Jerome Powell Testifies Before Senate Committee

Banking, Housing, and Urban Affairs will come to order. Welcome Chair Powell. Nice to have you back. Good to have you first this time of year.

(00:08)
Ohioans know, Americans know that our economy fundamentally is not a fair playing field. Instead, we have a David and Goliath economy where the largest corporations use their power to funnel all the gains in the economy to the top, aided and abetted by too many people in this room.

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Corporations squeeze every last penny from Americans’ pocketbooks and workers’ paychecks. They don’t even try to hide it anymore. They biggest corporations are charging more for less. Americans are frustrated. No, actually, Americans are pissed off. They have fewer and fewer choices. These choices cost more and more.

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Keeping prices down is part of the Fed’s mandate. But as many of us have made clear, the Fed’s main tool to combat inflation, raising interest rates does nothing to address the biggest causes of rising prices right now, corporate greed.

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Keeping rates too high for too long threatens workers’ paychecks while keeping other costs high, particularly housing costs. Housing prices and rents continue to go up. It’s no surprise that since the Fed began raising rates, the amount of income families need to qualify for a mortgage has nearly double.

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Home ownership has long been a bedrock of our middle class, but today, fewer and fewer middle class families can afford to buy a home. Higher interest rates are making our country’s housing supply shortage worse, not better. We need more housing construction of all types. How higher rates lead to the opposite and particularly make it harder for multifamily construction to work financially.

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Higher interest rates make borrowing more expensive for working families, whether it’s for a mortgage, or a car, or anything else. Most people don’t have the luxury of paying for everything in cash.

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And for the millions of Americans feeling their budgets stretched by higher prices, taking on credit card debt to pay for groceries and other essentials has become an option of last resort. But it’s more people struggle to pay down their debts, credit card interest rates are reaching all-time highs.

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Last month, Director Chopra testified in front of this committee and explicitly stated that credit card issuers are charging higher rates far beyond what they need to cover their costs. Corporate greed rearing its head again. Banks are making record profits at the expense of cash-strapped Americans. Every month that the Fed keeps rates high, Mr. Chair, it costs Americans money by making it more expensive to buy a house and to borrow money.

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Higher borrowing costs stifle future economic growth leading to fewer homes being built, leading to businesses making fewer investments in the economy. And eventually, if the Fed doesn’t stop, leading to workers losing their jobs.

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As they said, economic policy, I urge the Fed to weigh these trade-offs and remember whose jobs in futures are at stake. It’s why I’ve worked with my colleagues to hold corporations accountable and we’ll continue to do that.

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For instance, we fought to cap insulin prices for senior citizens. We’ll continue to fight to extend this price cap on life-saving drugs for all Americans. And why my colleagues and I on this committee are working, it’s why we’re working to lower housing costs for more Americans.

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Fed also continues its work to keep the banking system stable and ensure consumers’ money is safe. Last year, the Fed and other bank regulators issued a proposal to update bank capital requirements, strong capital standards. And you’ve heard in this committee overwhelming support for strong capital standards. They’re critical for the economy. It’s our way of making sure that if Wall Street bets go poorly, which they often do, investors, executives, and shareholders should pay for it, not taxpayers.

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The biggest banks have spent obscene amounts of money attacking this Fed proposal. But you, the Fed, don’t work for big banks, you work for the American people. Your concern should be developing capital rules that protect Americans’ money, not protect bank CEO’s stock portfolios. The Fed needs to look past these shameless lobbying efforts and finalize a rule in the best interest of taxpayers.

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Another dangerous piece of Wall Street business model that makes our banking system less safe is incentive-based compensation. This compensation model rewards risky behavior that enriches Wall Street executives in the short term, but banks makes banks more likely to fail.

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We saw the results of that model in 2008. We saw it again last year with the failure of Silicon Valley Bank and signature. Other regulators have moved forward with a proposal to rein in these reckless incentives. But the rule, Mr. Chair, can’t move forward without your and the Fed’s moving on it. This rule is long overdue, the Fed must join this statutorily required effort as soon as possible.

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Fed also has the important job of reviewing mergers and acquisitions between and among banks. Over the last several decades, we’ve seen the largest banks grow into massive, literally trillion-dollar companies, while thousands of small banks in rural communities in Northwest and Southeast Ohio, and small towns in those community, in those areas, and all across America have disappeared. Consumers have lost trusted local banks. Small businesses have lost long-time, reliable banking partners.

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Regulators like the Fed have the crucial job of guarding against mergers that reduce or eliminate competition and lead to bank closures or layoffs. I recently sent comment letters to the OCC and the FDIC on their current efforts. I expect the Fed to take the proper steps to ensure that its merger review process is robust and that it protects consumers and communities.

