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S. HRG. 116–2
THE SEMIANNUAL MONETARY POLICY REPORT
TO THE CONGRESS
HEARING
BEFORE THE
COMMITTEE ON
BANKING, HOUSING, AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
ON
OVERSIGHT ON THE MONETARY POLICY REPORT TO CONGRESS PURSUANT TO THE FULL EMPLOYMENT AND BALANCED GROWTH ACT OF 1978
FEBUARY 26, 2019
Printed for the use of the Committee on Banking, Housing, and Urban Affairs
(
Available at: https: //www.govinfo.gov /
U.S. GOVERNMENT PUBLISHING OFFICE
35–838 PDF
WASHINGTON
:
2019
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
MIKE CRAPO, Idaho, Chairman
RICHARD C. SHELBY, Alabama
SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania
JACK REED, Rhode Island
TIM SCOTT, South Carolina
ROBERT MENENDEZ, New Jersey
BEN SASSE, Nebraska
JON TESTER, Montana
TOM COTTON, Arkansas
MARK R. WARNER, Virginia
MIKE ROUNDS, South Dakota
ELIZABETH WARREN, Massachusetts
DAVID PERDUE, Georgia
BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina
CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana
CATHERINE CORTEZ MASTO, Nevada
MARTHA MCSALLY, Arizona
DOUG JONES, Alabama
JERRY MORAN, Kansas
TINA SMITH, Minnesota
KEVIN CRAMER, North Dakota
KYRSTEN SINEMA, Arizona
GREGG RICHARD, Staff Director
JOE CARAPIET, Chief Counsel
BRANDON BEALL, Professional Staff Member
LAURA SWANSON, Democratic Deputy Staff Director
ELISHA TUKU, Democratic Chief Counsel
DAWN RATLIFF, Chief Clerk
CAMERON RICKER, Deputy Clerk
SHELVIN SIMMONS, IT Director
CHARLES J. MOFFAT, Hearing Clerk
JIM CROWELL, Editor
(II)
C O N T E N T S
TUESDAY, FEBRUARY 26, 2019
Page
Opening statement of Chairman Crapo .................................................................
Prepared statement ..........................................................................................
Opening statements, comments, or prepared statements of:
Senator Brown ..................................................................................................
Prepared statement ...................................................................................
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WITNESS
Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve
System ...................................................................................................................
Prepared statement ..........................................................................................
Responses to written questions of:
Senator Brown ...........................................................................................
Senator Rounds .........................................................................................
Senator Perdue ..........................................................................................
Senator Tillis .............................................................................................
Senator Moran ...........................................................................................
Senator Warner .........................................................................................
Senator Schatz ...........................................................................................
Senator Van Hollen ...................................................................................
Senator Cortez Masto ................................................................................
Senator Smith ............................................................................................
Senator Sinema .........................................................................................
ADDITIONAL MATERIAL SUPPLIED
FOR THE
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RECORD
Monetary Policy Report to the Congress dated February 22, 2019 .....................
(III)
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THE SEMIANNUAL MONETARY POLICY
REPORT TO THE CONGRESS
TUESDAY, FEBRUARY 26, 2019
U.S. SENATE,
URBAN AFFAIRS,
Washington, DC.
The Committee met, at 9:49 a.m., in room SD–106, Dirksen Senate Office Building, Hon. Mike Crapo, Chairman of the Committee,
presiding.
COMMITTEE
ON
BANKING, HOUSING,
AND
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman CRAPO. The hearing will come to order.
We welcome you, Chairman Powell, to the Committee for the
Federal Reserve’s Semiannual Monetary Policy Report to Congress.
This hearing provides the Committee an opportunity to examine
the current state of the U.S. economy, the Fed’s implementation of
monetary policy, and its supervisory and regulatory activities.
In the wake of the 2008 financial crisis, the Fed entered a period
of unconventional monetary policy to support the U.S. economy, including drastically cutting interest rates and expanding its balance
sheet.
I have long been concerned about the Fed’s quantitative easing
programs and the size of its balance sheet.
As economic conditions improved, the Fed began trying to normalize monetary policy, including by gradually reducing the size of
its balance sheet.
The Fed’s balance sheet grew to approximately $4.5 trillion from
around $800 billion between 2007 and 2015 and now stands at
around $4 trillion still.
During the press conference following the FOMC’s most recent
meeting, Chairman Powell provided additional clarity on the Fed’s
plans to normalize monetary policy, saying, ‘‘the ultimate size of
our balance sheet will be driven principally by financial institutions’ demand for reserves plus a buffer, so that fluctuations in reserve demand do not require us to make frequent sizable market
interventions.’’
‘‘Estimates of the level of reserve demand are quite uncertain,
but we know that this demand in the postcrisis environment is far
larger than before. Higher reserve holdings are an important part
of the stronger liquidity position that financial institutions must
now hold.’’
‘‘The implication is that the normalization of the size of the portfolio will be completed sooner, and with a larger balance sheet,
than in previous estimates.’’
(1)
2
Banks’ reserve balances grew from $43 billion in January 2008
to a peak of $2.8 trillion in 2014 before falling to $1.6 trillion as
of January 2019.
During this hearing, I look forward to understanding more about:
what factors the Fed may consider in determining what is the appropriate size of the balance sheet; what factors have affected
banks’ demand for reserves, including the Fed’s postcrisis regulatory framework; and what amount of reserves are estimated to be
necessary for the Fed to achieve its monetary policy objective.
The state of the U.S. economy is a key consideration in the Fed’s
monetary policy decisions.
The U.S. economy remains strong with robust growth and low
unemployment.
Despite everyone telling us prior to tax reform that annual
growth would be stuck below 2 percent as far as the eye could see,
the economy expanded, as we predicted, at an annualized rate of
3.4 percent in the third quarter of last year, following growth of 4.2
percent and 2.2 percent in the second and first quarters of 2018,
respectively, according to the Bureau of Economic Analysis.
This strong growth, which is on track to continue to exceed previous expectations, will now provide our policymakers with much
greater flexibility to address other fiscal challenges than if we were
continuing to struggle with insufficient growth.
And according to the Bureau of Labor Statistics, the unemployment rate has remained low and steady around 4 percent while the
U.S. economy added 223,000 jobs per month on average in 2018,
as well as 304,000 jobs in the first month of this year.
People continue to enter the labor force with the labor participation rate increasing to 63.2 percent from 62.7 percent over the last
year.
Reinforcing this strong employment environment, Fed Vice
Chairman Rich Clarida said in a recent speech that ‘‘the labor market remains healthy, with an unemployment rate near the lowest
level recorded in 50 years and with average monthly job gains continuing to outpace the increases needed over the longer run to provide employment for new entrants into the labor force.’’
Major legislation passed through this Committee and enacted
last Congress supported economic growth and job creation.
The Economic Growth, Regulatory Relief, and Consumer Protection Act passed Congress with significant bipartisan support and
was enacted to right-size regulation and redirect important resources to local communities for homebuyers, individuals, and
small businesses.
I appreciate the work that the Fed has done so far to introduce
proposals and finalize rules required by the law.
Overseeing the full implementation of that law and the Federal
banking agencies’ rules to right-size regulations will continue to be
a top priority of the Committee in this Congress.
In particular, the Fed and other banking regulators should consider whether the Community Bank Leverage Ratio should be set
at 8 percent as opposed to the current 9 percent; significantly tailor
regulations for banks with between $100 billion and $250 billion in
total assets with a particular emphasis on tailoring the stress testing regime; provide meaningful relief from the Volcker Rule for all
3
institutions, including by revising the definition of ‘‘covered funds’’
and eliminating the proposed accounting test; and examine whether the regulations that apply to the U.S. operations of foreign
banks are tailored to the risk profile of the relevant institutions
and consider the existence of home-country regulations that apply
on a global basis.
The Committee will also look for additional opportunities to support policies that foster economic growth, capital formation, and job
creation.
Turning for a moment to another issue, Senator Brown and I
issued a press release on February 13 inviting stakeholders to submit feedback on the collection, use, and protection of sensitive information by financial regulators and private companies, including
third parties that share information with regulators and other private companies.
Americans are rightly concerned about how their data is collected
and used and how it is secured and protected. Americans need this
kind of attention from this Committee and from the Fed and our
other financial regulators.
Given the exponential growth and use of data, and the corresponding data breaches, it is also worth examining how the Fair
Credit Reporting Act should work in a digital economy and whether certain data brokers and other firms serve a function similar to
the original consumer reporting agencies.
The Banking Committee has plans to make this a major focus in
this Congress, and we encourage our stakeholders to submit their
feedback by the March 15 deadline.
Last, I want to take a moment to recognize one of our staff members who is retiring this week.
Dawn Ratliff is the Committee’s Chief Clerk, and she will be retiring, as I said, at the end of the week.
She might not want me to say this, but Dawn has been in the
Senate longer than most Senators. She has dedicated 27 years in
these hallways and has been with the Senate Banking Committee
since 2007, starting with then-Chairman Chris Dodd, and then
working for Chairman Tim Johnson, then Chairman Shelby, and
now myself.
Dawn is a Banking Committee institution. She is incredibly
knowledgeable, helpful, and professional, respected and well liked
by everyone with whom she works.
Dawn, your work on the Committee has truly made a lasting impact, and even though you will not be here following this week, you
will not be forgotten anytime soon.
We wish you the best of luck in your well-earned retirement.
Enjoy it.
[Applause.]
Chairman CRAPO. Senator Brown.
OPENING STATEMENT OF SENATOR SHERROD BROWN
Senator BROWN. Thank you, Chairman Crapo. And, Ms. Ratliff,
thank you again for your service to our country—to this Committee
and to our country and to the Senate. She has been instrumental
in making this Committee run smoothly for over a decade. We will
miss her, and congratulations on your retirement.
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Chairman Powell, welcome back to the Committee. It has been
a great week for Wall Street. The FDIC announced that banks
made a record-breaking $237.7 billion in profits in 2018, almost a
quarter trillion dollars in profits.
Corporations—led by the Nation’s largest banks—bought back a
record $1 trillion in stocks last year, conveniently boosting CEO
compensation. The President’s tax bill put $30 billion in the banks’
pockets and continues to fuel even more buybacks and CEO bonuses.
But that is never enough for Wall Street. It continues to demand
weaker rules so big banks can take bigger and more dangerous
risks. And from the proposals the Fed has put out after the passage
of S. 2155, it looks like the Fed and you are going along.
The economy looks great from a corner office on Wall Street, but
it does not look so great from a house on Main Street.
Corporate profits are up. Executive compensation has exploded—
all because of the productivity of American workers. But workers’
wages have barely budged. Hard work simply does not pay off for
the people fueling this growth.
Seven of the ten fastest-growing occupations do not pay enough
to afford rent on a modest one-bedroom apartment, let alone save
for a downpayment.
Household debt continues to rise, taking its toll on families. At
the end of 2018—think about this for a minute. At the end of 2018,
7 million Americans with auto loans were at least 90 days past due
on their payments. Seven million Americans with auto loans were
at least 90 days past due on their payments, even though the
President brags about unemployment being at record lows.
Borrowers of color have not recovered financially from the crisis.
Too many Americans of all ages are saddled with mountains of student loan debt.
The Trump shutdown revealed another frightening reality: Too
many Americans still live paycheck to paycheck, even with stable
jobs.
After 35 days of no pay, of uncertainty, of hardship, those workers went back to their jobs and eventually received their pay. But
more than a million Government contractors were not so lucky. We
are talking in many cases about custodians and security guards
and cafeteria workers making $12 to $15 an hour and going 35
days without pay and getting no compensation later like the
800,000 Government workers. We have heard a lot of talk about
whether GDP will recover from the shutdown, not much about how
workers will recover.
I give special thanks to Senator Smith for her work on trying to
remedy this incredible injustice that damn near anybody talks
about—damn near nobody talks about.
We have questioned for quite a while whether the economic recovery—now in its tenth year—has been felt by all Americans.
Stagnating wages and increasing income inequality between Wall
Street CEOs and working Americans point to an obvious answer.
Mr. Chairman, Chairman Powell, your comments at the February 6 Fed town hall, for educators confirmed this. A teacher
asked about your major concerns for the economy, and your answer
was: ‘‘We have some work to do more to make sure that prosperity
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that we do achieve is widely spread . . . median and lower levels
of income have grown, but much more slowly. And growth at the
top has been very strong.’’
‘‘Growth at the top has been very strong.’’ In other words, the
CEOs, the folks on Wall Street, they are doing just fine in this
economy.
Chair Powell, the Fed has spent a decade bending over backwards to help banks, to help big corporations that have hoarded
profits for themselves rather than investing in the millions of workers who actually make our companies successful.
We are late in this economic cycle. It is clear that record Wall
Street profits will not be trickling down to workers before the next
downturn.
Before the last crisis, we heard over and over again from Government officials and banks that the economy was doing fine 10 years
ago. Regulators and Congress continued to weaken rules for Wall
Street, continued to ignore the warning signs as families struggled
to make ends meet.
As the severity of the financial crisis became clear, the Fed
rushed to the aid of the biggest banks, but it did not devote even
a fraction of that firepower to helping the rest of America. Ignoring
working families was a policy failure then; it is a policy failure
now.
Mr. Chairman, I hope we do not make the same mistake again.
I look forward to your testimony and the new ideas for making
hard work pay off for everyone in our economy.
Thank you.
Chairman CRAPO. Thank you, Senator Brown.
Chairman Powell, we welcome you here again. We appreciate
your attention. We appreciate the report that you have provided to
us, and you may make your statement about that report and whatever information you would like to present to us, and then we will
proceed to some questions. Thank you.
Chairman Powell.
STATEMENT OF JEROME H. POWELL, CHAIRMAN, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. POWELL. Thank you and good morning. Chairman Crapo,
Ranking Member Brown, and other Members of the Committee, I
am happy to present the Federal Reserve’s semiannual Monetary
Policy Report to the Congress.
Let me start by saying that my colleagues and I strongly support
the goals Congress has set for monetary policy—maximum employment and price stability. We are committed to providing transparency about the Federal Reserve’s policies and programs. Congress has entrusted us with an important degree of independence
so that we can pursue our mandate without concern for short-term
political considerations. We appreciate that our independence
brings with it the need to provide transparency so that Americans
and their representatives in Congress understand our policy actions and can hold us accountable. We are always grateful for opportunities, such as today’s hearing, to demonstrate the Fed’s deep
commitment to transparency and accountability.
6
Today I will review the current economic situation and outlook
before turning to monetary policy. I will also describe several recent improvements to our communications practices to enhance our
transparency.
The economy grew at a strong pace, on balance, last year, and
employment and inflation remain close to the Federal Reserve’s
statutory goals of maximum employment and stable prices—our
dual mandate.
Based on available data, we estimate that gross domestic product, or GDP, rose a little less than 3 percent last year following a
2.5-percent increase in 2017. Last year’s growth was led by strong
gains in consumer spending and increases in business investment.
Growth was supported by increases in employment and wages, optimism among households and businesses, and fiscal policy actions.
In the last couple of months, some data have softened but still
point to spending gains this quarter. While the partial Government
shutdown created significant hardship for Government employees
and many others, the negative effects on the economy are expected
to be fairly modest and to largely unwind over the next several
months.
The job market remains strong. Monthly job gains averaged
220,000 in 2018, and payrolls increased an additional 304,000 in
January. The unemployment rate stood at 4 percent in January, a
very low level by historical standards, and job openings remain
abundant. Moreover, the ample availability of job opportunities appears to have encouraged some people to join the workforce and
some who otherwise might have left to remain in it. As a result,
the labor force participation rate for people in their prime working
years—which is to say the share of people ages 25 to 54 who are
either working or actively looking for work—has continued to increase over the past year. In another welcome development, we are
seeing signs of stronger wage growth.
The job market gains in recent years have benefited a wide range
of families and individuals. Indeed, recent wage gains have been
strongest for lower-skilled workers. That said, disparities persist
across various groups of workers and different parts of the country.
For example, unemployment rates for African Americans and Hispanics are still well above the jobless rates for whites and Asians.
Likewise, the percentage of the population with a job is noticeably
lower in rural communities than in urban areas, and that gap has
widened over the past decade. The February Monetary Policy Report provides additional information on employment disparities between rural and urban areas.
Overall consumer price inflation, as measured by the 12-month
change in the price index for personal consumption expenditures,
is estimated to have been 1.7 percent in December, held down by
recent declines in energy prices. Core PCE inflation, which excludes food and energy prices and tends to be a better indicator of
future inflation, is estimated at 1.9 percent. At our January meeting, my colleagues and I generally expected economic activity to expand at a solid pace, albeit somewhat slower than in 2018, and the
job market to remain strong. Recent declines in energy prices will
likely push headline inflation further below the FOMC’s longer-run
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goal of 2 percent for a time, but aside from those transitory effects,
we expect that inflation will run close to 2 percent.
