth. That said, the underlying strength of demand in 

the United States, supported by healthy growth in consumption and investment, seems to be 

sufficiently robust to overcome the drag from a higher dollar. 

A strong dollar, which lowers prices for U.S. impmts, also tends to restrain U.S. price inflation, 

whereas tightening resource slack tends to push up inflation. In the United States, inflation has 

recently moved up to near 2 percent, but, as noted earlier, we have not seen a clear sign of an 

acceleration above 2 percent, and there does not seem to be an elevated risk of overheating. That 
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said, the Committee monitors inflation developments carefully and sets monetary poliey 

accordingly. 
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-IQuestions for The Honorable Jerome H. Powell, Chairman, Board of Governors of the 

Federal Reserve System, from Representative Sinema: 

1. The Arizona Chamber of Commerce notes that a trade war immediately threatens over 

250 million dollars in Arizona exports and 772,800 Arizona jobs supported by global trade. 

Eighty-eight percent of Arizona exporters are small or medium-sized businesses, making 

the effects of trade war particularly acute for Arizona entrepreneurs and family-run 

businesses. Job-killing tariffs will target Arizona-made agricultural goods like apples and 

cotton, imperiling the livelihoods of Arizona family farmers. Tariffs also impose costs 

directly passed on to consumers, forcing Arizona families to pay more for their everyday 

purchases. One of the functions of the Federal Reserve System is to strengthen U.S. 

standing in the world economy. How do you anticipate the Administration's tariff policies 

affecting that work? 

As you know, Congress has entrusted the Federal Reserve with the statutory dual mandate of 

achieving price stability and maximum employment. Trade policy is the responsibility of 

Congress and the Administration. 

In general, trade and access to global markets provide many benefits for businesses and the 

people they employ, including larger and deeper markets for their products and a wider selection 

of inputs for production. Consumers also benefit through a greater variety of goods and more 

competitive prices. Because of these and other benefits, more open and globalized economies 

generally have been faster growing, more productive, and more dynamic. That said, the benefits 

of trade are not shared equally by all people and all sectors of the economy. Policymakers and 

economists alike are increasingly cognizant of the need to design policies to support workers and 

families so that the benefits of trade can be more widely shared. 

Since World War II, the United States has been a global leader in building a rules-based trading 

system, which has resulted in, over time, the consistent lowering of tariffs and growth in trade. 

The Administration's current trade policy process is still ongoing. If the end result is a world 

with higher tariffs in many countries, then experience suggests there will be significant negative 

effects for the U.S. economy. On the other hand, if the end result is a world with lower trade 

baniers and a more level playing field, then the U.S. economy will benefit. 

To date, tariff increases, both by the United States and other countries, have already affected 

individual businesses and industries, in pmiicular the agricultural sector. Moreover, our business 

contacts increasingly repoti that trade developments are creating policy uncetiainty, which is 

causing some firms to delay investments. Although the direct effects of announced measures on 

the overall U.S. economy are likely to be fairly modest, there is a possibility that trade tensions 

could disrupt supply chains and undermine business confidence. We continue to monitor trade 

developments and their effects on U.S. employment and inflation. 
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Questions for The Honorable Jerome H. Powell, Chairman, Board of Governors of the 

Federal Reserve System, from Representative Sinema: 

2. I was pleased to see economic growth in Q2 that is considerably stronger than that of 

Ql. Yet too many Arizona families aren't seeing wages rise in a commensurate manner. 

For many Arizonans, wages have stagnated or even declined when factoring in inflation. 

At the same time, the cost of health care and other essential goods and services continues to 

rise, causing many families to feel the pinch. What explanation can you offer fo1· wages 

failing to trend upward with economic growth? 

Although most indicators suggest that the labor market is quite strong, wage growth has 

remained moderate. Generalizing across various measures, average annual wage gains have 

picked up a little in recent years, from about 2 percent a few years ago to about 2 Y2 to 3 percent 

now. Even taking into account relatively low inflation, the gains in inflation-adjusted wages 

have averaged less than were seen prior to the recession. And of course, those figures are 

averages. Some people have seen larger gains than that and unfortunately some have seen less. 

One impotiant factor for the disappointing pace of overall wage gains, in the face of a strong 

labor market, is that productivity has increased relatively slowly over the past several years. 

Over time, productivity gains arc necessary to support rising living standards. Many other 

factors influence wages as well. There is no consensus about their relative importance, but some 

of the other factors cited by economists include globalization, demographic changes (e.g., the 

retirement of higher paid older workers) which affect measmed average wage gro\>ih, hidden 

labor market slack (e.g., the low labor force patiicipation rate), declines in unionization, rising 

employer concentration, atJd an increase in the use of non-compete agreements and nonpoaching agreements. 1 

3. Congress passed the Volcker Rule as part of Dodd-Frank to reduce risky activities, such 

as high-risk proprietary trading, at banks. We share the goal of reducing systemic risk in 

our financial system to ensure another crisis does not happen. At the same time, we also 

want to help companies grow and innovate by ensuring they have sufficient access to 

capital. The current definition of "covered fund" in the Volcker Rule permits banks to 

pt·ovide capital and credit to businesses but prohibits doing so via a fund structure. 