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Finally, Mr. Chair, you must ensure the Fed has high ethical standards. Fed officials should never again be able to profit from their positions by using confidential plans about fed monetary policy and emergency programs to pad their investment portfolios. The board’s latest update to its trading rules is simply not good enough.

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It still fails to establish the clear penalties needed for Federal Reserve officials who make investments in violation of the public trust. A rule of no consequences is really not much of a rule at all. The American people need to be able to trust that the Federal Reserve works for them in a time of deep cynicism that people have about the federal government overall. The American people need to know that officials aren’t abusing their positions for personal gain.

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As chair, you have an important role to play to make sure economy works for everyone, not just for Wall Street. The Fed’s regional banks must do their part to hear from people and other stakeholders in their 12 districts to understand their needs. I look forward to hearing today how the Fed will balance its dual mandate, how it will protect Americans’ money, how it will foster an economy that upholds the dignity of work. Senator Scott.

Thank you, Mr. Chairman. Thank you, Chair Powell, for being with us this morning. Welcome and welcome back. Joe Biden broke this economy, and it’s been very difficult to fix it. That’s the bottom line. I want to start with an end in mind. Joe Biden broke our economy, and it is very difficult for anyone to fix it.

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Everyday families are struggling to put food on the table. Real wage growth is being eaten away by rising prices and runaway inflation. Think about the fact that for 52 consecutive weeks in the Joe Biden, wages were eclipsed by inflation for 52 consecutive paychecks. I remember back in December of 2020 and South Carolina gas was $1.99 per gallon. Today, it’s still $3.19 per gallon, a 50% increase in just a few years. So, it’s devastating to the average American family, particularly families like the one I grew up in, a single parent household mired in poverty. When you see your gas prices up 50%, your food up 30%, your cost of keeping your house cool or warm up 25%. It’s not a challenge, it’s not unfortunate, it’s an absolute crises.

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And too many households in America today are living paycheck to paycheck, and they fear the challenges that are coming our way. The headwinds brought to us by the Biden administration. Those headwinds, of course, is seen through the prism of inflation. Inflation hasn’t been this high since the Jimmy Carter years, and that devastation is being felt and measured households by too much month at the end of the money. That devastation is real for the vast majority of Americans.

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And the pointing finger, I tell you what, whether it’s the Biden administration throwing the Fed under the bus, or any other way they can deflect from the real problem, I’ve seen it. Committee hearing after committee hearing after committee hearing. My friends on the left want to point their fingers at anyone other than the real culprits, at 1600 Pennsylvania Avenue.

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The progressive wish lists, spending projects, and out of control regulations of this administration continues to eat away at America paychecks, and they continue to blame whether it’s shrinkflation, greedflation, skimpflation, they’re looking for someone to blame except for Biden-flation. The devastation of Joe Biden’s economic policy continues to impact everyday Americans.

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The American people see through the facades and they want real solutions. It doesn’t take a PhD economist to understand what the average American is experiencing under this administration.

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When President Biden and my democratic colleagues pumped trillions of dollars into our economy, those dollars increase the demand and pushes prices higher. It’s that simple. The American people see and feel it every single time, and they see it. As I said earlier, the grocery stores, the gas stations, at the doctor’s office. It’s just undeniable the impact that this is happening.

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Just last week, we celebrated the birth of our country, the birth of this notion of freedom and liberty. But American families got slapped with the most expensive July 4th on record with a cookout this year costing on average 30% more than it did just a few years ago. I call that hogwash.

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What’s worse is that this administration doesn’t want to learn a lesson in economics. Instead of reducing the push for more spending and more regulations, they only simply double down. Let’s take for example, the tens of billions of dollars of student loan forgiveness. Constant new plans to forgive more money regardless of the constitutionality of their decisions.

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So, it’s important to ask, who are these billions of dollars of forgiveness actually benefiting? Well, the answer is simple. This forgiveness scheme will result in debt relief for 750,000 individuals from households with an average income of 300,000 or more. And just don’t forget the fact that the average American family has a household income around $74,000.

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So, what we’re doing with this unconstitutional student loan forgiveness is actually asking the median household of $74,000 per household to bear the burden of forgiving debt for students who live in households of over $300,000. And the actual cost of this, somewhere between $870 billion and $1.4 trillion.

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So, why do I have to even ask the question? Why do we continue to punish American families struggling paycheck to paycheck with a new scheme to relieve households over $300,000 of student loan debt? Well, the answer is pretty simple, politics. It’s one way to buy vote after vote after vote for November’s election. It’s just hard to imagine.

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So, while I appreciate your measured words outlining the Fed’s work to cool inflation, I think it’s pastime we all recognize what is truly going on. Political pandering from the left. I strongly believe that our economy cannot handle any more of this wasteful spending. And if you disagree, I would love to hear your thoughts on that.