While we view current economic conditions as healthy and the
economic outlook as favorable, over the past few months we have
seen some crosscurrents and conflicting signals. Financial markets
have become more volatile toward year end, and financial conditions are now less supportive of growth than they were earlier last
year. Growth has slowed in some major foreign economies, particularly China and Europe. And uncertainty is elevated around some
unresolved Government policy issues, including Brexit and ongoing
trade negotiations. We will carefully monitor these issues as they
evolve.
In addition, our Nation faces important longer-term challenges.
For example, productivity growth, which is what drives rising real
wages and living standards over the longer term, has been low.
Likewise, in contrast to 25 years ago, labor force participation
among prime-age men and women is now lower in the United
States than in most other advanced economies. Other longer-run
trends, such as relatively stagnant incomes for many families and
a lack of upward economic mobility among people with lower incomes, also remain important challenges. And it is widely agreed
that the Federal Government debt is on an unsustainable path. As
a Nation, addressing these pressing issues could contribute greatly
to the longer-run health and vitality of the U.S. economy.
Over the second half of 2018, as the labor market kept strengthening and economic activity continued to expand strongly, the
FOMC gradually moved interest rates toward levels that are more
normal for a healthy economy. Specifically, at our September and
December meetings we decided to raise the target range for the
Federal funds rate by 1⁄4 percentage point at each, putting the current range at 21⁄4 to 21⁄2 percent.
At our December meeting, we stressed that the extent and timing of any further rate increases would depend on incoming data
and the evolving outlook. We also noted that we would be paying
close attention to global economic and financial developments and
assessing their implications for the outlook. In January, with inflation pressures muted, the FOMC determined that the cumulative
effects of these developments, along with ongoing Government policy uncertainty, warranted taking a patient approach with regard
to future policy changes. Going forward, our policy decisions will
continue to be data dependent and will take into account new information as economic conditions and the outlook evolve.
For guideposts on appropriate policy, the FOMC routinely looks
at monetary policy rules that recommend a level for the Federal
funds rate based on measures of inflation and the cyclical position
of the U.S. economy. The February Monetary Policy Report gives an
update on monetary policy rules, and I continue to find these rules
to be helpful benchmarks, but, of course, no simple rule can adequately capture the full range of factors the Committee must assess in conducting policy. We do, however, conduct monetary policy
in a systematic manner to promote our longer-run goals of maximum employment and stable prices. As part of this approach, we
strive to communicate clearly about our monetary policy decisions.
8
We have also continued to gradually shrink the size of our balance sheet by reducing our holdings of Treasury and agency securities. The Federal Reserve’s total assets declined about $310 billion
since the middle of last year and currently stand at close to $4 trillion. Relative to their peak level in 2014, banks’ reserve balances
with the Federal Reserve have declined by around $1.2 trillion, a
drop of more than 40 percent.
In light of the substantial progress we have made in reducing reserves, and after extensive deliberations, the Committee decided at
our January meeting to continue over the longer run to implement
policy with our current operating procedure. That is, we will continue to use our administered rates to control the policy rate, with
an ample supply of reserves so that active management of reserves
is not required. Having made this decision, the Committee can now
evaluate the appropriate timing and approach for the end of balance sheet runoff. I would note that we are prepared to adjust any
of the details for completing balance sheet normalization in light
of economic and financial developments. In the longer run, the size
of the balance sheet will be determined by the demand for Federal
Reserve liabilities such as currency and bank reserves. The February Monetary Policy Report describes these liabilities and reviews
the factors that influence their size over the longer run.
I will conclude by mentioning some further progress we have
made in improving transparency. Late last year we launched two
new publications: the first, the Financial Stability Report, shares
our assessment of the resilience of the U.S. financial system; and
the second, the Supervision and Regulation Report, provides information about our activities as a bank supervisor and regulator.
Last month we began conducting press conferences after every
FOMC meeting instead of every other one. This change will allow
me to more fully and more frequently explain the Committee’s
thinking. Last November we announced a plan to conduct a comprehensive review of the strategies, tools, and communications
practices we use to pursue our congressionally assigned goals. This
review will include outreach to a broad range of stakeholders
across the country. The February Monetary Policy Report provides
further discussion of these initiatives.
Thank you, and I will be happy to respond to your questions.
Chairman CRAPO. Thank you very much, Chairman Powell.
As I mentioned in my opening statement, you said that the balance sheet normalization may end sooner with a larger balance
than previously anticipated in the—if I understand it correctly, the
ultimate size of the balance sheet will be principally driven by financial institutions’ demand for reserves plus a buffer, correct?
Mr. POWELL. That is correct.
Chairman CRAPO. Reserves have increased from $43 billion in
early 2008 to about $2.8 trillion in 2014, if I understand correctly,
before falling now down to about $1.6 trillion currently. Do you
have an estimate of the amount of reserves that are estimated to
be necessary to achieve the Fed’s monetary policy objective? And
how does the Fed’s postcrisis regulatory policy affect this amount?
Mr. POWELL. The quantity of reserves before the financial crisis,
Mr. Chairman, was $20 billion, in that range, plus or minus, so a
relatively small amount.
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One of the important things we did after the financial crisis was
require banking institutions, particularly the very largest ones, to
hold quite large buffers of highly liquid assets. One of those assets
that the banks like to hold to satisfy this requirement is bank reserves, so the demand for reserves is going to be very substantially
higher than it was before the crisis and will not go back to those
lower levels in any case.
We only have estimates based on market intelligence and discussions with financial institutions, and those estimates have actually
gone up substantially just over the course of the last year or so.
We do not have a precise notion, but, you know, we believe that
the public estimates that are out there of around $1 trillion plus
a buffer, as you mentioned in your remarks, will be, as a reasonable starting point, an estimate of where we might wind up.
Chairman CRAPO. All right. Thank you. As you know, I have
been a strong critic of the quantitative easing the Fed has been engaged in, and I appreciate your explanation of how you intend to
reach the appropriate balance of what the Fed’s balance sheet
should be. And I will continue to work with you on understanding
how we get to the right spot as soon as we can.
You mentioned in your statement and in your report that the
labor force participation rate has started to grow. That has been
one of the reasons we have seen such low economic performance,
in my opinion, in the past years. Do you expect that the labor force
participation rate growth that we have seen will stabilize and even
possibly increase as we continue to move forward?
Mr. POWELL. So labor force participation, if I can provide just a
little bit of background, was an area where the U.S. was at least
comparable to other well-off countries and in some cases at the
high end as far as labor force participation by women was concerned.
We are now at the bottom end of the league table for both men
and women, and it is a very troubling concern. A big part of it,
though, is driven by something that we cannot really change, and
that is just demographics. As the country ages, labor force participation should decline at a fairly steady level. Nonetheless, even allowing for that, we are lower than we need to be.
So the gains we have seen over the past year have been very
positive and very welcome from our standpoint. We do not know
how long they can be sustained, but we hope for a long time. I
would just say that I think we need a broad policy focus on how
to sustain labor force participation, including not just through Fed
policy but through legislative policy as well.
Chairman CRAPO. And I agree. I think that that is a critical part
of our ability to maintain the growth and strength of our economy.
I have lots of questions for you, but just one that I will have time
for in the remaining amount of time I have, and this will get to
regulatory relief and implementation of Senate bill 2155. As you
know, Senate bill 2155 provides smaller institutions with relief
from the Volcker Rule. Regardless, there are still significant issues
with the rule for institutions of all sizes, and I and six of my Banking Committee colleagues wrote to our financial regulators in October of last year urging further revisions to the rule to address outstanding issues, such as the rule’s ‘‘covered funds’’ definition and
10
its broad application to venture capital, other long-term investments, and loan creation. In addition, I am concerned that the proposed accounting test may make the Volcker Rule more complex
than is necessary.
Can you commit to using your significant regulatory discretion
provided by statute to promptly address these outstanding issues?
Mr. POWELL. Yes, we received comments on those issues and
more, and we thought some of those comments were very well
taken, and we are working hard to try to address them. And I assure you we will do our best to do that.
Chairman CRAPO. I appreciate that.
Senator Brown.
Senator BROWN. Thank you. Thank you again for being here,
Chairman Powell.
Yesterday your predecessor, Janet Yellen, said she does not think
President Trump has a grasp of macroeconomic policy. Is she right?
Mr. POWELL. I will not have any comment on that for you, Senator.
Senator BROWN. All right. I guess I am not surprised.
It is troubling that the former Fed Chair, the woman that sat in
your job and was very good at that job, tells the press point blank
that she does not think the President of the United States understands the economy. I think the American people continually and
more and more understand that this President—that many Americans, GM workers in Youngstown and Hamtramck, for example,
believe he has betrayed workers in this country. That is becoming
clearer and clearer.
Let me shift to another question. Last week former Fed Chair
Paul Volcker raised concerns that the culture of banking only focuses on the profits of the firm and the pay of the CEO. I share
this concern that we should focus on workers. Since 1979—you
know these numbers, Mr. Chairman—worker productivity has
grown 70 percent. Compensation for those workers has grown by
just 11 percent. Meanwhile, the top one-tenth of 1 percent saw
their earnings grow by 343 percent. This disparity, as you know,
is even worse for women and people of color.
So do you think, Mr. Chairman, the Fed’s employment mandate
is just to ensure that people are employed? Or do you think full
employment implies a dignity of work, that is, meaning workers
earn a salary and benefits that let them fully participate in the
2019 economy in our country?
Mr. POWELL. Our mandate, as you well know, is maximum employment, and we try to take that to heart. And, you know, our tool
for trying to achieve that is monetary policy. And I think we are
at a 50-year low in unemployment. There are many other issues in
the country. You have mentioned some of them. But, honestly, to
achieve some of the things you are talking about, we need other
tools. It is not—the Fed cannot affect every social problem, as you
well know.
Senator BROWN. Is that a social problem, that fewer and fewer
people, even though they are employed, wages are stagnant, is that
just a social problem?
Mr. POWELL. Well, wages, I would say wages do go into our assessment of maximum employment. We do look at wages, and I am
11
happy to say that wages, while they were very sluggish in the
aftermath of the crisis, have now started to move up in a way that
is more consistent with past history and with inflation and productivity——
Senator BROWN. But not even close to productivity, not even
close to gains in productivity for most workers.
Mr. POWELL. So today—I know the chart you are talking about.
You are talking about over the longer run. If you look at what—
wages are now going up a little better than 3 percent. Inflation is
right at 2. Productivity has been running—sorry. Inflation has been
at 2. Productivity has been around 1. So 3 percent is about right
from that narrow standpoint.
Wages have moved up. We welcome that. We do not find it troubling from an inflation standpoint at this point. So we do look very
carefully at wages as we assess maximum employment, as we assess whether we are meeting our maximum employment goal.
Senator BROWN. Let me put it in a bit of a historical perspective.
Will Rogers during the Great Depression provided a lesson I think
we could learn from today. He said that, ‘‘Unlike water, money
trickles up, not down.’’ Of the Government’s response to that economic crisis of the Great Depression, he said, ‘‘The money was all
appropriated for the top in the hopes that it would trickle down to
the needy. . . . Give it to the people at the bottom . . . the top will
have it before night anyhow. But it will at least have passed
through the poor fellow’s hands. They saved the big banks but the
little ones went up the flue.’’
This observation is 89 years old. It seems like the Fed still
thinks, from your answer and from the behavior of the Fed, that
the best way to help workers is to shore up big bank profits and
hope the prosperity trickles down. Over the last decade, it has been
creative in how it accomplishes this. I believe the Fed has the authority and the duty to be creative, to help workers share in the
prosperity they create. My staff will follow up with your staff on
ways of doing that.
One more question. It seems like ‘‘too big to fail’’ is alive and
well. We are seeing a potential merger—we are seeing growth in
most of the largest money center banks. Two regional banks, as
you know, SunTrust and BB&T, each with over $200 billion in assets, decided to merge, saying it was too difficult for them to compete with the money center banks’ investment in technology.
What message does the Fed send to regional and community
banks about their future if the Fed eventually approves this merger?
Mr. POWELL. Well, we have a process that we go through in evaluating any merger. It is set forth in great detail in the law and in
our guidance. We will go through that process carefully, fairly, and
thoroughly and with a lot of transparency when we do get an application. We do not actually have an application yet on that matter.
We expect to get it sometime in the next few weeks.
So we will do all of that. I would just say we have not prejudged
anything, and we are going to do our work on that professionally,
carefully, fairly, and transparently.
Senator BROWN. OK.
Chairman CRAPO. Senator Shelby.
12
Senator SHELBY. Thank you.
Chairman Powell, somebody is doing something right. I do not
know if it is the President or you or a combination of everything.
I think this is the best economy I have seen in my lifetime at this
point.
Now, the question is: How do we keep it going? How do we keep
it going? That is part of your job—not totally, but you are into the
money. How do you gauge inflation, for example? You know, there
are a lot of ways to do it. That is one. You were talking about price
stability, maximum employment. Price stability, you are talking
about the stability of the monetary policy, the value of our currency, and everything that goes with it. How do we keep this economy going, in your judgment?
Mr. POWELL. So I think you said it very well. We want to use
our tools to sustain this expansion and keep the labor market
strong and keep inflation near 2 percent. That is exactly what we
are trying to do. And so we look around and what do we see? We
see a labor market that is strong and continuing to strengthen. Job
creation is strong. Wages are moving up. So that is a very healthy
thing.
With inflation, we see muted inflation pressures. Even now with
really historically low unemployment and a great recovery, an ongoing recovery in the labor markets, we still see muted inflation
pressures, and that gives us the ability to be patient with monetary
policy, and that is what we are going to do. The Committee has decided that with our policy rate in the range of neutral, with muted
inflation pressures and with some of the downside risks that we
have talked about, this is a good time to be patient and watch and
wait and see how the situation evolves.
Senator SHELBY. How does the abundance of hydrocarbons that
we have found in this country in recent years, which prices everything, how does that feed into the economy in a positive way?
Mr. POWELL. Well, in a couple of ways. One, it’s a big industry.
We have a very large energy industry now thanks really to shale.
In addition, if you think about the—so that employs a lot of people,
and that is a big thing in certain areas of the country. Five or six
major areas of the country have a lot of employment and economic
activity.
Interesting on inflation. If you look back to the 1970s, a lot of
what set off the bad inflation outcomes in the 1970s was an oil
shock. What we have in our very large domestic oil industry now
is, in effect, a shock absorber, because when oil prices go up, American shale producers and other oil producers will produce more oil,
and so that offsets that shock and will, you know, prevent that
shock from driving inflation up here. So it has been a real positive
for our economy from a number of perspectives.
Senator SHELBY. Mr. Chairman, how important is the certainty
of good trade agreements to our economy and to the world economy?
Mr. POWELL. Well, uncertainty is the enemy of business, and
businesses, they want a set of rules, they want an established,
transparent set of rules, and they want to play by those rules, be
able to make longer-term plans, investments, and hiring and that
kind of thing.
13
At the same time, we need the trade—you know, of course, we
are not responsible for trade. We do not comment on trade policy
at all. But we have been hearing a lot from our contacts around
the country really all year, this year and all last year, about uncertainty, and we do sense it has been holding back some decisions,
probably had some minor effect on confidence and maybe activity.
But, overall, certainty around trade and other Government policies
is very important.
Senator SHELBY. As we look at our current account, the imbalance of trade with most of the world, does that concern you? And
if it does, why?
Mr. POWELL. You know, the overall current account is set economically by the difference between savings and investment in our
country. So it is really an identity that kind of works that way.
It tends to go up in good times. When Americans are, you know,
at work and earning well and buying things and the economy is
strong, we tend to buy things. Some of those things tend to be imported. The trade deficit and the current account balance can go
down quickly in bad states of affairs.
Of course, over time we would like to see balance both in savings
and investment and in the trade balance.
Senator SHELBY. I do not have much time left, but we have discussed this before, cost-benefit analysis. Last year when you came
before the Committee, we discussed here the formation and the policy affecting this, an assessment unit to conduct cost-benefit analysis on regulations. Could you provide here an update on the work
of the entity here? And what have you learned and what is going
on?
Mr. POWELL. Yes, so that unit is up and running now, and it is
a relatively new undertaking. Cost-benefit analysis is something
we, of course, have done really always, and particularly in the last
decade or so we have upped our game. Now we have a particular
unit focused on it. We are very pleased with the progress it is making, and they are involved in the rulemakings and assessment of
everything we do. So it is a positive development, and, you know,
we look forward to making it ever stronger.