I'm incredibly proud of Arizona's public universities, which create opportunities for 

Arizonans to turn good ideas into great startups- creating jobs and growing the economy. 

These startup incubators are placed at risk if the startup structures itself as a covered fund. 

This is perplexing because fund structures allow banks to diversify risl>, which would 

appear to be consistent with the goal of the Volcker Rule. 

1 See Alan B. Krueger, Reflections on Dwindling Worker Bargaining Power and Monetmy Policy, Luncheon 

Address at the Jackson Hole Economic Symposium (Aug. 24, 20 18), available at 

h!!Rs://www.kansascityfcd.org/-/media/filesipublicat/sympos/20 18/papersandfLandouts/824180824kruegerremark~ 

.pdf/la=en; see also Ernie Tedeschi, Unemployment Looks Like 2000Again. But Wage Growth Doesn't, The New 

York Times, Oct. 22, 2018, available at https://wv,_w.nytimes.com/20 18/10/22/upshot/mystery-slow-wageerowth-econony.btmJ. 
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What are your thoughts ou this? Is there intention to address aspects of the definition of 

covered fund so that banks are not discouraged from diversifying dsk? 

The Board, along with the Office of the Comptroller of the CutTency, Federal Deposit Insurance 

Corporation, Commodity Futures Trading Commission, and Securities and Exchange 

Commission (the "agencies") adopted regulations to implement section 619 of the Dodd-Frank 

Wall Street Reform and Consumer Protection Act (12 U.S.C. § 1851) (the "Volcker Rule") in 

2013. These regulations included a definition of"covered fund" that, in the agencies' view, was 

consistent with the statutory purpose of the Volcker Rule to limit certain investment activities of 

banking entities. Subsequently, and based on experience with the Volcker Rule regulations, the 

agencies identified opportunities for improvement and proposed amendments to the Volcker 

Rule regulations in May 2018.2 

The proposal requests comment on how to tailor the regulations governing a banking entity's 

covered fund activities. For example, the proposal asks whether a different definition of 

"covered fund" would be appropriate. In addition, the proposal requests comment on potential 

exemptions for particular types of funds, or funds with pa1iicular characteristics. 

Since proposing the amendments in May, the agencies have held meetings with and received 

comments from interested parties regarding the treatment of covered funds. The agencies expect 

to meet with and receive comments from interested parties throughout the comment period, and 

will carefully consider each comment to determine whether any changes to the covered fund 

regulations would be appropriate. 

2 83 Fed. Reg. 33,432 (July 17, 2018). 
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Questions for The Honorable Jerome H. Powell. Chairman. Board of Governors of the 

Federal Reserve System from Representative Stivers: 

1. Chairman Powell: As you know, the U.S. Method 2 G-SIB framework created fixed 

coefficients that apply to each indicator used in the surcharge calculation. This incentivizes 

firms to reduce their risk. However, despite recognizing the need to update these rules to 

account for normal economic growth, these coefficients have remained unchanged since the 

finalization of the U.S. G-SIB rule in 2015. Since that time, the U.S. economy has 

experienced significant economic growth. Does the Fed monitor the impact of economic 

growth on the GSIB coefficients? Additionally, when will the FRB update the coefficients to 

address the economic growth? 

The Federal Reserve Board's (Board) capital rules have been designed to significantly reduce the 

likelihood and severity of future financial crises by reducing both the probability of failure of a 

large banking organization and the consequences of such a failure were it to occur. Capital rules 

and other prudential requirements for large banking organizations should be set at a level that 

protects financial stability and maximizes long-term, through-the-cycle, credit availability and 

economic growth. Consistent with these principles, the Board originally calibrated the GSIB 

surcharge so that-given the circumstances of the financial system--each GSIB would hold 

enough capital to lower its probability of failure so that the expected impact of its failure on the 

financial system would be approximately equal to that of a large non-GSIB. 

The bulk of post-crisis regulation is largely complete, with the important exception of the U.S. 

implementation of the recently concluded Basel Committee agreement on bank capital standards. 

It is therefore a natural and appropriate time to step back and assess those efforts. The Board is 

conducting a comprehensive review of the regulations in the core areas of post-crisis reform, 

including capital, stress testing, liquidity, and resolution. The objective of this review is to 

consider the effect of those regulatory frameworks on the resiliency of the financial system, 

including improvements in the resolvability of banking organizations, and on credit availability 

and economic growth. 

In general, I believe overall capital for our largest banking organizations is at about the right 

level. Critical elements of our capital structure for these organizations include stress testing, the 

stress capital buffer, and the enhanced supplementary ratio. Work is underway to finalize the 

calibration of these fundamental building blocks, all of which form part of the system in which 

the GSIB surcharge has an effect. In this regard, I would note that the GSIB surcharge rule does 

not take full effect until January 2019.