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But it’s not just spending policies that stifle growth, it’s also over-regulation. And I can’t think of a better example of over-regulation than parking more capital on the sidelines through Basel III end game. That proposal itself would cost millions of Americans their chance to own a home, start a small business, and have access to the credit and the capital necessary to make their American dreams come true. For those who are

We’re actually watching this hearing today on CSPAN. Basel III capital requirements are like taking your star quarterback, Dak Prescott, and telling him to sit on the sidelines because he just might get injured during the season. It’s just plain ridiculous. But these proposed capital requirements would just do that, forcing more money to the sidelines of the greatest economy on the planet and out of the hands of first time home buyers, business owners, and folks trying to achieve the American dream. The stakes are high and that is why we have to get this right. You’ve heard me say this a number of times, but it bears repeating. We need transparency in your rulemaking process as this normal proposal lacks any form of clear justification. Chairman Powell, it is essential that you and your fellow governors and the other agencies join in this rulemaking, follow the law, do the homework, and then, let the public check the work.

(15:08)
And that’s why I believe that it is absolutely necessary to have a complete re-proposal of Basel III endgame. Give the stakeholders an opportunity to take a look at it and then recalibrate what is necessary going forward. Any increases in capital that are not quantitatively justified harm the American people who need it most. Our farmers, home buyers, small business owners need and deserve access to credit. Therefore, I’ll repeat it one more time, you need to restore confidence in this rulemaking process. Pull the existing proposal and have a complete restart. And then, when the data has been analyzed and is available for the public scrutiny, reissue an appropriate proposed rule following the requirements of the APA. I look forward to your opening statement and having a chance to have a conversation afterwards.

Thanks, Senator Scott. Mr. Chair, welcome. Thank you for your service and for your testimony today. Please proceed.

Chairman Brown, Ranking Member Scott and other members of the committee, I appreciate the opportunity to present the Federal Reserve’s semi-annual monetary policy report. The Federal Reserve remains squarely focused on our dual mandate to promote maximum employment and stable prices for the benefit of the American people. Over the past two years, the economy has made considerable progress toward the Fed’s 2% inflation goal, and labor market conditions have cooled while remaining strong. Reflecting these developments, the risks to achieving our employment and inflation goals are coming into better balance. I will review the current economic situation before turning to monetary policy.

(16:57)
Recent indicators suggest that the US economy continues to expand at a solid pace. Gross domestic product growth appears to have moderated in the first half of this year following impressive strength in the second half of last year. Private domestic demand remains robust, however, with slower, but still solid, increases in consumer spending. We have also seen moderate growth in capital spending and a pickup in residential investment so far this year. Improving supply conditions have supported resilient demand and the strong performance of the US economy over the past year. In the labor market, a broad set of indicators suggest that conditions have returned to about where they stood on the eve of the pandemic, strong but not overheated.

(17:43)
The unemployment rate has moved higher but was still at a low level of 4.1% in June. Payroll gains averaged 222,000 per month in the first half of the year. Strong job creation over the past couple of years has been accompanied by an increase in the supply of workers reflecting increases in labor force participation among individuals aged 25 to 54, so-called workers in their prime working years and a strong pace of immigration. As a result, the jobs to workers gap is well down from its peak and now stands just a bit above its 2019 pre-pandemic level. Nominal wage growth has eased over the past year. The strong labor market has helped narrow long-standing disparities in employment and earnings across demographic groups.

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Inflation has eased notably over the past couple of years, but remains above the Federal Open Market Committee’s longer run goal of 2%. Total personal consumption expenditures prices rose 2.6% over the 12 months ending in May. Core PCE prices, which exclude the volatile food and energy categories, also increased 2.6%. After a lack of progress toward our 2% inflation objective in the early part of this year, the most recent monthly readings have shown modest further progress. Longer term inflation expectations appear to remain well anchored as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets.

(19:20)
Our monetary policy actions are guided by our dual mandate to promote maximum employment and stable prices for the American people. In support of these goals, the committee has maintained the target range for the federal funds rate at 5.25-5.5% since last July after having tightened the stance of monetary policy significantly over the previous year and a half. We’ve also continued to reduce our securities holdings. At our May meeting, we decided to slow the pace of balance sheet runoff starting in June, consistent with the plans released previously. A restrictive monetary policy stance is helping to bring demand and supply conditions into better balance and to put downward pressure on inflation. The committee has stated that we do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2%.