Senator SHELBY. My last question to you, in the few seconds I
have left, is: What is the health of our banking system that you
regulate at the Federal Reserve, our biggest banks?
Mr. POWELL. I think our banking system overall is quite strong,
you know, record profits, no bank failures I think in 2018, much
higher capital, much higher liquidity, better risk management;
stress tests have really focused banks on understanding and managing their risks. We have better resolution planning overall. I
think our banking system is strong and resilient. We never take it
for granted. We are always looking for problems and cracks, but I
would say overall our banking system is strong.
Senator SHELBY. Thank you.
Thank you, Mr. Chairman.
Chairman CRAPO. Senator Menendez.
Senator MENENDEZ. Welcome, Chairman. As the number of legitimate cannabis-related businesses grow across the United
States, the vast majority of banks and credit unions are not offering services to these enterprises for legitimate fear of legal and reg-
14
ulatory risk. My home State of New Jersey is moving toward legalization of recreational marijuana, and I have concern that these
new businesses as well as the existing medical marijuana businesses in the State will continue to find themselves shut out of the
banking system. And when these businesses are forced to operate
exclusively in cash, they create serious public safety risks in our
communities.
Do you agree that financial institutions need clarity on this
issue?
Mr. POWELL. I think it would be great to have clarity. Of course,
financial institutions and their regulators and supervisors are in a
very difficult position here with marijuana being illegal under Federal law and legal under a growing number of State laws. It puts
financial institutions in a very difficult place and puts the supervisors in a difficult place, too. It would be nice to have clarity on
that supervisory relationship.
Senator MENENDEZ. And in a corollary question, related to the
provision of banking services is the ability for such businesses to
secure insurance products, a necessity for those looking to secure
financing. Would it be helpful for Congress to also consider the role
of insurance companies as States move forward to legalization?
Mr. POWELL. I believe so, yes.
Senator MENENDEZ. OK. On a different question, on February
7th BB&T announced that it planned to purchase SunTrust in a
deal that would result in the combined bank becoming the sixth
largest commercial bank in the country with $434 billion in total
assets. As you may know, in 2008 BB&T’s Community Reinvestment Act rating was downgraded due to substantive violations of
the Equal Credit Opportunity Act and the Fair Housing Act.
BB&T’s most recent CRA exam released last year also included a
substantive violation of fair lending laws, a violation which likely
should have resulted in another downgrade to the bank’s CRA rating.
I want to be sure that the Federal Reserve is not following the
OCC and deemphasizing its treatment of fair lending violations
when it comes time to evaluate a proposed merger. What assurance
can you give us that the Federal Reserve will treat these violations
with the seriousness they deserve?
Mr. POWELL. We have not changed our policy on that, and we do
consider—it comes in the law under convenience and needs of the
communities served, and that includes consumer compliance and
fair lending records and the record of performance under CRA.
Those are all things that we do consider when we get a merger application.
Senator MENENDEZ. And when you are considering it, can you
give us a sense of what the Federal Reserve’s review of this bank’s
or any other bank’s Community Reinvestment Act track record of
compliance with fair lending laws will look like?
Mr. POWELL. We will look thoroughly at it. We will look at the
rating, of course, which I believe is—I think it is satisfactory now.
Banks that have an unsatisfactory or less than satisfactory rating
I think have a hard time. But we will look at that, and we will also
consider public comments and a full range of information. Any information that is presented to us we will consider.
15
Senator MENENDEZ. Well, I ask this question because it seems to
me that, particularly at the OCC, we have—who has released a
proposal without input from the Fed or FDIC contemplating sweeping changes to the implementation of the Community Reinvestment
Act. In a speech last year, Governor Brainard said the Community
Reinvestment Act was ‘‘more important than ever.’’ He stressed
that branches and deposit-taking ATMs remain an important way
that banks engage with a community. You also highlighted recently
the importance of enforcing the CRA and other laws that help ensure people have adequate access to financial services wherever
they live.
Can we get your commitment to build consensus among the Fed
Governors before moving forward with proposals to change implementation of the Community Reinvestment Act?
Mr. POWELL. Oh, yes.
Senator MENENDEZ. OK. I think it is important that you do everything in your power to try to achieve a unanimous vote on this
issue, should the Fed decide to move forward. Many of us find this
an incredibly important part of our law and an increasingly diminishing reality of financial institutions that somehow think that
they do not really have to fully engage and implement the law and
ultimately still get away with it. And so I think there has to be a
strong message that that is not the case. I hope you will be able
to deliver that message.
Mr. POWELL. We are unified in our commitment to, you know,
the mission of CRA, and to any revisions that we do, we are going
to want to see that they preserve that mission and enable banks
to serve it more effectively.
Senator MENENDEZ. Thank you, Mr. Chairman.
Chairman CRAPO. Senator Toomey.
Senator TOOMEY. Thank you, Mr. Chairman.
Chairman Powell, welcome back. Good to see you again. Let me
just start by once again compliment you and your colleagues on
taking us a long way toward normalizing monetary policy. In my
view, this was long overdue, but you have been pursuing what
strikes me as a prudent, thoughtful, and data-informed process of
getting back to normal. So I want to thank you for that.
A quick regulatory question, if I could. I was pleased with the
interagency proposal that was released by the Fed and the other
agencies dealing with S. 2155 and specifically the tailoring of capital and liquidity requirements, enhanced prudential standards.
I think the comment period closed in January on this proposal.
Can you assure us that it is a high priority to finalize these rules?
Mr. POWELL. It is a very high priority. S. 2155 implementation
is probably our highest priority, and we are pushing ahead.
Senator TOOMEY. Any idea of a timeframe by which we could expect to see finalized rules there?
Mr. POWELL. I would not want to put a date—I mean, there are
so many rules. There are a dozen rules that we have comments on
right now. I can come back to you with——
Senator TOOMEY. OK. But I am glad to hear it is a priority.
Mr. POWELL. It is.
Senator TOOMEY. We are obviously eager, and we think you
are—I think you are heading in the right direction.
16
Unrelated, as you know, the private sector has set up a real-time
payment system, and I think a real-time payment system is a terrific innovation that is very, very good for our economy. My understanding is all depository institutions have access to it on an equal
footing, as they should. To the extent that that is the case, do you
believe it is necessary for the Fed to develop an alternative or competing real-time payment system?
Mr. POWELL. That is a judgment that we have not made. We
sought comment on that question, and we had a range of views,
and it is something we are thinking about. We are mindful that,
you know, we do not—under the Monetary Control Act, for example, we have to find that the services we provide are capable of
being paid for and also not something that the private sector can
adequately provide.
Senator TOOMEY. Right.
Mr. POWELL. So we are looking at that very question.
Senator TOOMEY. I would be interested in just hearing what your
thoughts are as you go forward on that. It does seem to me that
the private sector is providing a perfectly viable and affordable and
reasonable mechanism here.
On another topic, as you know, there has been recent discussions
both, I think, inside and certainly outside the Fed about whether
the Fed ought to reconsider the way it thinks about inflation, and
specifically, I guess the way I understand this discussion, whether
the Fed ought to target a price level rather than a change in the
price level, and specifically if there were an extended period of time
when inflation ran below a target, would it make sense for the Fed
to intentionally attempt to exceed the target modestly or by enough
so that over a long period of time you would hit the average.
My first reaction is to be pretty concerned about that. Intentionally running at an inflation rate above the target rate worries
me given that historically inflation has been much harder to control and high inflation has been a bigger problem than low inflation. But I wonder what your thoughts are about this topic.
Mr. POWELL. These are questions, as you know, that are going
to be the subject of careful consideration over the course of this
year and beyond in our thinking.
You know, the issue that we face is that rates have come down—
long and short rates have come down really over the last 40 years
and are now much—they are just much lower, real rates and, of
course, inflation—add inflation back in, nominal rates as well, the
implication of that being that in a typical downturn, the odds are
much more—much higher that we will wind up back at the zero
lower bound again. And in that situation, that fact there has the
potential to drag inflation expectations down over time.
In our thinking, inflation expectations are now the most important driver of actual inflation. So we are trying to think—and, really, the economics profession has been thinking about it for 20
years, since the experience of Japan in the late 1990s, thinking of
ways to make that inflation 2-percent target credible, highly credible, so that inflation kind of averages around 2 percent rather
than only averaging 2 percent in good times and then averaging
way less than that in bad times, which would draw expectations
down.
17
No decisions have been made. You raise a—there are plenty of
questions and concerns to be addressed, but there is also a problem
that I think we owe it to the public to try think our way through
the best possible way to address that problem so that we can carry
out our mandate.
Senator TOOMEY. Yeah, I understand the logic. I understand the
problem that you are wrestling with. I would just urge great, great
caution on this for many, many reasons, not the least of which, for
whatever period of time the Fed decided it would exceed the goal
so that it averages the goal—first of all, during that period of time,
presumably you do not have price stability. Certainly not zero. You
would be intentionally running above even the goal.
I have got other questions, but I see I am out of time. I just want
to urge caution on that one, Mr. Chairman.
Chairman CRAPO. Senator Tester.
Senator TESTER. Thank you, Mr. Chairman, Ranking Member
Brown. Thank you for being here, Chairman Powell. I appreciate
your service, appreciate the work you are doing.
I want to talk a little bit about the Government shutdown that
we just came through that cost the economy $11 billion, and I
think that is a conservative figure. There is at least one in this
Government that wants to use Government services and public employees as a pawn when they do not get their way.
But what I want to ask you about is we are faced with a debt
ceiling coming up March 1. Could you walk us through quickly, if
you could, the economic impacts of failing to increase that debt ceiling?
Mr. POWELL. Well, the failure to increase the debt ceiling creates
a lot of uncertainty in the first instance, and then when you actually get up to the point where the Government runs out of cash and
does not pay its bills—we never passed that point yet. That is kind
of a bright line, and I hope we never do pass it. But there is a lot
of uncertainty that is generated and a lot of distraction from what
is otherwise a pretty good economy.
Senator TESTER. What would happen to our interest rates on $22
trillion worth of debt if we were not to do what we needed to do
with the debt ceiling?
Mr. POWELL. It is beyond even considering. The idea that the
United States would not honor all of its obligations and pay them
when due is just something that cannot even be considered.
Senator TESTER. Would it double?
Mr. POWELL. It would go up. But I think, you know, we have the
best credit rating; you know, we borrow at very low rates, and the
world believes in our full faith and credit. And I think that is not
something I would——
Senator TESTER. It would have draconian effects on our economy
overall.
Mr. POWELL. Potentially. Very hard to predict and possibly large
negative effects.
Senator TESTER. But there are some in this body, quite frankly,
that say it would be no big deal. Do you agree with that?
Mr. POWELL. No, I do not. I think it would be a very big deal
not to pay all of our bills when and as due. I think that is something the U.S. Government should always do.
18
Senator TESTER. I agree. Senator Shelby talked about the certainty of trade agreements. I will not ask you to grade this Administration’s trade policies, but from your perspective, how is this Administration’s trade policy affecting our economy—positively or
negatively?
Mr. POWELL. You know, again, we do not play a role in trade negotiations. I think it would be inappropriate for me to comment on
their trade policy, either directly or indirectly. As I mentioned, you
know, we have been hearing and everyone has been hearing from
business about it, and particularly I would think in your State,
hearing about trade.
Senator TESTER. Exactly. And in my real job, I farm, and I can
tell you, as we prepare for planting this spring, I cannot tell you
any commodity or any livestock that is going to make us much
money, if any.
And so I believe the Minneapolis Fed came out and said that bad
ag loans, we are seeing an uptick—a serious uptick, I might add—
in farm foreclosures. Are you concerned about that? Do you think
it is a direct result of trade, or is it something else?
Mr. POWELL. I actually did see that piece. As you know far better
than I, the agricultural economy has been under a lot of pressure
for really 5 years now. It is just low crop prices, sustained low crop
prices, and that has not changed, and that has driven up, you
know, bankruptcies under Chapter 12, foreclosures, and all kinds
of bad things. So, I mean, I think the bigger picture is just crop
prices have been low. Obviously, the trade issues have not helped
this year.
Senator TESTER. OK. And the Fed also suggested that farm
bankruptcies have not peaked yet, that we have not seen the potential negative impact on rural America that these low commodity
prices—and might I add, before that 5 years, we had some of the
best ever when we had some trade going on.
Do you agree with the assessment that the Federal Reserve
study suggests that we have not seen the peak of farm bankruptcies yet?
Mr. POWELL. I did read that, whatever it was, an article or a blog
post, and it did say that. It sounded plausible to me.
Senator TESTER. OK. We in agriculture got a bailout. It was pretty serious dollars overall, but it did not amount to much by the
time it got to the ground, truthfully, as compared to what production ag is losing in products. But we also hear from more than just
agriculture. We hear from small businesses, and the small businesses are telling me that the big guys can afford to stay in business because of these trade wars, but they are going to be out of
business. And we are not talking about family farms now, which
is absolutely affecting—my previous question. But do you believe
that the trade policies impact smaller businesses greater than the
big ones?
Mr. POWELL. I do not know the answer to that. It is a fair question.
Senator TESTER. OK. Well, I have got some other questions I will
put in for the record.
I want to thank you for being here today. I will tell you that the
economy is booming, but there are a lot of flags that are coming
19
up that I am seeing that are canaries in the coal mine, so to speak,
and I hope—you are a smart guy. Hopefully you are able to pay
attention to those to avoid any pitfalls.
Thank you.
Chairman CRAPO. Senator Rounds.
Senator ROUNDS. Thank you, Mr. Chairman. Good morning,
Chairman Powell.
Mr. POWELL. Good morning.
Senator ROUNDS. It is good to see you once again, and thank you
very much for coming in today.
Before I begin my questions, I wanted to take a moment to underscore the importance of the Insurance Policy Advisory Committee that the Fed is required to establish pursuant to S. 2155.
As you are aware, South Dakotans have a very strong interest in
preserving our State-based insurance regulatory system. I look forward to working with you and the new Committee to find ways
that we can promote the interests of our State-based system. So I
appreciate that.
I have got a series of questions that I think I am just going to
put them in as questions for the record and ask you to respond
later on. Very seldom do we get an opportunity to have the Chairman of the Fed come in in front of literally the country and to
share his thoughts about the direction of our country, in many
cases the financial systems that we have here and so forth. And I
got to thinking, this is probably an opportunity that we should not
let go by to talk about the impact of the Federal Government and
its spending with regard to monetary policy as well.
In particular, it seems that Congress has a tendency to only
make changes in the way it does business when there is a crisis
at hand, and I would like to give you another particular to perhaps
visit with us and offer if not direction, at least an observation as
to what happens when Congress fails to take care of some of the
safety net programs that we have in this country. And I want to
begin by simply recognizing that we have $22 trillion in debt, and
clearly that debt is being financed. That means there is competition
for those dollars.
The Federal Reserve, on the other hand, it actually manages
through regular meetings and discussions—and the quantitative
easing is an example of one where you as an organization have
very carefully selected how you will work that through, how you
will refinance and so forth. But you manage it on a regular basis.
Congress has a tendency with its budget and the money that it
spends to not even look at a number of the expenditures. Today
with our budget, we have about 31 percent of the budget that we
actually vote on. We vote on defense and nondefense discretionary
spending. We do not vote on nor do we appear to manage Social
Security, Medicare, Medicaid, or interest on the debt, about 70—
well, close to 70 percent of all of that which we spent every single
year.
Every single year for as far as we can see, we are going to run
significant deficits. Would you care to comment on the way that
Congress manages or does not manage the safety nets—Social Security, Medicare, and Medicaid—and what impact that has on our
economy as a Nation?
20
Mr. POWELL. I should start by saying that we try to stay in our
lane, which is monetary policy, bank regulation, financial stability,
and we have no supervisory role or really role as a commentator.
We do not score bills. There is JCT, there is CBO, there is OMB,
and we do not do those jobs.
But I will say, as I said in my statement, that the U.S. Federal
Government is on an unsustainable fiscal path, by which is meant
that debt as a percentage of GDP is growing and now growing
sharply, growing quickly, faster, and that is unsustainable by definition. We need to stabilize debt to GDP.
The timing of doing that, the ways of doing it, through revenue,
through spending, all of those things are not for the Fed to decide.
Senator ROUNDS. But as perhaps, for lack of a better term, one
of the chief economists in the Nation, to be able to give advice to
the folks that are out there, to the country as a whole about the
things that we have in our future and about the threats to our future, Social Security will go bankrupt unless we start managing it.
Is that a fair statement, on the current trajectory?
Mr. POWELL. I think if I could say it this way: I think what happens over time is that we wind up spending more and more of our
precious revenues to service the debt, to pay interest to people who
own the debt, as opposed to investing in the things that we really
need—education—all the things that we need to be investing in so
that we can compete in the global economy.