(20:14)
Incoming data for the first quarter of this year did not support such greater confidence. The most recent inflation readings, however, have shown some modest further progress and more good data would strengthen our confidence that inflation is moving sustainably toward 2%. We continue to make decisions meeting by meeting. We know that reducing policy restraint too soon or too much could stall or even reverse the progress that we’ve seen on inflation. At the same time, in light of the progress we’ve made, both in lowering inflation and in cooling the labor market over the past two years, elevated inflation is not the only risk we face. Reducing policy restraint too late or too little could unduly weaken economic activity and employment. In considering adjustments to the target range for the federal funds rate, the committee will continue its practice of carefully assessing incoming data and their implications for the evolving outlook, the balance of risks, and the appropriate path of monetary policy.

(21:11)
Congress has entrusted the Federal Reserve with operational independence that is needed to take a longer term perspective in the pursuit of our dual mandate of maximum employment and stable prices. We remain committed to bringing inflation back down to our 2% goal and to keeping longer term inflation expectations well anchored. Restoring price stability is essential to achieving maximum employment and stable prices over the long run. Our success in delivering on those goals matters to all Americans. I’ll conclude by emphasizing that we understand that our actions affect communities, families and businesses across the country. Everything we do is in service to our public mission. Thank you. I look forward to your questions.

Thank you, Mr. Chairman. The senior member of the committee will begin the questioning. Senator Reed.

Thank you very much, Mr. Chairman. Former President Trump has indicated that he would propose, if elected, a substantial increase in tariffs of between 10 and 60%, and by doing thus, eliminate the federal income tax. First in the question, what would be the impact of tariff increases on prices, consumers and the economy?

Thank you, Senator Reed. So I’m going to say that we go very far out of our way not to comment on campaign type information. We just don’t do that. We also don’t comment on trade policy. We have really specific and important jobs and we try to stick to those.

Well, I’m glad I allowed you to establish that principle up front, Mr. Chairman, but let me opine a bit. 10% increases in tariffs is going to have an effect on prices at the shop aisle. It’s going to increase them because it’ll be passed on likely. 60% tariff increases are significant. And in fact, I’ve been told that to replace the income tax you would have to raise tariffs across the board 70% to make up for the loss of the income tax, which would, I think, create huge economic problems. I respect your impartiality and your neutrality, but the numbers don’t seem to add up to anything that would help the country.

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Let me switch to something else that might be more within your line of response. You said in your opening statement that the labor markets appear to be in a better balance, and that’s one of the key factors to judge whether interest rates can be raised. I must say I’m concerned a bit that we are not on a very faster track to decreasing interest rates from the Fed and because of the better balance you cite, can you comment on that, Mr. Chairman?

Sure. So the most recent labor market data do send, to your point, a pretty clear signal that labor market conditions have cooled considerably compared to where they were two years ago. This is no longer an overheated economy. This is an economy, as I mentioned in my opening remarks, that is more or less back by most measures to where it was before the pandemic. And that was a strong labor market, but it was not an overheated labor market. So, I think that the upshot of that really is that we’re well aware that we now face two-sided risks and have for some time, but now the labor market appears to be fully back in balance.

(24:42)
We know that if we move to quickly, we risk unnecessarily hampering economic activity and possibly interfering with the ongoing expansion. We know that if we move too slowly, that we may undo the good we’ve done. Well, actually, it’s the other way. If we loosen policy too late or too little, we could hurt economic activity. If we loosen policy too much or too soon, then we could undermine the progress on inflation. So we’re very much balancing those two risks, and that’s really the essence of what we’re thinking about these days.

But the direction seems to be going towards lowering interest rates at some point, we would hope. That might be a wish rather than a direction.

But I think if you look at the last summary of economic projections, I guess I would say it this way, it doesn’t seem likely that the next policy move would be a rate increase. We don’t take things like that off the table, but that does not seem the likely direction. The likely direction does seem to be, as we make more progress in inflation and as the labor market remains strong, we begin to loosen policy at the right moment.

Thank you. Just two weeks ago, the Supreme Court handed down two decisions that impact every federal regulatory agency, including the Federal Reserve. They overturned the Chevron case, which had eliminated judicial deference to agency decision-making for many, many decades, and they also dramatically extended the statute of limitation done to the Administrative Procedure Act. What is your judgment, is the cumulative effect of these decisions on the Federal Reserve? More broadly, what does it mean to the economy if virtually any regulatory decision the Fed makes can be second guessed by a judge? What position are we in now?

We’re, as an institution, very focused on reading the actual letter and intent of the law and following it carefully. This is a strong institutional value that we have. Those are brand new decisions that just came down and we’re really in the process of just studying some. I don’t have anything for you on them, but we will, of course, follow the law as the Supreme Court has read it, because that’s their job.

Well, thank you and I concur with compliance with the law, but when you do your analysis, and if it is detrimental to your ability to regulate the bank industry in the United States, I think you have an obligation to make that [inaudible 00:27:17]. Thank you, Mr. Chairman.

Thank you, Senator Reed. Senator Scott from South Carolina is recognized.

Thank you, Mr. Chairman. Chairman Powell, we’ve heard a steady stream of commentary that there will be changes to Basel III endgame proposal that can be seen certainly as good news. Some reports say it could be finalized as soon as August. Others say you are circulating a term sheet for a revised proposal. Through it all, this proposal will have outsized impacts on our banking system from big to regional to our US-based foreign institutions, as well as impeding access to credit for consumers. So even though you yourself have said there will be broad and material

… material changes. I believe this proposal is flawed both in process and in substance and should be withdrawn. Do you agree and will you commit to withdrawing the existing proposal and issuing a new proposal with a robust notice and comment process?

Let me update everyone on the status of all that.

Please.

Over the past several months, we’ve had, in fact, Vice Chair for Supervision Barr has held a series of discussions with the other bank regulatory agencies around potential changes to the original proposal. I’m pleased to say that we’ve made quite a bit of progress on those and are very close to agreeing on the substance of those changes. I can’t really be specific because nothing is agreed until everything’s agreed. I won’t have a lot of specifics for you today. The question where we’re continuing to try to make progress is that of process. It is my strongly held view of members of the board that we do need to put a revised proposal out for comment for some period.

(29:06)
The reason is when there are broad material changes, that has been our practice. We don’t see a reason to deviate from that practice. It seems to be consistent with past practice and with the Administrative Procedure Act. That’s very much what we think and we’re working through that question with the FDIC and the OCC. We haven’t reached agreement on that, but I am very hopeful that we will. We’re prepared to move forward when we do reach agreement on that.

Well, I appreciate most of your response, sir. I do want to discuss one aspect more of Basel before we move on to another topic. I find it very concerning with how much of this proposal of this process appears to have been done behind closed doors. The Fed, the FDIC, OCC proposed Basel III endgame last July. Then, in October, the Fed began the collection of data to conduct a quantitative impact study on the cost of Basel III proposal, a study which I will note, should have been conducted before any proposal was ever issued. Move forward to January of this year, Vice Chair Barr committed to a public comment period. Once results of the study were published, we are still waiting to view the results. Keep in mind, all the while, we’re hearing rumors that the Fed is working on revising its proposal and moving towards an updated version. Please help me understand how will the Fed revise or reissue a capital proposal before receiving public comments, is basically my question.

Well, as you know, we have received extensive public comments and we’ve also evaluated the quantitative impact survey that you mentioned.

Yes.

The idea would be when we do reach agreement with the other agencies fully, that we would publish the proposed changes and also the quantitative impact survey and also the effects that the QIS suggests that that changes would have. We’ll put all that out for comment again for a period of time. Then, having had yet another round of comment, we can then move toward finalizing. That’s basically the broad strokes of how I would see this moving forward.

How long do you see that opportunity for public comments?

It would be meaningful. It might be 60 days. It doesn’t need to be a long one, but before we do that, there’s a lot of work that needs to take place before you actually put out the revised proposal. Quite a bit of work. It will take some time and then we would put it out, and then there would be… I’m just taking that number, 60 days of comment and then we would get the comments back. It would be another period of evaluating the comments, and only then would you go final. There are a number of steps here.

Yeah. Thank you. Well, just final point as I’m running out of time here. I think Senator Reid made the comment about the Chevron case and the impact that it could have certainly in curtailing, from my perspective, the regulatory state. The necessity of a cost-benefit analysis on new regulations that will impact the economy, I think is quite helpful. In the thousand plus pages of Basel III, I think there were about 20 pages that reflected some kind of cost-benefit analysis approach. I really hope that we see more of that going forward.

Thank you.

Senator Tester from Montana is recognized.

Well, thank you, Mr. Chairman. Thank you for the courtesy, Chairman Powell. Good to see you here today. Appreciate your work. Look, regardless where I go in the state, Montana housing is a big issue. Whether it’s Billings or Butte or Bozeman or Busby or big Sandy, it doesn’t matter. Larger towns to medium-sized towns to small towns, housing is a huge issue. I think it’s a huge issue all over the country. Correct me if I’m not correct in that. I was wondering how the housing challenges fit into the overall economic picture that you’re seeing.

We do pay a lot of attention, and I would agree with you. We have significant housing issues in the country and we had them before the pandemic. Certainly, the pandemic has created new distortions and monetary policy works through interest-sensitive spending. There is no more interest-sensitive spending than buying a house and having a mortgage. For sure, our tighter policy is having an effect on economic activity in the housing sector. I would also say the best thing we can do for housing is to succeed in getting inflation down to 2% on a sustainable, so that rates can come down so that the housing market can get back to what was the pre-pandemic normal, which is to say still a housing shortage, but not dealing with the kinds of specific things we’re dealing with now.