I think, you know, on the spending side, the thing in my personal
thinking—again, this is not the Fed’s role—and I think in many
people’s thinking, the thing that drives our fiscal unsustainability,
the single biggest thing is just health care delivery. We deliver
health care outcomes that are pretty average for a well-off country,
but we spend 17 percent of GDP doing it. Everyone else spends on
average 10 percent of GDP. That is a trillion-plus, way more than
a trillion dollars every year that we spend in delivering health
care. So if I were in your seats—and I am not—I think that is a
good place to look. It is not that benefits themselves are too generous. It is that we deliver them in highly inefficient ways, particularly health care.
Senator ROUNDS. If I could—and I know I am out of time, but
I will just say, in other words, what you are saying is if we actually
managed—if we actually managed the resources that we had, we
could probably do a better job than what we do today, where we
just simply do not even include it in our regular budget that we
vote on on a year-to-year basis.
Mr. POWELL. Again, I cannot—I am not here to criticize Congress, but I do think it is a profitable thing to do.
Senator ROUNDS. Thank you.
Thank you, Mr. Chairman.
Chairman CRAPO. Thank you. I will agree with you, Senator
Rounds.
Senator Smith.
Senator SMITH. Thank you, and it is wonderful to see you again.
I appreciated very much our conversation in my office the other
day.
I want to follow up a little bit on what Senator Tester was asking
about regarding the economic issues in rural areas. And I appre-
21
ciate your interest in this discussion, and this was featured in the
Monetary Policy Report that you put out.
You know, it strikes me that if you look at the overall positive
numbers in our economy, it is a good thing. But when you
unbundle those strong numbers, you see inequities and gaps, as
you have pointed out, around race and gender and then also
around rural areas. In Minnesota, it is interesting. You know, we
have some rural counties where the unemployment rate is close to
2 percent. And then we have other rural counties where the unemployment rate is more like 6 or 7 percent.
So your Monetary Policy Report highlights the impact of what is
happening with rural workers without a college degree, in particular, and the impact on labor force participation and how employment-to-population ratios have recovered dramatically for college-educated people but less so for noncollege people. And I am
really worried about this disparity that it is causing.
So can you tell us, in your judgment, why is this gap widening
in rural areas?
Mr. POWELL. I thought the box is very interesting, and you will
note that, like so many economic problems, there is no really clear
or easy answer. But the way I would say it is the gap between
rural and urban areas in unemployment is not so big. It really
shows up in labor force participation.
Senator SMITH. Right.
Mr. POWELL. That is where it shows up. So when we think about
low labor force participation, the first thing that comes to mind is
educational levels, because people in the population, the broader
population, lower educational levels tend to be associated with
lower labor force participation. But even accounting for that, that
does not account for much, really, of the disparity. So, you know,
it can be that rural areas are more associated with manufacturing
activities, which have had less recovery than the service sector,
which is now much larger than the manufacturing sector.
In addition, it all may be affected by people leaving rural areas,
in other words, people who leave rural areas to go to an urban area
where there are better job opportunities. So it is something, you
know, that we are still working on understanding, but it is a fairly
stark disparity, and I think we all see it.
Senator SMITH. Right.
Mr. POWELL. I was in Mississippi a couple of weeks ago and certainly saw it there in a rural area.
Senator SMITH. So when people are leaving, does that suggest
then that the population that is left is older and——
Mr. POWELL. Or perhaps less able to find a job, less able to take
part in the labor force. So some of the people who have job skills
may have left that area, leaving the remaining population with
lower labor force participation. That may be part of it.
Senator SMITH. So would that not suggest that it would be smart
on our part—this is not a Fed policy, but it is a policy to increase
our emphasis and our investment in, you know, career and technical education, the kind of training that you need in order to fill
those manufacturing jobs in rural areas?
Mr. POWELL. So I do think that we could use a national focus on
labor force participation, and that would be certainly one piece of
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it. We do not really have the tools. I can identify it as a problem,
and it is a serious problem, but I think that is a profitable place
to look.
Senator SMITH. The other thing I wonder is maybe people are not
coming back into the workforce because they cannot afford to. In
rural Minnesota, you cannot afford child care and it is not readily
available. So I wonder if that is not part of the problem, that the
jobs that are there are not paying. So how come wages do not go
up? If there is a demand for labor, people potentially are there,
why don’t wage go up?
Mr. POWELL. As I mentioned earlier, wages have moved up from
their very low levels of increase earlier. I would not say that they
are going up quickly now, but they are going up at a more healthy
rate.
There are some things in the Federal Tax Code where people lose
their benefits with their first dollar of earnings, which, again, it is
not our job, but that does not sound like you want people to go
back to work.
Senator SMITH. That is counterproductive, right.
Mr. POWELL. You want them to be rewarded for going back to
work, and it seems like that is something we could look at—you
could look at.
Senator SMITH. Right. Thank you very much, Chairman Powell.
I know I am out of time. I want to just note that I appreciated the
question that Senator Tester was asking about farm bankruptcies,
which is a real concern in Minnesota and across the whole northern swath of States. I am going to follow up with a written question about how you see those farm bankruptcies potentially affecting the overall economic strength of the country, especially in rural
areas.
Mr. POWELL. Thank you.
Senator SMITH. Thank you, Mr. Chair.
Chairman CRAPO. Senator McSally.
Senator MCSALLY. Thank you, Mr. Chairman. Chairman Powell,
good to see you again.
I want to continue actually on the line of discussion that you
have been on. In our conversation when we met, we talked about
this labor force participation issue, and everywhere I go in Arizona,
in the more metropolitan areas anyway, companies are—the economy is doing great, the optimism is there, but they are lacking for
workers. They are just screaming for workers. And it is really up
and down the skill set. It is not just in the trade craft, although
that often tends to be those areas. And so what we are seeing is
this labor force participation rate is going up a little bit, ticking up,
but there is clearly still this gap that is maybe holding back even
more economic growth because of the mismatch of not having the
workers for the jobs that are there.
So can you just give some additional perspective on that? And,
you know, what within your power and within our power do you
think that we can do in order to incentivize increasing that number, get more people off the sidelines, get them the skills that they
need in order to continue to provide more opportunities for people
we represent?
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Mr. POWELL. Sure. So this strong labor market and strong economy that we have at the aggregate level is, as you mentioned, pulling people back into the labor force or encouraging them to stay in
the labor force and not leave. So this is very, very positive for us.
Labor force participation has gone back up above 63 percent, and
to be in the labor force, by the way, you have either got to have
a job or have looked for a job in the last 4 weeks. So if you have
not looked for a job in the last 4 weeks and you are not employed,
you are not considered unemployed.
So this is very, very positive, and we hope it is sustained, but,
you know, that is sort of a strong labor market, pulling people back
in. Even with that, though, our labor force participation rates are
lower than other countries that have anything like our level of
wealth and income and economic activity. And it is not easy to say
why, but I do think—and I think that the Fed’s ability to—our ability to address this is really just a function of trying to keep us at
maximum employment. There are plenty of people and it is younger people, particularly younger men, particularly less well educated
younger men, but also people across the gender spectrum and the
income spectrum and age spectrum. We just have low labor force
participation, and I think it is—you know, we want the economy
to grow, and we want that prosperity to be widely spread. Labor
force participation gets both of those things almost better than anything, and so I think it is something that ought to be a high focus
for people who have different tools than ours.
Senator MCSALLY. I agree with you, and not necessarily within
your tools, but just based on your perspective. What do you think
is holding that back? What is your perspective and what else can
we do in order to remove those barriers for people to, you know,
get back in the labor force, to be working to support their families,
themselves, and meet their full potential?
Mr. POWELL. Part of it would be probably education and skills
gaps. Part of it would be the opioid crisis. You know, there just
would be a range of things, and I would think that there are also—
as we were discussing a minute ago, there also are some disincentives to go to work that are built into benefit programs. I met with
a group of women in West Virginia last year who were in an apprenticeship program for carpentry, electrical, plumbing, steel
work, and that kind of thing. And the hardest thing they had to
do was to go to work in this program, which has 100 percent placement and which paid, you know, 9 or 10 bucks an hour, because
that was less than the very meager benefits they were already getting. So they had to take a pay cut to go back to work. And they
did it anyway. They did it anyway, which was pretty inspiring. But
I think we ought to have policies that reward and support labor
force participation.
Again, they are not ours. I should not get into the prescriptive
business, but I think it is really important for the country.
Senator MCSALLY. Thank you, and I do want to follow up on the
rural–urban gap. We have got a lot of rural counties. I visited
many of them this week in Arizona, and we are seeing the same
thing where there is that disconnect in wage growth and in labor
force participation in those rural areas. Do you take that into account in Fed policy? And, again, other perspectives of what else we
24
might be able to do on our side or on your side in order to not have
that gap widening for those in the rural areas?
Mr. POWELL. We do in the general sense that we are learning
and we have learned this year that there is more slack in the labor
market because people are coming back in. If people were not coming back in, then the unemployment rate would be substantially
lower. But they are, or they are staying in. So labor force participation is rising in either case, and that tells us that there is more
room to grow, and that certainly has implications for monetary policy.
In terms of the urban and rural, we look at those disparities. We
look at all different kinds of disparities. In a general way, they inform our thinking about the state of the economy, and particularly
maximum employment, which is not—there is no one number that
you can look at. You have to look at a range of indicators, and that
would be one of them.
Senator MCSALLY. OK, great. Thank you.
Chairman CRAPO. Senator Jones.
Senator JONES. Thank you, Mr. Chairman. Chairman Powell,
thank you for being here today. I really appreciate it.
I want to stay on the urban versus rural divide a little bit. Obviously, we see you have got Senators on this Committee who have
a lot of urban areas, and it seems like that there is one factor that
may come into play that is not quite so obvious that we have talked
about, and that is health care.
In 2017, the Atlanta Fed set out to study the urban–rural divide
in the Southeast, and one of the factors they kept noticing was the
impact on residents’ health on the economic output to simplify
what is obviously a very complex issue.
According to that Fed study in Atlanta, while the portion of
workers who say they are too sick or disabled to work is roughly
6 percent nationally, that rises to over 12 percent and higher in the
rural South.
So from your perspective, what role do you think that health outcomes play in economic growth, particularly in rural America?
Mr. POWELL. I think poor health outcomes are very much associated with a lot of social issues, including low labor force participation and lots of other economic issues, you know, low lifetime earnings and many, many different things. And those are obviously
more prevalent now in rural areas, as you pointed out.
Senator JONES. And I would assume you would agree that if
health care is not accessible in those areas—for instance, in Alabama we have seen rural hospitals closing left and right, seven or
eight in the last 7 or 8 years—with the absence of health care, it
may contribute to the people leaving those rural areas and into
urban areas. Would you agree with that?
Mr. POWELL. It is hard to say whether—you know, people have
been leaving for some time. Some of these counties, as you obviously know, have lost half their population in the last four or five
decades.
Senator JONES. Individually, if the States were to develop policies that would expand health care in these communities, give affordable health care, access to health care, what would you expect
the economic impact to be?
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Mr. POWELL. Well, I think people who—health care is going to—
you know, in principle would allow people to remain in the labor
market, would get them back in the labor market and keep them
from getting sick and being out of the labor market. So that would
be a positive for the economy.
Senator JONES. I appreciate that. I promise you we are not going
to ask you to testify in front of the HELP Committee.
Senator Tester made a comment as he was finishing up that despite—and there is a lot of good economic news. Everybody agrees
there is a lot of great economic news out there. But I think a lot
of folks also, as in Senator Tester’s words, see canaries in the coal
mine. Do you see any? Other than the obvious of the debt that we
have, do you see any canaries in the coal mine that we need to be
looking for in this Congress?
Mr. POWELL. I would say that the outlook for the U.S. economy
is a positive one, is a favorable one. There are always risks, and
right now I would say that the predominant risks to our economy
are slowing global growth, as I mentioned, particularly China and
Europe. We have seen a significant slowing in growth really over
the course of the past year, and it seems to be ongoing. And that
can create a headwind for the United States economy. I talked
about Brexit. That is an event risk which could have implications
for us.
Here domestically, again, I think the outlook is generally a favorable one.
Senator JONES. OK. Thank you, Mr. Chairman. And Senator
Shelby asked you about the state of health of our big banks, which
you gave a pretty favorable report on. But in December of this
year, right as the Government was shutting down, the Secretary of
the Treasury issued a press release, and he had this call with all
of the big banks to discuss their liquidity and to make sure that
things were OK. The next day, I think he had a call with you and
some of the other regulators. And that sent some alarm bells, I
think, throughout the country and folks up here.
Can you kind of walk through those 2 days and what was the
purpose? What did you see was the purpose of the Secretary of the
Treasury 4 days into the shutdown attempting to reassure folks, I
guess, that the banking system was OK?
Mr. POWELL. Let me say, of course, I would not comment on the
Secretary at all. But, you know, our financial system, as I mentioned earlier, is very strong, record profits, no bank failures last
year, capital is much higher, liquidity is much higher, risk management is much better. You know, we never take this for granted. We
keep watching carefully and looking for problems. But I can say
that what I was thinking in those days was, you know, we had significant volatility in the markets, and I was just, you know, wondering, looking and asking the question, does that have any broader implications for the economy or for the financial system? And
the answer I felt was no, but it is something that you are—part
of the job is to ask that question, which I was.
Senator JONES. All right. Thank you, Mr. Chairman. I appreciate
you being here.
Thank you, Mr. Chairman.
Chairman CRAPO. Senator Kennedy.
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Senator KENNEDY. Mr. Chairman, thank you for coming today.
My good friend Senator Brown lamented the fact that our financial
institutions are making profits now. That is a good thing, right?
Mr. POWELL. We need a profitable financial system to have a
well-capitalized financial system.
Senator KENNEDY. Well, is it better if banks are making money
or losing money from a macroeconomic standpoint?
Mr. POWELL. I think we want banks to be profitable and strong
and well capitalized, and they have been.
Senator KENNEDY. OK. I want to talk about the Government
shutdown. Tell me if I get this wrong. CBO estimates an $11 billion impact to our economy. We will recover about $8 billion, so the
net loss to our economy is $3 billion. Does that sound about right?
Mr. POWELL. All I know about that is that is what I have read.
Senator KENNEDY. OK. That is what I have read, too. You got
to trust somebody. I will take CBO at their word.
We have got about a $21 trillion economy. Is that right?
Mr. POWELL. That sounds about right.
Senator KENNEDY. OK. So as a percentage of our economy, that
$3 billion loss is one-half of 1 percent. Is that about right?
Mr. POWELL. You did that math very quickly, Senator. I am
going to trust you on that.
Senator KENNEDY. Good. OK. That is an infinitesimal impact, is
it not?
Mr. POWELL. That is very small.
Senator KENNEDY. OK. Let us talk about the economy. Some
economists said that if we passed the Tax Cuts and Jobs Act, our
economy would overheat. Those economists were wrong, were they
not?
Mr. POWELL. The economy did not overheat, has not overheated.
Senator KENNEDY. We are having growth without inflation. Is
that correct?
Mr. POWELL. We have inflation right at our target.
Senator KENNEDY. About 2.2 percent?
Mr. POWELL. Right around 2 percent, 1.9 percent.
Senator KENNEDY. OK. And we have had more business investment. Is that correct?
Mr. POWELL. We have had solid investment, very solid in the
first part of last year and reasonably good in the second half of last
year, and I think the outlook is for continued reasonable levels of
business investment.
Senator KENNEDY. And wages are up. Is that correct?
Mr. POWELL. Yes, they are. As I mentioned, you have wages
now—all of our wage measures have moved up to 3 percent or a
little better, which is a very good thing to see.
Senator KENNEDY. I want to get your opinion on—and I am not
trying to ask you to make policy, but I am asking you as the Fed
Chair, what could we have done in hindsight to encourage more
business investment in plants and machinery and equipment and
software which would have created more jobs and hopefully increased productivity? Specifically, let me ask you this: There is legislation to prohibit share buybacks. Is that a good thing? I know
share buybacks have a positive economic impact. But if you had
legislation that cut business taxes but also said you cannot use
27
that money to buy back shares, you have to invest it in your company or pay shareholders dividends, what would you think about
legislation like that, just from an economic standpoint?
Mr. POWELL. Well, I think it is—first of all, that kind of a decision is really not in our hands.
Senator KENNEDY. I know.
Mr. POWELL. It is really for you to make.
Senator KENNEDY. I am asking you as an economist.
Mr. POWELL. So I would say the goal—I guess I would just say
the goal of having prosperity be widely shared I think is one that
we all share. I think the thing about share—when you talk about
companies and what they do with their profits and how they allocate capital, in our system we have always left those decisions to
the private sector, to private hands.
Senator KENNEDY. Right.
Mr. POWELL. And I would want to understand the consequences
of changing that, and I would want to look at whether there are
not other ways to achieve the goals that I think we all want, which
is to have prosperity be widely shared.
Senator KENNEDY. OK. Are there other ideas you might have to
make sure prosperity is more widely shared?
Mr. POWELL. I think it ties to some of the things we have been
talking about here. You know, labor force participation is just a
win for the overall economy. The economy will grow faster, and the
people who are not taking part tend to be the ones with lower education, who are the edges of the labor force. So we are underperforming as a Nation on this compared to our peer group.
Senator KENNEDY. Why?
Mr. POWELL. It is a good question. It is a problem that stands
out here compared to other countries, and——
Senator KENNEDY. Is it because we pay people too much not to
work, or is it because people do not have the skills, or is it because
they do not have access to the jobs? This is my last one, Mr. Chairman.
Mr. POWELL. You know, I think there is a range of perspectives
on this, and there is a range of—there is some wisdom in a lot of
different ideas, and I think the best thing to do would be to get
some proposals that would have broad support and work on those.
I do think quite a bit of it is skills, education, aptitude, and also
not having disincentives in the Tax Code where people lose their
benefits, for example, with the first dollar of pay. That seems like
a disincentive to work that—and none of this, by the way, is in the
Fed’s hands, but since you ask.
Senator KENNEDY. You are doing a great job. Thank you.
Mr. POWELL. Thank you, Senator.
Chairman CRAPO. Senator Warren.
Senator WARREN. Child care. Thank you, Mr. Chairman. Thank
you, Chairman Powell, for being here.
Earlier this month, two giant banks, SunTrust and BB&T, announced that they intended to merge. This new too-big-to-fail institution would have about $450 billion in assets and become the
sixth largest bank in the United States.
Now, as you know, bank acquisitions and mergers do not go
through on their own. They have to be approved first by the Fed.
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So last spring I wrote you a letter asking for data on the number
of merger and acquisition applications received by the Fed and the
number that had been approved over the last 10 years.
Chairman Powell, when you answered my letter in May of 2018,
how many merger and acquisition applications from the banks had
you received since 2006? Do you remember?
Mr. POWELL. No, I do not have the numbers in front of me.
Senator WARREN. Would 3,819 sound right?
Mr. POWELL. Yes.
Senator WARREN. Good. OK. And do you remember how many of
those 3,819 applications you denied?
Mr. POWELL. No, I do not.
Senator WARREN. Would zero sound right?
Mr. POWELL. If you say so.
Senator WARREN. Well, you said so. It is your letter.
Chairman Powell, has the Board denied any applications since
you responded to my letter in May?
Mr. POWELL. I would just—if I can offer a little context——
Senator WARREN. Well, let us get this part out, because that is
what I am trying to do is build some context here.
Mr. POWELL. I do not believe we have. I think what happens is
that we—people do not apply or they withdraw their applications.
Senator WARREN. That is exactly what I am going to talk about.
So zero percent of the applications for mergers and acquisitions
since 2006 have been denied. Now, that does not mean that all potential mergers and acquisitions make it through the process. Thirteen percent of applications are withdrawn before they get a decision. According to your letter, Chairman Powell, ‘‘Prospective applicants may discuss a proposed transaction with Federal Reserve
System staff prior to filing, and applicants will be discouraged from
filing applications where it is apparent that the applications would
not meet all of the statutory factors required for approval.’’
So if you think that a proposed merger will not be approved, you
discourage the bank from following through. Is that right?
Mr. POWELL. In some cases. I think that would be in cases where
it is clear that there is a statutory problem, you know, for example,
in some cases——
Senator WARREN. OK, but you approve 100 percent of those that
go ahead and apply, so I assume they are getting some——
Mr. POWELL. Unless they are withdrawn. Unless they are withdrawn.
Senator WARREN. That is what I said. So you encourage them to
withdraw if they are not going to get an approval.
Mr. POWELL. But they can file and then withdraw.
Senator WARREN. But the point is they withdraw if they are not
going to get it because of a conversation you had that is a nonpublic conversation.
So this is a formal process required by regulation. In order to do
an approval, people who object to the merger have an opportunity
to file a protest. That is how the process is supposed to work. That
would include, for example, communities that are worried that
local banks may close following a merger or acquisition; employees
who are concerned about losing their jobs; State officials that may
be concerned about decreasing competition and so on.
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So, Chairman Powell, you have explained that consultation with
a bank starts, can start before the merger is announced publicly.
When is it that the public can actually file protests, before or after
the merger is announced?
Mr. POWELL. So I think the process is that we receive an application for a merger—which we have not received yet. We expect to
receive it, I am told, sometime next month. And——
Senator WARREN. And when will the public have a chance to——
Mr. POWELL. Certainly then.
Senator WARREN. And that is true in all of these, right? The public does not get a chance to comment until after the application is
already filed. But the application is only filed after the banks have
had a chance to have this quiet conversation with the Fed.
I just want to get this straight. You and the banks get together
in the back room and grease the wheels before the merger is announced. And if you are not going to approve the merger, you tell
the bank in advance, and then they go figure out something else.
If the public wants a chance to weigh in, they have to wait until
you have already made a decision. No wonder you approved 100
percent of the merger applications. Not a single no. Your approval
process itself appears to be a rubber stamp, that everything is happening behind closed doors.
So the question I have is about the SunTrust and BB&T merger.
Is this one just going to be another rubber stamp? You have already made the decision behind closed doors before the public gets
a chance to weigh in?
Mr. POWELL. No, not at all. We are going to conduct a very fair
and open, transparent process. I think, you know, our obligations
under the statute are clear and they are quite broad. We will be
hearing from groups of all kinds and going through our process
carefully and thoroughly.
Senator WARREN. So it is just that in the last 3,819 merger applications, which were all approved without a single one for which you
said no, this time you are going to be listening to comments from
the public that might cause you to say no?
You know, I just have to say I will bet that SunTrust and BB&T
looked at that 100 percent merger success rate and saw what everyone else sees, and that is that the Fed works for big, rich banks
that want to get bigger and want to get richer, and then everyone
else pays the price for diminished competition, for worse service,
for higher prices, for employee layoffs, for the risk that we have yet
another too-big-to-fail bank on our hands.
I just think it is time that we put down the rubber stamp and
that we really let the public and everyone else weigh in before we
create yet another too-big-to-fail bank.
Thank you, Mr. Chairman.
Chairman CRAPO. Senator Cotton.
Senator COTTON. Thank you, Chairman Powell, for being here. I
want to start talking about stress tests for midsize banks.
Reform legislation that the Congress passed to the Dodd–Frank
Act last Congress increased the threshold for stress tests from $10
billion banks to $100 billion banks. Can you tell us why so many
of us still hear from banks in that window, larger than $10 billion
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but smaller than $100 billion, are still hearing from their examiners that they need to undergo such stress tests?
Mr. POWELL. Well, let me say the law, the new law, is that banks
between 10 and 100 do not have to—are exempt from the DFAST
stress tests. That should be crystal clear. I think you are referring
to the guidance.
Senator COTTON. Yes.
Mr. POWELL. Which we are in the process of looking at and revising and, I would think, addressing that issue.
Senator COTTON. OK. But to be perfectly clear, banks between
$10 billion and $100 billion are not required to undergo Dodd–
Frank stress tests.
Mr. POWELL. Correct.
Senator COTTON. When I was in Afghanistan and Iraq, young
soldiers used to complain about the rules of engagement, and if you
looked at the rules of engagement that the four-star commanders
had issued, they are actually pretty flexible. That had been filtered
down in a different way to the front lines, though. Do you think
it is possible that your guidance that you just gave gets filtered
down to examiners on the front line in a slightly different way?
Mr. POWELL. I think that is something that happens, yes, and,
again, we are looking at—there is this guidance that is still outstanding. Some of these banks are still going to want to do stress
testing, and we are not going to discourage that. It is actually a
good practice. But we are going to be looking at that guidance to
make sure that there is no question that banks between $10 and
$100 billion in assets are not required by law to do stress tests.
Senator COTTON. OK. Thank you. These examiners, they hold a
lot of power in their hands, obviously, when they are on the front
lines and they are in one of these smaller community banks. And
when they say something may be voluntary, you know, that is
heard by the banker in a different way than they may intend it.
It reminds me of my old basketball coach who used to have voluntary shoot-arounds before school and on some afternoons. And it
just so happened that the players that reported to those voluntary
shoot-arounds tended to be the ones that got playing time on Tuesday and Friday night.
Mr. POWELL. We try to communicate, and I think our examiners
do a good job, basically, but, you know, we know we need to work
hard to make sure that the message gets out clearly, and we find
that our people do listen. So we are alert to that.
Senator COTTON. Thank you.
I want to turn now to a different question. I know there has been
some talk here about the unemployment rate, which is pretty low,
and the labor force participation rate, which is increasing. I want
to talk about wages and wage growth. There was some recent data
out from the Bureau of Labor Statistics. It was highlighted in a recent Wall Street Journal article that said, despite these factors, income to employees in the form of pay and benefits continues to decrease. It is down to 52.7 percent of our gross domestic income. It
was as high as 59 percent in the 1970s and 57 percent in 2001. By
the same token, business income, profits to businesses, whether it
be the biggest corporations or small businesses, have gone from 12
percent to up to 20 percent.
31
Can you give me your thoughts on why we are seeing more income going into the hands of owners in this country and less into
the hands of workers?
Mr. POWELL. Yes, so that is the labor share of income, is what
you are talking about, and really, if you look back through history,
it zigs and zags, but it generally zigged and zagged at a higher
level. And then right around the year 2000, labor’s share went
down sharply for about 10 years and then, broadly speaking, has
been about flat since then. You know, it goes up and it goes down,
but it is basically flat. And the question is, Why? It is a really good
question, and there are a lot of different answers. Honestly, there
is no clear, easy answer.
As a separate matter, wages are actually growing at a level that
makes sense. The problem is the level. It is not the growth rate.
Wages and benefits are growing at around 3 percent, a little better.
That is a healthy growth rate in an economy with 1 percent productivity increase and 2 percent inflation. The problem is there
were 10 years when that did not happen, from 2000 until 2010. So,
you know, it can have to do with a lot—globalization is a big answer there. That was right around the time of China joining the
WTO. Some researchers will connect it to that. So, in any case, you
know, we welcome these wage increases for this reason.
Senator COTTON. Well, I do as well, and I hope that we will continue to see them and see a little bit more of that growing economic
pie going into the hands of our workers.
Thanks.
Chairman CRAPO. Senator Cortez Masto.
Senator CORTEZ MASTO. Thank you. Chairman Powell, thank you
for being here again.
I have concerns about discrimination in lending, so I want to ask
you a follow-up question to the record that I submitted last time
you were here, and it involves the Federal Reserve’s responsibility
to enforce the fair lending laws.
I asked you how the Fed would improve its oversight of fair lending rules. In your response, you mentioned that Fed examiners
evaluate each financial institution for fair lending compliance.
So I guess my specific question is: How would examiners evaluate whether a lender might steer consumers to higher-priced loans?
In your written response, you mentioned credit scores, loan-tovalue ratios, and lending products, but can you expand on what the
examiners would consider to ensure against consumers being
steered to high-priced loans?
Mr. POWELL. So I think examiners who examine for that I believe are trained to look for patterns of that nature.
Senator CORTEZ MASTO. Specific criteria. Is there anything specific that they look to that you are aware of?
Mr. POWELL. You know, I have a general understanding of this,
but I should come back to you with more details.
Senator CORTEZ MASTO. OK, and thank you. I appreciate that.
And I would also like to know, as you come back and answer this
question, would examiners consider incentive pay tied to higherpriced loans as a red flag or a pattern? Would the existence of bonuses for bank staff that provided a loan with higher fees and in-
32
terest rates be a red flag to these examiners? So if you could expand on that in writing, that would be fantastic. I appreciate that.
Mr. POWELL. Happy to do that.
Senator CORTEZ MASTO. Thank you.
The other issue that is important for me because it is an issue
in Nevada and across the country is affordable housing. In your response to my submitted questions for the record, I asked you if the
rapid rise of housing costs was encouraging your consumer price
models to assume a higher threat of inflation than actually existed.
Do you think that the Fed’s raising interest rates was a factor
in rising house costs?
Mr. POWELL. Well, I think that higher interest rates certainly
played into higher mortgage rates, and that will have had an effect.
Senator CORTEZ MASTO. What about the costs of building that
apartment or house?
Mr. POWELL. Yeah, I think materials costs and—what you hear
from builders is labor shortages, particularly skilled labor shortages, and you also hear higher materials costs, some of which are
affected by tariffs, of course. So you hear them under tremendous
cost pressure, and I think that was flowing through into higher
prices, and that was, you know, making the affordability calculus
a little bit more challenging for buyers at the same time rates were
going up, and I think all together that picture, you know, slowed
down housing construction in the last year or so.
Rates are now down a little bit, about 50 basis points, and so we
are seeing a little bit—starting to see a little bit of a pickup there.
Senator CORTEZ MASTO. How would you compare the impact of
the higher interest rates on construction to that of the higher
prices for goods that may be caused by tariffs?
Mr. POWELL. You know, I think that the higher costs—it depends
on—from the standpoint of the consumer, what matters is what
does the house cost. I think you will find that the interest rate has
an important—is a very important thing from the consumer’s
standpoint. But in setting the price of the house, it is not the interest rates. It is really the cost of materials and labor.
Senator CORTEZ MASTO. And then you talked about——
Mr. POWELL. And land.
Senator CORTEZ MASTO. ——the higher cost of labor. Could that
higher cost of labor also be due to curbing immigration and the
lack of labor because of that?
Mr. POWELL. It certainly could in construction, particularly in
some regions. I visited Houston not so long ago, and I think a big
part of their construction labor force was from immigration. I think
they were feeling shortages there for that reason.
Senator CORTEZ MASTO. Thank you.
Last summer, the Federal Reserve economist noted that high levels of student debt was preventing Millennials from buying a home.
Other studies have found that Millennials faced housing supply
constraints, beginning their careers in a poor labor market, and
high student loan burdens which have made it difficult for them to
buy a home.
What was the response to the Federal Reserve’s assertion that
student debt prevented at least 400,000 Millennials from buying a
home?
33
Mr. POWELL. What was the response?
Senator CORTEZ MASTO. Yes.
Mr. POWELL. It is just research, and I think there is a growing
amount of research that shows that student loans, of course, have
been growing very, very fast in the last few years, and——
Senator CORTEZ MASTO. Was that the right number, the 400,000?
Mr. POWELL. I do not know that number.
Senator CORTEZ MASTO. Did you get a sense was it too high, too
low? Was that——
Mr. POWELL. I do not know that number. I will tell you it is a
trillion and a half dollars in outstanding student loans, and there
is research that shows that for students who cannot discharge—
cannot service their loans or discharge them, that those loans can
weigh on them over a long period of time and have real effects on
their economic and personal lives over time.
Senator CORTEZ MASTO. And ability at actually home ownership.
Is that correct?
Mr. POWELL. Yes.
Senator CORTEZ MASTO. Thank you. Thank you, Chairman, for
being here.
Mr. POWELL. Thank you.
Chairman CRAPO. Thank you.
Senator Moran.
Senator MORAN. Mr. Chairman, thank you very much. Mr.
Chairman, thank you very much.
Let me start with what I think is a straightforward question followed by a much more complicated one. Eighteen of my Senate colleagues joined me in a letter calling on regulators to provide a
more significant reduction in the reporting burden of our smallest
banks in the first and third calendar quarters, as required by Section 205 of 2155. We are looking for a greater difference in those
reporting requirements than what has been proposed.
According to the current proposal, banks with less—those smallest assets would save only an average of 71 minutes per quarter.
So not a significant change based upon the proposed rules. Can you
speak to whether you think our concerns about our smallest banks
and their call reports have been addressed?
Mr. POWELL. Senator, as you mentioned, that rule, we put that
rule out for comment. We got a lot of comments and got your letter,
and we are carefully reviewing those comments. I think what we
are trying to balance is—we are trying to find the right balance,
and we will certainly take into account the comments that we get.
Senator MORAN. Well, I appreciate that. I would want you to do
that. But if the end result of 2155 is as modest as this appears to
be, we have not achieved our goal. That cannot be the congressional intent, at least in this instance on this topic. So let me reiterate that.
Then let me talk about what I think is at least a difficult topic
for me to have a conversation with you about just because of its
complexity. A key goal of this legislation was to provide qualifying
community banks relief from the complexities and burdens of current risk-based capital rules. But we, of course, want to ensure that
they maintain a high quality of capital consistent with the current
rules.