Let me drill down a little bit. I’m speaking not necessarily from a housing cost interest. You’re correct on the things you just brought up. I’m speaking more from a standpoint of economic growth in that there are plenty of small businesses, schools, hospitals, main street businesses that can’t hire people that can’t expand because there simply is no place for them to live. How does that fit into your economic outlook metrics? Because I think from my perspective at least, I think it’s limiting the opportunity for expansion. It’s limiting the opportunity for entrepreneurs, business start-ups. Does that fit into the economic picture that you look at?

Our mandate is for stable prices and maximum employment. Again, I think for housing supply, the best thing we can do is get inflation under control so that rates can come back down, so that we can have a more normalized set of rates and a more normalized housing system. I think policies to increase housing supply are really not so much in the hands of the Fed. They’re in the hands of legislatures, state and federal.

Do you believe that if we were to put forth some housing incentives, whatever they may be, that could have a… If those incentives resulted in more affordable workforce housing on the market, that would have positive impacts on the economy?

These are questions for you, but I would say this, that I’m aware that housing is in short supply and that for many, it’s a critical need for the workforce. More of it is better, but as to where the fiscal policy, how you should prioritize that, that’s not up to us.

Look, I want to talk about the independence of the Fed for a second because I know that you are a strong supporter of independence as am I, and political influence, I don’t think helps with monetary policy in the country. Give me your perspective at least on why the Central Bank independence is so critically important.

Thank you. I’d be glad to. Essentially, all advanced economies have adopted a policy of central bank and operational independence. That just means that we make our decisions, we’re instructed to make them without taking in extraneous factors, one of which would be politics. The record is pretty clear that that’s a good institutional arrangement that serves the public well. We just want to stress, as we do periodically, that this is an institutional choice that we make as a country and that as long as it’s seen to serve the public well, it’s a good choice. We think so.

Okay. On advanced economies, there’s some that talk about the economy of this country not being in very good shape. From your perspective, tell me how the economy of this country is doing compared to other advanced economies that have central banks.

I’m in lots and lots of international discussions as part of my job and the story for the last two years has been just how exceptional the performance of the U.S. economy has been, and that’s not a secret. Clearly, the U.S. economy has performed very well compared to our advanced economy colleagues.

Is there any country in the world with central bank, any advanced economy that’s performing better?

As a central bank?

No. Any economy that’s an advanced economy that has a central bank that performs better than us?

None comes to mind. If I think of the majors, the answer would be no.

Okay. Thank you.

Thanks, senator Tester. Senator Rounds, the South Dakota is recognized.

Thank you. Mr. Chairman. Mr. Chairman, first of all, thanks for coming in again and visiting with us. I just want to focus on two specific items and I’m going to start with the Basel III endgame discussion. I think Senator Scott did an excellent job of laying out the concerns that many of us have had with it. I would like to go back into just one particular issue, which I think a lot of folks out there that follow this. I know it’s technical in nature, but let me just ask a specific question, and you can pick it apart for me please. Both you and Vice Chair Barr have confirmed that there will be material changes to every risk type outlined in the proposal. Since there will be significant changes, do you believe where the agencies have landed now would be considered a logical outgrowth of the original proposal from last summer?

For those people who are not familiar with, that’s the legal test that turns out to be, if it’s a logical outgrowth. If it’s not a logical outgrowth, that would legally require re-proposal. I don’t want to make the legal judgment. I will just say, again, from my standpoint, my view and strongly held view of some of my colleagues on the board is that it will be appropriate for us to put out the changes again for a period of comment just because it’s the right thing to do. It’s what we would do typically in a situation where there are material changes to a proposal.

Do you feel that you have a consensus in the board to allow that to move forward in terms of an additional comment period?

Yes. Of course, we have to get… The FDIC and the OCC, we’re in discussions with them to work on something that would meet that need and we have to get their agreement too.

It sounds like that’s the path that you would like to go down.

Yes.

If that were the case, would it be fair to say that we’d probably be looking at final determinations or recommendations for a Basel III endgame proposal probably end of next year before it would become anything of a final determination?

I think that may be right that something like that could be right. It’s hard to be precise. We would put it out, it takes some time to write this stuff up. Then, you put it out for comment, then you get the comments, then you read the comments, then you write the final rule. Beginning part of next year is a good guesstimate.

The only reason why I push is because there are so many folks directly involved with this and the impact on our economy here and with a lot of our financial institutions. This is a significant change and it’s one that a lot of people are following. I’m trying to get you to get into the depth of this as much as possible, and I thank you for that. I’d also want to go into one other area. Once again, this is something that you and I have had visits about in front of this group before, but I want to talk about what the parts of inflation are and what parts you can control and what parts, as the Fed, you really can’t control. The demand side of the equation on inflation is the part that you have the tools to work with, but there is the supply side of the equation, which is still out there.