34
The recent interagency proposal for community bank leverage
ratio allows certain banks with less than $10 billion in total assets
to elect to use the CBLR instead of the current risk-based capital
requirements if the CBLR ratio is above 9 percent, the current
ratio required being 5 percent. So under the new proposed framework, a bank would be considered less than well capitalized if it
fell below 9 percent and has not opted out of the CBLR, that would
then trigger certain restrictions and requirements.
As currently written, the proposal seems to dangle the incentive
of reduced regulatory burden but with capital requirements 4 percent higher for our small banks to qualify.
Would it not make sense to leave the existing PCA framework
unchanged, allowing small banks to maintain well-capitalized status and begin reporting capital ratios under the current risk-based
capital rules when CBLR falls below the 9 percent?
Mr. POWELL. That is another rule that we have out for comment,
obviously, and—Senator, can I ask, is that a comment that you
have——
Senator MORAN. If we have not, we can or will.
Mr. POWELL. I would encourage you to do so. You know, these
are—we think these are really important tailoring proposals, and
they are obviously mandated by S. 2155, and we want to get them
right. So I understand your question, and, you know, we will look
carefully at that.
Senator MORAN. Are all of the financial institution regulators
working well together in implementation of 2155?
Mr. POWELL. I believe so, yes. I think we share the goal of, first
of all, putting a very high priority on implementing S. 2155, but
also on tailoring. For smaller banks, I think all of us feel that there
is a lot we can do without undermining safety and soundness, and
we want to find those things and do them.
Senator MORAN. I appreciate that approach. I have had many
conversations with regulators for as long as I have been on this
Committee and in the Senate, and it is something that has always—and I am not suggesting this at all about you, but it is always something that is highlighted certainly when talking to me
about its importance. But it is hard to find change that has occurred voluntarily by regulators to make the burdens less on our
community banks, and that is why 2155 was so appealing to me,
is that we had failed generally to get regulators to change their behaviors, and 2155 seems to me to be the option, the only option
that I have seen that actually might force change when it has been
so reluctantly to arrive. So I care a lot about that.
In the 15 seconds I have left, I would remind you that agriculture, as you and I visited about last time we talked, is in significant—faces significant challenges. I want to make certain that our
community banks, our relationship bankers do not lose the ability
to consider character and history, remind you that we have
generational bankers along with generational farmers whose
grandfather bankers have taken care of grandfather farmers and
down through the generations. That has continued, and our community bankers know who has character, who has ability to pay,
who has the history to demonstrate that, and we cannot tie their
strings or the agricultural challenges the economy faces today, ag
35
country’s problems will be significantly exacerbated if you take
away the ability to take into account those factors that are not
crossing a ‘‘T’’ and dotting an ‘‘I.’’
Thank you.
Mr. POWELL. Thank you.
Chairman CRAPO. Senator Van Hollen.
Senator VAN HOLLEN. Thank you, Mr. Chairman. And, Chairman
Powell, thank you for your service.
I want to focus for a moment on the impact of the tax bill, the
tax bill that passed about a year ago, and especially taking a look
at the banking industry, because I think in no other sector is it
clearer as to what a huge giveaway this tax cut was to big financial
interests. I do not know if you saw the Bloomberg analysis that
was conducted earlier this month. They looked at the 23 U.S.
banks that the Federal Reserve says are most important to our
economy and concluded that those 23 banks got a $21 billion tax
break windfall. Did you see that analysis?
Mr. POWELL. I do not know that I did.
Senator VAN HOLLEN. And would you be surprised to learn that
they used much of that windfall for a major stock buyback?
Mr. POWELL. I honestly do not know. First of all, I know that the
tax cut reduced taxes for big companies that were very profitable
quite substantially.
Senator VAN HOLLEN. Well, they did, and, again, it was a $21
billion windfall, and a lot of it used for, you know, stock buybacks
that helped a lot of the executives.
What is interesting is that during that same period of time we
saw a loss of 4,300 jobs among those 23 banks. Does that surprised
you—big tax break, and yet a loss of jobs among the big banks?
Mr. POWELL. You know, it must be several million people we are
talking about, so it is——
Senator VAN HOLLEN. But, of course, it was sold on the promise
that we would see all these new jobs generated. I do want to ask
you about the increase in wages. Obviously, it is always good to see
an increase in wages. Of course, nominal wages are only half the
equation, right? You also have to look at rising costs when you look
at real wages. And isn’t it the case that when you look at real
wages and the rise in real wages during the last term of the
Obama administration, real wages rose faster during that period of
time than they have since the beginning of the Trump administration, even with the tax cut? Isn’t that the case?
Mr. POWELL. You know, I just do not look at it in terms of those
timeframes. I would say that—the way I would say it about wages,
if you look back to 2012, if you look at the four major wage and
benefit increases, things that we track, it was around 2 percent. All
of them were right around 2 percent. Now they are at 3 percent
or a little better, and part of that is just that the labor market has
continued to improve since that time.
Senator VAN HOLLEN. Sure. No, of course. But as you testified,
you have also seen an uptick in inflation and costs, right? So the
result for a real American is how much of the increased wages that
are coming in, what the purchasing power of that will be. Anyway,
if you could take a look at that and get back and confirm whether
or not that is true. The figures I have got suggest that you saw a
36
more rapid increase in real wages, again, during the last term of
the Obama administration, which just gets to the point about, you
know, there is a lot of hype about the tax cuts.
Let me ask you about student loans. My colleague just asked you
about that. You just testified that we have got $1.5 trillion in student loans. I think that the Fed just reported that delinquent U.S.
student loans reached a record $166 billion in the fourth quarter
of 2018. You indicated this is putting a lot of stress on students
who were trying to get out there and buy their apartments or rent
their apartments.
Would you be in favor of allowing students to discharge their
debts in bankruptcy just like banks can?
Mr. POWELL. So I think it is important that students be in a position to borrow, to invest in their education. It is important that
they get proper disclosure about what the risks are and what the
success rates are and that kind of thing. It is not a Fed—someone
asked me in this Committee a year or so ago that question, and I
did answer it directly. But I would say it is not really for the
Fed——
Senator VAN HOLLEN. Well, let me ask you, is the impact of student debt in your view impacting the economy in a negative way,
the fact that these students are, you know, stuck as soon as they
graduate trying to pay back loans that they apparently cannot
repay?
Mr. POWELL. Yes, I think for students who cannot repay their
loans, there is a growing amount of research that shows that those
people can have, you know, longer-term negative economic effects.
Of course, some people invest in their education and borrow money
to do it, and it works out very well for them as well. But for those
who do not, it can be quite a negative——
Senator VAN HOLLEN. Well, there are a lot of people who cannot
right now.
Mr. POWELL. That is right.
Senator VAN HOLLEN. You just reported a record delinquency
rate in the last quarter.
The last thing I would say, Mr. Chairman, while I have the
Chairman of the Federal Reserve here, is I am going to keep after
you and your colleagues on this faster payments issue. It makes no
sense to me that Mexico, South Africa, soon the entire European
Union will have immediate ability to clear payments while we do
not. A check cashed on Friday will not clear until the middle of
next week. And millions of Americans are paying a lot more in
terms of late fees and, you know, payday loan interest rates at sort
of loan shark rates because of that. So I hope you will give the
same attention to that issue as you are giving to some of the other
issues you discussed this morning.
Mr. POWELL. Thank you. We will.
Chairman CRAPO. Senator Perdue.
Senator PERDUE. Thank you, Mr. Chairman. And thank you,
Chairman, for being here and for your perseverance. These are big
committees. You have been here a long time. I have two questions
for you.
One, I am always amazed at the economic experts in this Committee and the revisionist views of history, so let me just throw
37
some facts out in leading to a question for you. This recovery is
real. We are growing about 100 basis points more than the last Administration just after 2 years. CBO says if you grow four-tenths
of 1 percent, you more than pay for this tax bill. So those are two
facts.
The second thing is median income is at a historic high. It is the
highest it has ever been in the United States. Five million new jobs
have been created, lowest unemployment in 50 years, lowest African American unemployment ever measured, lowest Hispanic unemployment ever measured.
My concern, though, is with labor issue, with export issues, and
interest rate issues. We have nine Fed fund increases over the last
2 years or so, 21⁄2 years, and with our debt—and this is the question I am trying to get to, and you know where I am going here.
I appreciate the time you gave me recently in a private conversation. The Federal debt really bothers me, and its overhang on the
economy and our ability to drive the economic wherewithal of every
American. The national debt is the greatest threat to national security, according to our military experts, and yet today we just turned
$22 trillion of national debt, if you include all the debt that we
have as a Government.
As I understand it, there is about $200 trillion of debt in the
world; $60 trillion of that is sovereign. We have about a third of
that. Five percent of the world’s population has about a third of all
sovereign debt.
So the question I have—and the projection is in the next—that
increase is 21⁄4 percent, with our size debt technically is about $450
billion of new interest that we have loaded in there. And yet of that
$60 trillion of sovereign debt in the world, about $11 trillion of that
is laid out at negative interest rates. Much of that is in the euro
zone.
My question is: Are there carry-on contagion issues out there
that could negatively impact this recovery and the continuation of
this recovery independent of what we do fiscally or monetarily here
in the U.S. due to these negative interest rates around the world?
Mr. POWELL. I think the negative interest rates that you are seeing are a reflection of kind of a risk-off mood and slower growth
in China and Europe in particular. Europe had a good strong year
in 2017 and then really slowed down over the course of 2018, and
we are seeing some more of that now. So that is, I think, what you
are seeing. I think it really is through slower—slower global
growth for the United States can be a headwind, just as very
strong—2017 was a year of synchronized strong growth really
around the world. It was a very good year, and we were feeling a
tailwind for that. That has now turned into a bit of a headwind for
us.
Our economy, though, I think the outlook for our economy is still
a favorable one, still a positive one. But, nonetheless, this will be
a headwind.
Senator PERDUE. There is a growing debate in Congress now
among some of my colleagues about advocating a change in how
monetary and fiscal policy work together, and these people are advocating a modern monetary theory. They want a spend-now,
spend-later, spend-often policy that would use massive annual defi-
38
cits to fund these tremendously expensive policy proposals such as
Medicare for All, free college for all, make every structure in the
U.S. energy efficient in 10 years, and a universal basic income
whether you are working or not.
Under this landscape, it is proposed that the Fed would keep interest rates artificially low and that fiscal policy would then be
driven by Congress and theoretically manage the business cycle.
What obstacles do you anticipate seeing, and how successful has
fiscal policy been in terms of managing either inflation or interest
rates?
Mr. POWELL. Let me say I have not really seen a carefully
worked out, you know, description of what it meant by MMT, what
you are mentioning. It may exist, but I have not seen it. I have
heard some pretty extreme claims attributed to that framework,
and I do not know whether that is fair or not. But I will say this:
The idea that deficits do not matter for countries that can borrow
in their own currency I think is just wrong. I think U.S. debt is
fairly high at a level of GDP and, much more importantly than
that, it is growing faster than GDP, fairly significantly faster. We
are not even close to primary balance, which means, you know, the
deficit before interest payments. So we are going to have to either
spend less or raise more revenue.
In addition, you know, to the extent people are talking about
using the Fed as a—our role is not to provide support for particular
policies. It is to—and that is central banks everywhere. It is to try
to, you know, achieve maximum employment and stable prices. So
that is really what it is, and I think decisions about spending and
controlling spending and paying for it are really for you.
Senator PERDUE. Thank you.
Chairman CRAPO. Senator Schatz.
Senator SCHATZ. Thank you, Mr. Chairman. Chairman Powell,
thank you for your service. Thank you for your stewardship.
PG&E, California’s largest utility, filed bankruptcy last month,
partly as a result of liability costs from climate-related disasters.
The damage from 2017 and 2018 wildfires exceeded $30 billion,
more than PG&E’s assets and insurance coverage combined. Climate risks threaten many sectors of our economy: real estate, agriculture, fisheries, industries with extensive supply chains. They are
all at risk.
Take coastal real estate as just one example. The U.S. Government currently estimates that storms, floods, erosion, rising sea
level now threaten approximately $1 trillion in national wealth
held in coastal real estate. According to Freddie Mac, ‘‘Some of the
varied impacts of climate change may not be insurable.’’ More than
300,000 coastal homes are at risk of chronic inundation by 2045,
a timeframe that falls well within the timeframe of the 30-year
mortgage. These properties are worth about $117 billion and contribute nearly $1.5 billion toward the property tax base. Banks, insurance companies, and other financial institutions are all exposed
to these risks, and that is why the Bank of England recently announced that it is planning to include the impact of climate change
in its bank stress tests next year.
39
So here is a simple question. It is not a ‘‘gotcha’’ question. Do you
agree that climate change creates financial risks for the individual
financial institutions and for our financial system as a whole?
Mr. POWELL. So let me say we do not formally or directly include
climate change in our supervision, but we do, actually, require financial institutions, particularly those who are more exposed to
natural disasters and that kind of thing, we do require them to understand and manage that particular operating risk.
So, for example, if you are a bank on the southern coast of Florida and you are subject to hurricanes, we definitely require you to
have plans and risk management things in place to deal with those
sorts of things. So you would pick up natural disasters and that
kind of thing which are associated with climate change.
Senator SCHATZ. Do you think your processes and your staff and
your sort of approach to this, which has been built properly over
many, many years and pursuant to the statute, do you think you
are moving fast enough to acknowledge the accelerating risks of climate change over the last 2 or 3 years? Do you think there is room
for you to do a scrub of whether or not you are fulfilling your statutory mandate? Because I get that you are supposed to pick up any
risks related to natural disasters. The question is whether you
have really loaded in the latest information from the scientific community to go back to these banks, to go back to REITs, to go back
to lenders who have either stranded assets or assets in the coastal
area or whose supply chain is particularly dependent on a certain
kind of weather pattern which is not materializing anymore. Do
you think you are doing enough in this space?
Or let me phrase it another way. Are you confident that you are
doing enough in this space?
Mr. POWELL. You know, it is a little bit like cyber risk. You
know, should you ever be confident that you are doing enough in
that space? So I think we—you know, I think we are open—we are
clear-eyed about the nature of coastal risks and natural disaster
risks and that kind of thing. But it is a fair question, and, you
know, we will go back and look at it again.
Senator SCHATZ. Could you please respond in writing as it relates to this specific question?
Mr. POWELL. Sure.
Senator SCHATZ. The Bank of England and 29 central banks and
bank supervisors from around the world are moving toward incorporating climate risk into their supervision of financial institutions.
You know that another part of the Federal Reserve’s mandate is
to engage with its counterparts abroad to address systemic risk. Do
you think the Federal Reserve should be engaging with its international counterparts on this question?
Mr. POWELL. We are in those meetings. We are involved in those
bodies. As I mentioned, we do not formally take climate change
into account in our risks, but I think the consequences are things
that we do supervise for.
Senator SCHATZ. I just think that you have been extraordinary
in terms of your ability to withstand political pressure and look at
the data and do what is right for the health of the economy. I do
not want this to be an exception. I understand that talking about
climate change is fraught with partisan peril and will attract the
40
ire of a certain category of people and institutions. But your job is
to measure risk, and I would submit that you are not measuring
that risk sufficiently.
One final question, if you will indulge me, Chairman Crapo, and
that is, has anybody either directly or indirectly communicated
with you about rates from the White House?
Mr. POWELL. That is kind of a broad question.
Senator SCHATZ. It is a broad question.
Mr. POWELL. You know, I do not really talk about—it is probably
not appropriate to discuss our—my private conversations with
other Government officials, any other Government officials. I would
say I am completely committed to conducting monetary policy in a
way that is nonpolitical and in a way that serves all of the American public. You know, and I am very comfortable and confident
that that is exactly what the Fed is going to do.
Senator SCHATZ. Thank you.
Chairman CRAPO. Senator Reed.
Senator REED. Mr. Chairman, thank you for your distinguished
service.
Senator Brown brought up in his comments your February 6
town hall, where you made it clear that we have to work to make
prosperity more dispersed throughout society. You also indicated
that many of the policies are beyond the purview of the Federal Reserve, but most of them are clearly in the purview of Congress. If
you could, just give us your top three issues that we have to deal
with or can deal with to make equality much more realized in this
country.
Mr. POWELL. Senator, I will go back again to labor force participation, which is just—it is a big win for the overall economy, and
it is also—the people who are not taking part in the labor force are
by and large the less well educated and less skilled or people who
may be in areas where opioids are prevalent and that kind of thing.
So I think a bipartisan focus, a focus on labor force participation
would bring in a lot of policies that would help deal with, you
know, what I see as the problems, which are, you know, sort of relatively stagnant growth in incomes, in median incomes, and also
relatively low mobility. Education, of course, would be at the top
of every list, I think, in addressing these issues as well.
Senator REED. And this could require resources that we would
have to commit, and I think you are aware we are on the cusp of
another debate about sequestration and the share of resources to
defense and nondefense. And, in fact, we are looking at very draconian numbers in terms of the situation with the BCA. But you
would argue that we do have an obligation to make a significant
investment in domestic programs in order to provide for this equality?
Mr. POWELL. I think that it would be great for our country and
for our economy if we could address these issues. Easy for me to
say. I do not have to find the resources.
Senator REED. Thank you.
Let me just turn to another topic which I am very much involved
with: the Military Lending Act. As you know, it puts a 36 percent
cap on interest rates that are charged to men and women in the
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uniform of the United States. The Federal Reserve is one of the
independent regulators charged with its enforcement.
Unfortunately, what we have seen from the CFPB particularly is
a retreat. They are no longer supervising this; they are no longer
using this in their supervisory activities. They will enforce a complaint, but the complaints are seldom made. Most young soldiers do
not even realize, or sailors or marines, that they have this ability
to complain. We are looking at DOD and OMB exempting an insurance product for auto dealers which might result in interest payments far in excess of 36 percent.
Can you commit your continued, strong, and persistent enforcement to the letter of the Military Lending Act?
Mr. POWELL. Yes, it will be a priority for us. I commit to that.
Senator REED. Thank you very much.
There is another issue, too, that I think you have touched upon,
and that is cybersecurity. It seems to be the ubiquitous complaint
of everyone, not just in the financial sector but every sector. And
it seems to me, too, that typically those who are going to exploit
cyber look for the back door, not the front door. They look for the
small institution, not the big Wall Street bank that is spending
$200 million a year on cyberprotections.
How are you dealing with that? How are you and your colleagues
dealing with that, going out and making sure that community
banks and other smaller institutions that might be more vulnerable
are taking the appropriate steps? Is that part of your expected procedures? Are you looking closely at cybersecurity?
Mr. POWELL. Yes, we are, and it is hard because, of course, the
big banks are attacked, too, but they have the resources to deal
with it. And so we deal through FFIEC, you know, which is a body
of the regulators to promulgate guidance. We supervise for that
guidance, and with the smaller banks, it is very important, and,
you know, that is a way—we see that as a real vulnerability, for
example, for the payment system. But we have also got to be mindful of the burden on smaller banks. But it is something we are very
focused on.
Senator REED. Are you focused to the extent of conducting, you
know, red-on-blue exercises, i.e., you know, seeing what is working
out there, seeing where all the connectivity exists or does not exist?
Are you doing that or getting any access to organizations that are
doing that?
Mr. POWELL. We do tabletop exercises, let us say, and these are
led by the Treasury Department. This has been a major focus for
Treasury, and appropriately so, and we take part in them. There
is always the feeling with cyber that you are just not doing enough.
Senator REED. Right. Well, in fact, that feeling is justified.
Mr. POWELL. It probably is.
Senator REED. Unfortunately.
Mr. POWELL. Yeah.
Senator REED. Thank you again for your service, Mr. Chairman.
I appreciate it very much.
Mr. POWELL. Thank you, Senator.
Chairman CRAPO. Thank you, and I am not quite done yet, Mr.
Chairman. I have a couple more questions.
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I would like to go back to the issue of wages. This has been discussed by a number of the Senators with you. In your testimony
and in some of your answers, you indicated that wage growth is at
about 3 percent, and there was some comment by one of the Senators, at least, that the nominal wage growth—or that the current
rate of wage growth may or may not be keeping up with inflation,
if I understand the question you were asked correctly. But if I understand your answers, isn’t wage growth today growing at a faster
rate than inflation?
Mr. POWELL. Yes. Real wages are going up at—you have to look
at the average over a year or so, and you have got to look at a
broad range of indicators. There is no question that wages are
going up in real terms by roughly the amount of the productivity
increase, which is appropriate.
Chairman CRAPO. And in your use of the term ‘‘wages,’’ do you
include benefits? Or is there a separate calculation on how benefits——
Mr. POWELL. There are four different—there are countless measures of wages, of compensation, let us say. One of them that includes wages and benefits is the Employee Compensation Index,
and that might be our single favorite one. It is one of four major
ones that we look at. So that one does include benefits, and it, too,
is showing growth in excess of right around 3 percent, maybe in
the low 3’s now.
Chairman CRAPO. All right. Thank you.
We have also—in fact, I had discussed with you earlier some aspects of the labor force participation rate. Now, I understand that
just the retirement—or the Baby Boomers retiring is one of the biggest downward pressures in our labor force participation rate, and
I started to have a discussion with you in my earlier questions
about now that we have seen that labor force participation rate
start to increase, whether that would be stable or not. Could you
just discuss a little more with me your evaluation of what it looks
like for us in terms of labor force participation in general? And I
may follow up on that a little bit.
Mr. POWELL. Yes. So I would say it is very gratifying to see U.S.
labor force participation actually move up by 0.5 over the course of
the last year as the labor market has gotten just stronger and
stronger and stronger. So that has been a great thing to see.
Given the level of job creation that we have had, if labor force
participation had not gone up, then the unemployment rate would
now be much lower than it is. So the unemployment rate has actually gone up to 4 percent from 3.7 percent, but this is only a good
thing because it means people are coming back into the labor force.
The real thing, though, is even with these increases, we still lag
other countries. We still lag other countries who have higher labor
force participation. You pointed out, correctly, that the aging of the
population is decreasing labor force participation at a trend rate,
and that trend rate is about 0.2 or maybe 0.25 percent every year.
So for us just to hold participation flat is actually a gain against
a longer-run trend. And really for the last—really since 2013, since
the latter part of 2013, labor force participation has been flat to
slightly up, which, again, is really good to see. But, honestly, that
is just a consequence of having a really good labor market.
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I think if you are going to have that be sustained through good
times and bad and put us on a more competitive footing with other
countries, it is going to need more than a good labor market. It is
going to need policies that reach out and, you know, give people the
skills and aptitudes to be able to be sustainably in the labor market.
Chairman CRAPO. All right. Thank you. I cannot remember
where I read this, but someone commented recently that today, the
way our labor market is working, if a person wants to work, there
is a job for them. Do you tend to agree with that observation?
Mr. POWELL. Generally speaking, although, you know, if you are
in some regions, for example, there are regions of the country
which are very poor and do not have job creation. I will tell you
where that comes from. The level of job openings is now at or above
the level of unemployed people. So you can say in a sense if you
are looking for a job, there is at least numerically one job. But
there are lots of people who—you know, probably millions of people
who are out of the labor force and in a perfect world, in a better
world, would be in the labor force. They are in their prime working
years, and they are not in the labor force because of some kind of
a problem or issue, and I think those are the people we want to
get back.
Chairman CRAPO. All right. Thank you.
Just to switch topics for a minute, we have seen, I think you indicated, a little bit under 3 percent growth in our GDP in the last
year. I guess on Thursday we are going to get some economic analysis that will give us some statistics on that.
One of my colleagues indicated today that, with regard to the tax
bill that was passed, there was a lot said—I am not going to ask
you to comment on this. I am just putting some facts out there.
There was a lot said about how the tax bill would generate a $1.4
trillion deficit. That projection assumed somewhere in the neighborhood of 1.9 or 2 percent growth in the economy. And it was indicated at the time from all of the analysis we got that, if we just
had four-tenths of a percentage rate of growth above that, there
would not be any deficit involved with the tax legislation. And, of
course, we have seen far more than four-tenths of growth so far in
terms of the performance of the economy.
So that leads to my question, and I know that you do not have
a crystal ball, but you do analyze what it looks like for the economy. And my question relates to given what we have seen, we have
seen a growth of about almost a percentage point in the GDP over
the last 12 months, or previous growth rates, if I understand it
right. Do you have a projection or do you have anything that you
can share with us about what you see moving forward as to whether the economy will continue to perform? I know you said that it
may slow down a little bit this year. But do you have a projection
as to what it would likely look like over the next few years in terms
of GDP growth?
Mr. POWELL. I think a good place to start with that question is
what makes up growth, and it really boils down to more hours
worked and then more output per hour. That is really all there is.
And more hours worked is really a function of population growth.
Population growth has slowed—or let us say it this way: The trend
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growth in the labor force, given aging and given immigration and
everything we have, is only about five-tenths right now. And, actually, if immigration is going to be even lower, then it is going to
be below five-tenths. Immigration has made up, you know, half of
that five-tenths. So that is one piece of it. It is 0.5 percent trend
labor force growth. The rest is just productivity. No one can forecast productivity growth with any confidence. All we can really do
is create policies that will, you know, encourage investment, encourage innovation, and all those sorts of things, and let productivity happen as it will. It is something that just happens.
But if you look at longer-term averages, it has been very difficult
to predict. But you would have to have sustained high productivity—if you are going to have five-tenths labor force growth, you
would have to have, you know, very high sustained productivity,
higher than we have seen, frankly, to get really high levels of
growth. That is why I think it is so important to focus on both of
those two things—labor force participation and also productivity.
That is the closest to anything we can focus on to raise our potential growth rate.
Chairman CRAPO. Well, thank you. And in terms of increasing
labor force participation, I know there are a lot of factors. One that
has been brought up here today already is to perhaps change our
policy at the policy level so that a person who takes a job, who is
not currently employed, a person who is willing to go take one of
those jobs and become productive in the labor force does not actually economically suffer from that decision based on the safety net
program support that the Government is already providing.
I am not going to ask you to comment on policy, but is it correct
that if we were to eliminate or reduce the incentive to stay unemployed because of the disadvantage economically of relying on
wages rather than benefits, we would increase labor force participation?
Mr. POWELL. I think incentives do matter, and I think—I mean,
I would think if you go back to work, your pay should only go up,
in my perfect-world thinking. Again, easy for me to say, but that
is how I would say it.
Chairman CRAPO. All right. Thank you.
Switching gears one more time, and then I will wrap it up. Housing finance reform. As I am sure you have seen, there is a very significantly increased emphasis on housing finance reform, both on
this Committee and I think in Congress in general, as well as at
the level of the Administration. In 2017, you gave a speech in
which you outlined a few principles that you saw for how we
should approach housing finance reform, and I am just going to
quote what you said: ‘‘Do whatever we can to make the possibility
of future housing bailouts as remote as possible; to change the system to attract large amounts of private capital, and that any guarantee should be explicit and transparent and should apply to securities, not to institutions; and to identify and build upon areas of
bipartisan agreement.’’
Do you still agree with those principles and how to approach it?
Mr. POWELL. I sure do.
Chairman CRAPO. Good. I agree with them, too. Strongly. And we
are going to be very aggressively trying to put together a bipartisan
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solution to this here on this Committee and in Congress in general.
And I just would like to ask you, first of all, if you will commit to
work with this Committee in our efforts to build the right solution
to this issue; and then, second, any other comments you might
want to make about how our Nation should approach housing finance reform. And I would ask you also to discuss how getting this
fixed could impact our economy and could impact growth.
Mr. POWELL. So I do think—and I said this in those remarks. I
think that this is one of the big unfinished pieces of business in
kind of the postcrisis reform period. Fannie and Freddie had to be
taken over by the Government fairly early on in the financial crisis.
It was a big part of the financial crisis. And I think we have—I
think the proposals that you have had in the past and I am sure
the one you will have this year, I think they all have the right elements there. It is just a question of getting something done. And
I think it would be really good for the economy to get this off the
Fed’s—sorry, off the Federal Government’s balance sheet and get
a lot of private capital between the taxpayer and the housing risk,
if you will.
So I think it would be a very positive thing for the economy, and,
of course, we will be delighted to work with you. I think we have
some very strong, experienced staffers in the housing area, and we
would be happy to provide whatever expert help we can.
Chairman CRAPO. All right. Thank you. And I know I said that
was the last one, but this is really the last one. Again, shifting subjects, you have testified today that there are some pretty positive
things going on in our economy right now and that we are in a relatively good position on a lot of factors.
In terms of risks to our economy, could you just tell me what you
think are some of the bigger risks we should keep in mind?
Mr. POWELL. I do think that the baseline outlook is a good one,
favorable one. There are always risks, though, and as I mentioned,
I do see the foreign risks as particularly relevant right now. So
global growth has slowed. It has slowed in China. It has slowed
particularly in the advanced economies and particularly in Europe.
When growth is booming around the world, we feel that as a tailwind. When growth is slowing, we feel it as a headwind. And I
think we are feeling some of that now, and we may feel more of
it. So that is a risk.
Brexit is an event risk, which should not in the end have much
of an effect on our economy, but it is something we are monitoring
very carefully.
You know, domestically, I think we are in good shape. Unemployment is low. Confidence is still at positive levels. So I feel like, you
know, we have the makings of a good outlook, and as I said, our
Committee is really monitoring the crosscurrents, we call them,
which are really the risks. And for now we are going to be patient
with our policy and allow things to take time to clarify.
Chairman CRAPO. All right. Well, thank you. And I know I speak
on behalf of the Committee. We appreciate the dedication of you
and the other Governors at the Federal Reserve. We all want to
have this economy stay strong and grow stronger, and we look forward to making sure that we can achieve the right policies and
help together to make that happen.
46
My last closing comment would be I echo the concerns—or not
the concerns, really, but the issues raised by some of my colleagues
about the implementation of S. 2155. I know you are working
very—you just said it was the highest priority maybe at the Fed
right now on the oversight level. But I would just encourage you
to move ahead expeditiously on those issues. A number have been
raised already. I will reiterate our concern that we move as quickly
as we can on the implementation of the requirements and the principles of S. 2155 with regard to those financial facilities, banks
under $100 billion, and getting the stress testing levels for them
at the right point.
If you want to comment on that, you are welcome to. If not, I will
wrap up the hearing.
Mr. POWELL. I might add one thing to my last comment, if I
could.
Chairman CRAPO. Sure.
Mr. POWELL. I would want to leave you with the thought that
when I say we are going to be patient, what that really means is
that we are in no rush to make a judgment about changes in policy.
We are going to be patient. We are going to allow the situation to
evolve, and also the balance of risks and allow the data to come
in. And I think we are in a very good place to do that.
Chairman CRAPO. All right. Thank you. I appreciate that perspective, and once again, thank you for being here with us today.
That does conclude the questioning for today’s hearing, and for
Senators who wish to submit questions for the record, those questions are due on March 5th, Tuesday.
Chairman Powell, we ask that you respond to those questions as
promptly as you can. Once again, thank you for being here, and
this hearing is adjourned.
Mr. POWELL. Thank you, Senator.
[Whereupon, at 12:15 p.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and additional material supplied for the record follow:]
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PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
We welcome Chairman Powell to the Committee for the Federal Reserve’s Semiannual Monetary Policy Report to Congress.
This hearing provides the Committee an opportunity to examine the current state
of the U.S. economy, the Fed’s implementation of monetary policy, and its supervisory and regulatory activities.
In the wake of the 2008 financial crisis, the Fed entered a period of unconventional monetary policy to support the U.S. economy, including drastically cutting interest rates and expanding its balance sheet.
I have long been concerned about the Fed’s quantitative easing programs and the
size of its balance sheet.
As economic conditions improved, the Fed began trying to normalize monetary
policy, including by gradually reducing the size of its balance sheet.
The Fed’s balance sheet grew to $4.5 trillion from around $800 billion between
2007 and 2015, and now stands at around $4 trillion.
During the press conference following the FOMC’s most recent meeting, Chairman
Powell provided additional clarity on the Fed’s plans to normalize monetary policy,
saying ‘‘ . . . the ultimate size of our balance sheet will be driven principally by
financial institutions’ demand for reserves, plus a buffer so that fluctuations in reserve demand do not require us to make frequent sizeable market interventions.’’
Estimates of the level of reserve demand are quite uncertain, but we know
that this demand in the postcrisis environment is far larger than before.
High reserve holdings are an important part of the stronger liquidity position that financial institutions must now hold . . .
. . . The implication is that the normalization of the size of the portfolio
will be completed sooner, and with a larger balance sheet, than in previous
estimates.
Banks’ reserve balances grew from $43 billion in January 2008 to a peak of $2.8
trillion in 2014 before falling to $1.6 trillion as of January 2019.
During this hearing, I look forward to understanding more about: what factors the
Fed may consider in determining what is the appropriate size of the balance sheet;
what factors have affected banks’ demand for reserves, including the Fed’s postcrisis
regulatory framework; and what amount of reserves are estimated to be necessary
for the Fed to achieve its monetary policy objective.