(41:16)
I want to just lay this out because as we do this in this setting, it naturally becomes political in nature because one of the starting points that we talk about is when this administration took office and what happens with supply side issues at that time. As I work my way through this, I just want to share the concern that I’ve got and then I recognize you don’t want to be political in it, but I want to lay this out. Then, I want to talk about what you can control and what you can’t control with regard to making changes on inflation through the processes that you have. Since President Biden took office, gasoline prices have risen over 54%. Energy prices have risen

… 41%. Fuel oil prices have risen 37%. Now I can go on and on, but you understand what I’m saying is energy has increased substantially, and I think one of the reasons for this has been additional demand as we’ve come out of a pandemic. But the other part of this has been whether or not investors really want to go back in and invest in traditional energy resources after the President made the specific determination to cancel the Keystone XL Pipeline on the day that he stepped into office. When he did that, he sent one heck of a message to investors about traditional energy and investing in traditional energy in the United States, and the fact that a multi-billion dollar contract could be canceled with a stroke of a pen.

(42:44)
Now, my question to you is what percent, or has there been a discussion about what percent or what amount of the inflation that we’ve seen over 20% increase in terms of affordability for a lot of our products? How much of that is attributable to the demand side and how much of it really is attributable to supply side challenges that we’ve seen in this country?

That’s a question that we’ve thought about a lot, and any attempt to reduce that to a precise number would be inappropriate because it’s so uncertain. But I think we can say, I believe strongly there’s a significant demand element and there’s a significant supply element, and we’ve seen the supply side heal so much over the course of the last year or so, and we clearly see that that’s contributing to lower inflation. We also see cooling demand, for example, in the labor market. So the two forces are working together. I can’t really break it down. It would be such an imprecise estimate.

Just simply an acknowledgement though, that it is both, demand-

It’s both. It’s definitely both-

… and it is supply.

It is both. Yeah.

Thank you.

For sure.

Thank you, Mr. Chairman. My time has expired.

Chair Powell, unemployment has risen by half percentage point over the past year. The number of job openings has dropped almost 50%. The hiring and quit rates are now below pre-pandemic levels. I’m concerned that if the Fed waits too long to lower rates, the Fed could undo the progress we’ve made on creating good paying jobs. Full employment is part of the mandate, as you say, over and over. How are you assessing the risks of higher interest rates in the labor market?

So I completely agree with your characterization. The latest data do show that we’ve had considerable cooling in the labor market, and we do. We’re very much aware that we have two-sided risks now, as I mentioned earlier, and we’re determined to balance those as best we can. We want to see more good inflation data, and we also want to continue to see a strong labor market. And those two things are equal under the law. We have this challenging thing to balance them, but we’re very much conscious that that is our job and we’re trying to do that.

Well, and you know that if unemployment trends upward, we must act immediately to protect Americans jobs. Workers have too much to lose if the Fed overshoots inflation target and causes a completely unnecessary recession. We will say that over and over and over again. I think you understand that.

(45:14)
Housing. Higher interest rates are making housing more unaffordable. Higher rates are supposed to lower cost, yet housing prices continue to soar. By keeping rates high, the Fed ignores the economic reality of the millions of Americans struggling to make ends meet and get ahead. Let me ask you three quick yes or no questions if you would answer that way.

(45:34)
Since late 2022 when the Fed began raising rates, has the volume of housing sales decreased?

I believe it has, yes.

Since late 2022, has the median home price increased?

I believe it has.

Since late 2022 have monthly mortgage payments become more affordable or less affordable for home buyers?

Less affordable.

Okay, thank you. In short, despite housing sales declining, the median price for a single home, single family home is increased by nearly $20,000. People are spending a greater share of their income in mortgage payments. So in some higher rates, it’s clear from your answers and data, it’s clear higher rates are not bringing down housing costs. The cost of home ownership is only going up.

(46:22)
Let me shift to the Synapse bankruptcy. Since mid-May, tens of thousands of people, including many Ohioans, have lost access to their money due to the bankruptcy of this fintech middleman. Reports indicate that as much as $95 million may have gone missing. The Fed oversees one of Synopsis’s former partner banks, Evolve Bank & Trust. As a regulator, it’s your job to make sure that banks protect the people whom they serve. What’s the Fed doing to help customers who felt the impact by the Synapse collapse? What are you doing to regain access to their money?

So we do supervise the bank. We don’t supervise Synapse or let alone the fintechs that feed into Synapse. And we’re strongly encouraging Evolve to do whatever it can to help make money available to those depositors. We also, as you may know, did an enforcement action against. Before this all happened, we did an inspection or looked at Evolve and we hit them with an enforcement action around these very risk management issues, again, before the current situation developed.

Okay. It’s critical that consumers are made whole as soon as possible. We will continue to talk to you about that. We will watch, we will let you know we’re watching. The Fed needs to use the supervisor authority to ensure that Evolve is committing the resources necessary to return those funds to the account holders.

(47:49)
Last comment. I want to note one last thing. Last year’s Fed report on the failure of Silicon Valley Bank noted how incentive-based compensation encouraged excessive risk-taking that led to the bank’s failure. You either watched or had reports of when those bank CEOs testified in front of this committee. The report, the incentive-based compensation that led to the bank’s failure, I mentioned it said that SVB managers “had a financial incentive to focus on short-term profit over sound risk management.” That’s what a number of us, Senator Smith, Senator Butler, Senator Warner and I have said over and over, that the short-term profit over sound risk management causes significant problems to our financial system. Compensation practices still pose a threat to our banking system.

(48:44)
I urge you to move quickly to join your colleagues in the long overdue rulemaking on executive compensation. I mean, you know, you read the reports at the outrage of the public about executive compensation continuing to go up and up and up and up. You have a role, a significant role, a legal role to deal with that. Thank you.

(49:08)
Senator Tillis is recognized.

Thank you Mr. Chair. Chairman, thank you for being here. I want to be real quick on Basel III endgame and I want to be mindful of time. Just simply, can I get a commitment from you on releasing the results of the QIS?

We plan to release the results of the QIS.

What timeframe?

Well, first we have to get agreement with the other banking agencies, but as soon as possible.

Can you imagine any other banking agencies having a concern with releasing it or is it just a matter of proforma?

Not at all.

Okay.

No, it’s just a matter of the bigger picture of getting agreement on the revisions to Basel III and also how to proceed.

That’s great. And I really appreciate the feedback that I’ve received from you. I should have started by thanking you again for your continued accessibility and discussions outside of the committee. They’re very productive and I appreciate that, and your leadership at the Fed.

(50:04)
I grew up in the ’70s, got my social security number in 1973 when I was 12 years old. That’s when I made my first payment. So I’ve been following the economy even as a youngster. And that was a really lousy time to enter in the workforce. Tell me, and I’m hearing discussions among some of our members now that would almost be reminiscent of discussions with prior Fed members saying, “Look, we got a lower interest rates and we’ve got unemployment out of control.” So it sounds like we’re taking some suggestions from some of my colleagues or plays from a playbook that didn’t prove to be very effective back in the ’70s. What can we learn?

(50:48)
I’m not going to ask you about where you go from here, but if we look back into a postmortem on some of the decisions that were made when we had consistently high un-inflation … we had the inflation I should say, we had consistently high unemployment. What lessons can we learn there? Or what mistakes should we not necessarily repeat?

(51:08)
And I know that this is a fingerprint of a challenge. It’s not exactly like the stressors that we had back in the ’70s, but what can we learn from the decisions, what I think are arguably the wrong decisions made back then when we were dealing with high unemployment and high inflation? What have we learned?

I think the number one thing we learned was that it’s up to the central bank to take it on and stick with it until it’s done. And that doesn’t sound controversial now, but it actually was back then. And so people didn’t really get in there and get it done and inflation kept coming back.

(51:44)
I also think there are significant differences this time to the questions a minute ago. This is a combination of a supply side that we had very significant supply shocks along with big demand shocks from the reopening of the economy and from all the other things that happened. So I think we have to, each one of these things is different in its own way. We try to learn the lessons of history, though.

You agree or disagree, any disconnect between inflation and inflation expectations from the 2% target should be addressed now and not at a later time?

Absolutely.

I like that answer. I want to go to something different. I’m trying to go into a lightning round now and finish on time. We’ve seen the 2024 stress test results for the banking, US banking system. It looks like to me, by every objective measure, we’ve got a banking system that’s on strong financial footing. Do you agree?

Yes.

One last thing is, the Fed considers making broad and material changes to the Basel III proposal, back on that one. Can I urge you not to overlook the second order issues, important FBOs in certain regionals to ensure that the banks are not unduly influenced? If the current proposal, for example, the outsized operational risk costs were high, are we going to take care of that in any sort of reproposal?

Let me just say we’re very conscious of the comments across the spectrum. Foreign banks, domestic banks, small, medium-sized banks, everyone’s going to get heard carefully as part of this process. That is our obligation.

And I think in response to Senator Rounds’ question, you did indicate it’s probably because of the nature of the likely changes from what Mr. Barr expected to what may ultimately come, we are going to open it up to comment again?

That’s the strong view of the Federal Reserve. We’re working on that question with the FDIC and the OCC to try to find a path to do that.

Very good.

But from our standpoint, that’s essential.

I think it’s a strong view from at least several members on this side of the dais here. That would be very, very important because I think it’s going to materially change. Thank you, Mr …