The state of the U.S. economy is a key consideration in the Fed’s monetary policy
decisions.
The U.S. economy remains strong with robust growth and low unemployment.
Despite everyone telling us prior to tax reform that annual growth would be stuck
below 2 percent as far as the eye could see, the economy expanded at an annualized
rate of 3.4 percent in the third quarter of last year, following growth of 4.2 percent
and 2.2 percent in the second and first quarters of 2018, respectively, according to
the Bureau of Economic Analysis.
This strong growth, which is on track to continue to exceed previous expectations,
will now provide our policymakers with much greater flexibility to address other fiscal challenges than if we were continuing to struggle with insufficient growth.
And, according to the Bureau of Labor Statistics, the unemployment rate has remained low and steady around 4 percent while the U.S. economy added 223,000 jobs
per month on average in 2018, as well as 304,000 jobs in the first month of this
year.
People continue to enter the labor force with the labor participation rate increasing to 63.2 percent from 62.7 percent over the last year.
Reinforcing this strong employment environment, Fed Vice Chairman Rich
Clarida said in a recent speech that ‘‘the labor market remains healthy, with an unemployment rate near the lowest level recorded in 50 years and with average
monthly job gains continuing to outpace the increases needed over the longer run
to provide employment for new entrants to the labor force.’’
Major legislation passed through this Committee and enacted last Congress supported economic growth and job creation.
The Economic Growth, Regulatory Relief and Consumer Protection Act passed
Congress with significant bipartisan support and was enacted to right-size regulation and redirect important resources to local communities for homebuyers, individuals, and smaller businesses.
I appreciate the work the Fed has done so far to introduce proposals and finalize
rules required by the law.
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Overseeing the full implementation of that law and the Federal banking agencies’
rules to right-size regulations will continue to be a top priority of the Committee
this Congress.
In particular, the Fed and other banking regulators should consider whether the
Community Bank Leverage Ratio should be set at 8 percent as opposed to the proposed 9 percent; significantly tailor regulations for banks with between $100 billion
and $250 billion in total assets with a particular emphasis on tailoring the stress
testing regime; provide meaningful relief from the Volcker Rule for all institutions,
including by revising the definition of ‘‘covered funds’’ and eliminating the proposed
accounting test; and examine whether the regulations that apply to the U.S. operations of foreign banks are tailored to the risk profile of the relevant institutions
and consider the existence of home country regulations that apply on a global basis.
The Committee will also look for additional opportunities to support policies that
foster economic growth, capital formation, and job creation.
Turning for a moment to another issue, Senator Brown and I issued a press release on February 13 inviting stakeholders to submit feedback on the collection, use,
and protection of sensitive information by financial regulators and private companies, including third parties that share information with regulators and other private companies.
Americans are rightly concerned about how their data is collected and used, and
how it is secured and protected.
Given the exponential growth and use of data, and corresponding data breaches,
it is also worth examining how the Fair Credit Reporting Act should work in a digital economy, and whether certain data brokers and other firms serve a function
similar to the original consumer reporting agencies.
The Banking Committee plans to make this a major focus this Congress, and we
encourage stakeholders to submit feedback by our March 15 deadline.
Lastly, I want to take a moment to recognize one of our staff members who is
retiring this week.
Dawn Ratliff is the Committee’s Chief Clerk, and she will be retiring at the end
of the week.
She has dedicated 27 years in these hallways, and has been with the Senate
Banking Committee since 2007, starting with then-Chairman Chris Dodd, and then
working for Chairman Tim Johnson, Chairman Shelby, and now myself.
Dawn is a Banking Committee institution—she is incredibly knowledgeable, helpful, and professional, respected and well-liked by everyone with whom she works.
Dawn, your work on the Committee has truly made a lasting impact, and even
though you will be gone, you will not be forgotten anytime soon.
We wish you the best of luck in your well-earned retirement. Enjoy it.
PREPARED STATEMENT OF SENATOR SHERROD BROWN
Thank you, Chairman Crapo.
I also want to thank our Chief Clerk Dawn Ratliff for her service to this Committee and the public. She has been instrumental in making the Committee run
smoothly for over a decade. Dawn, we will miss you, and congratulations on your
retirement.
Chairman Powell, welcome back to the Committee.
It has been a great week for Wall Street.
The FDIC announced that banks made a record-breaking $237.7 billion in profits
in 2018, almost a quarter trillion dollars.
Corporations—led by the Nation’s largest banks—bought back a record $1 trillion
in stocks last year, conveniently boosting their CEOs compensation. The President’s
tax bill put $30 billion in the banks’ pockets, and continues to fuel even more
buybacks and CEO bonuses.
But that’s never enough for Wall Street—it continues to demand weaker rules, so
big banks can take bigger and more dangerous risks. And from the proposals the
Fed has put out after the passage of S. 2155, it looks like you are going along.
The economy looks great from a corporate headquarters on Wall Street, but it
doesn’t look so good from a house on Main Street.
Corporate profits are up. Executive compensation has soared. And that’s all because of the productivity of American workers. But workers’ wages have barely
budged. Hard work isn’t paying off for the people fueling all this growth.
Seven of the 10 fastest growing occupations don’t pay enough to afford rent on
a modest one-bedroom apartment, let alone save for a downpayment.
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Household debt continues to rise, taking its toll on families. At the end of 2018,
seven million Americans with auto loans were 90 or more days past due on their
payments—a record, even though unemployment is at decade lows.
Borrowers of color have not recovered financially from the crisis. And too many
Americans of all ages are saddled with a mountain of student loan debt.
The President’s Government shutdown also revealed another frightening reality—
too many Americans, still live paycheck to paycheck, even those with stable jobs.
After 35 days of uncertainty and hardship, those workers went back to their jobs
and eventually received their pay. But more than a million Government contractors
weren’t so lucky. We’re talking in many cases about custodians and security guards
and cafeteria workers making $12 or $15 an hour. We have heard a lot of talk about
whether GDP will recover from the shutdown, and not enough about how workers
will recover.
We have questioned for quite a while whether the economic recovery—now in its
10th year—has been felt by all Americans. Stagnating wages and increasing income
inequality between Wall Street CEOs and working Americans point to an obvious
answer.
Chair Powell, your comments at the February 6th Fed town hall for educators
confirmed this. A teacher asked about your major concerns for the U.S. economy,
and you answered:
We have some work to do more to make sure that prosperity that we do
achieve is widely spread. ( . . . ) median and lower levels of income have
grown, but much more slowly. And growth at the top has been very strong.
‘‘Growth at the top has been very strong.’’ In other words, the CEOs, the folks
on Wall Street, they’re all doing just fine.
Chair Powell, the Fed has spent a decade bending over backwards to help banks
and big corporations that have hoarded profits for themselves rather than investing
in the millions of workers who actually make our companies successful.
We are late in this economic cycle, and it is clear that record Wall Street profits
won’t be trickling down to workers before the next downturn.
Before the last crisis, we heard over and over again from Government officials and
banks that the economy was doing fine. Regulators and Congress continued to weaken rules for Wall Street, and ignored the warning signs as families struggled to
make ends meet.
As the severity of the financial crisis became clear, the Fed rushed to the aid of
the biggest banks, but it did not devote even a fraction of that firepower to helping
the rest of America. Ignoring working families was a policy failure then, and it is
a policy failure now.
Chair Powell, I hope we don’t make the same mistake again. I look forward to
your testimony and new ideas for making hard work pay off for everyone in our
economy.
PREPARED STATEMENT OF JEROME H. POWELL
CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
FEBRUARY 26, 2019
Good morning. Chairman Crapo, Ranking Member Brown, and other Members of
the Committee, I am happy to present the Federal Reserve’s Semiannual Monetary
Policy Report to the Congress.
Let me start by saying that my colleagues and I strongly support the goals Congress has set for monetary policy—maximum employment and price stability. We
are committed to providing transparency about the Federal Reserve’s policies and
programs. Congress has entrusted us with an important degree of independence so
that we can pursue our mandate without concern for short-term political considerations. We appreciate that our independence brings with it the need to provide
transparency so that Americans and their representatives in Congress understand
our policy actions and can hold us accountable. We are always grateful for opportunities, such as today’s hearing, to demonstrate the Fed’s deep commitment to transparency and accountability.
Today I will review the current economic situation and outlook before turning to
monetary policy. I will also describe several recent improvements to our communications practices to enhance our transparency.
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Current Economic Situation and Outlook
The economy grew at a strong pace, on balance, last year, and employment and
inflation remain close to the Federal Reserve’s statutory goals of maximum employment and stable prices—our dual mandate.
Based on the available data, we estimate that gross domestic product (GDP) rose
a little less than 3 percent last year following a 2.5 percent increase in 2017. Last
year’s growth was led by strong gains in consumer spending and increases in business investment. Growth was supported by increases in employment and wages, optimism among households and businesses, and fiscal policy actions. In the last couple of months, some data have softened but still point to spending gains this quarter. While the partial Government shutdown created significant hardship for Government workers and many others, the negative effects on the economy are expected
to be fairly modest and to largely unwind over the next several months.
The job market remains strong. Monthly job gains averaged 223,000 in 2018, and
payrolls increased an additional 304,000 in January. The unemployment rate stood
at 4 percent in January, a very low level by historical standards, and job openings
remain abundant. Moreover, the ample availability of job opportunities appears to
have encouraged some people to join the workforce and some who otherwise might
have left to remain in it. As a result, the labor force participation rate for people
in their prime working years—the share of people ages 25 to 54 who are either
working or looking for work—has continued to increase over the past year. In another welcome development, we are seeing signs of stronger wage growth.
The job market gains in recent years have benefited a wide range of families and
individuals. Indeed, recent wage gains have been strongest for lower-skilled workers. That said, disparities persist across various groups of workers and different
parts of the country. For example, unemployment rates for African Americans and
Hispanics are still well above the jobless rates for whites and Asians. Likewise, the
percentage of the population with a job is noticeably lower in rural communities
than in urban areas, and that gap has widened over the past decade. The February
Monetary Policy Report provides additional information on employment disparities
between rural and urban areas.
Overall consumer price inflation, as measured by the 12-month change in the
price index for personal consumption expenditures (PCE), is estimated to have been
1.7 percent in December, held down by recent declines in energy prices. Core PCE
inflation, which excludes food and energy prices and tends to be a better indicator
of future inflation, is estimated at 1.9 percent. At our January meeting, my colleagues and I generally expected economic activity to expand at a solid pace, albeit
somewhat slower than in 2018, and the job market to remain strong. Recent declines in energy prices will likely push headline inflation further below the Federal
Open Market Committee’s (FOMC) longer-run goal of 2 percent for a time, but aside
from those transitory effects, we expect that inflation will run close to 2 percent.
While we view current economic conditions as healthy and the economic outlook
as favorable, over the past few months we have seen some crosscurrents and conflicting signals. Financial markets became more volatile toward year end, and financial conditions are now less supportive of growth than they were earlier last year.
Growth has slowed in some major foreign economies, particularly China and Europe. And uncertainty is elevated around several unresolved Government policy
issues, including Brexit and ongoing trade negotiations. We will carefully monitor
these issues as they evolve.
In addition, our Nation faces important longer-run challenges. For example, productivity growth, which is what drives rising real wages and living standards over
the longer term, has been too low. Likewise, in contrast to 25 years ago, labor force
participation among prime-age men and women is now lower in the United States
than in most other advanced economies. Other longer-run trends, such as relatively
stagnant incomes for many families and a lack of upward economic mobility among
people with lower incomes, also remain important challenges. And it is widely
agreed that Federal Government debt is on an unsustainable path. As a Nation, addressing these pressing issues could contribute greatly to the longer-run health and
vitality of the U.S. economy.
Monetary Policy
Over the second half of 2018, as the labor market kept strengthening and economic activity continued to expand strongly, the FOMC gradually moved interest
rates toward levels that are more normal for a healthy economy. Specifically, at our
September and December meetings we decided to raise the target range for the Federal funds rate by 1⁄4 percentage point at each, putting the current range at 21⁄4 to
21⁄2 percent.
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At our December meeting, we stressed that the extent and timing of any further
rate increases would depend on incoming data and the evolving outlook. We also
noted that we would be paying close attention to global economic and financial developments and assessing their implications for the outlook. In January, with inflation pressures muted, the FOMC determined that the cumulative effects of these developments, along with ongoing Government policy uncertainty, warranted taking a
patient approach with regard to future policy changes. Going forward, our policy decisions will continue to be data dependent and will take into account new information as economic conditions and the outlook evolve.
For guideposts on appropriate policy, the FOMC routinely looks at monetary policy rules that recommend a level for the Federal funds rate based on measures of
inflation and the cyclical position of the U.S. economy. The February Monetary Policy Report gives an update on monetary policy rules. I continue to find these rules
to be helpful benchmarks, but, of course, no simple rule can adequately capture the
full range of factors the Committee must assess in conducting policy. We do, however, conduct monetary policy in a systematic manner to promote our long-run goals
of maximum employment and stable prices. As part of this approach, we strive to
communicate clearly about our monetary policy decisions.
We have also continued to gradually shrink the size of our balance sheet by reducing our holdings of Treasury and agency securities. The Federal Reserve’s total assets declined about $310 billion since the middle of last year and currently stand
at close to $4.0 trillion. Relative to their peak level in 2014, banks’ reserve balances
with the Federal Reserve have declined by around $1.2 trillion, a drop of more than
40 percent.
In light of the substantial progress we have made in reducing reserves, and after
extensive deliberations, the Committee decided at our January meeting to continue
over the longer run to implement policy with our current operating procedure. That
is, we will continue to use our administered rates to control the policy rate, with
an ample supply of reserves so that active management of reserves is not required.
Having made this decision, the Committee can now evaluate the appropriate timing
and approach for the end of balance sheet runoff. I would note that we are prepared
to adjust any of the details for completing balance sheet normalization in light of
economic and financial developments. In the longer run, the size of the balance
sheet will be determined by the demand for Federal Reserve liabilities such as currency and bank reserves. The February Monetary Policy Report describes these liabilities and reviews the factors that influence their size over the longer run.
I will conclude by mentioning some further progress we have made in improving
transparency. Late last year we launched two new publications: The first, Financial
Stability Report, shares our assessment of the resilience of the U.S. financial system, and the second, Supervision and Regulation Report, provides information about
our activities as a bank supervisor and regulator. Last month we began conducting
press conferences after every FOMC meeting instead of every other one. The change
will allow me to more fully and more frequently explain the Committee’s thinking.
Last November we announced a plan to conduct a comprehensive review of the
strategies, tools, and communications practices we use to pursue our congressionally
assigned goals for monetary policy. This review will include outreach to a broad
range of stakeholders across the country. The February Monetary Policy Report provides further discussion of these initiatives.
Thank you. I am happy to respond to questions.
52
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM JEROME H. POWELL
Q.1. Last month I sent the Board of Governors a letter asking it
to reevaluate the countercyclical capital buffer, currently set at
zero. Banks are doing well, but there are certainly growing risks
in the economy. Now is the time to ensure that the banks have
enough capital for those eventual bad times, and many of your colleagues on the Board and at the Reserve Banks agree. I have not
received a response.
When will the Fed raise the buffer?
A.1. As stated in the Federal Reserve Board’s (Board) policy statement, we will raise the countercyclical capital buffer when systemic
vulnerabilities are meaningfully above normal. 1 At this time, the
Board assesses the resilience of the financial system overall to be
strong. Our forward-looking stress tests indicate that the institutions at the core of the financial system—the Nation’s largest
banks—will be able to continue to support lending and economic
activity during severe macroeconomic and stressed market scenarios. The Board recently voted to maintain the level of the countercyclical capital buffer at zero. 2
Q.2. Earlier this month the Board suspended stress testing for
bank holding companies between $100 billion and $250 billion in
total assets. Meanwhile you have not finalized rules for how this
same group of banks will be regulated after passage of S. 2155.
Will you commit to me that these institutions will be required to
participate in the 2020 stress testing cycle?
A.2. As noted in the October 31, 2018, Notice of Proposed Rulemaking, domestic bank holding companies subject to Category IV
standards (those with total assets between $100–$250 billion and
less than $75 billion in cross-jurisdictional activity, nonbank assets,
weighted short-term wholesale funding, and off-balance sheet exposure) would be subject to supervisory stress testing on a 2-year
cycle. The exemption from the 2019 stress test cycle for domestic
bank holding companies with assets of between $100 and $250 billion with a limited risk profile was intended to provide these banks
with immediate burden relief, consistent with the requirement in
S. 2155 that they be subject to periodic rather than annual stress
tests. Under the Board’s current rules, these banks will be subject
to stress tests in 2020.
Q.3. Related, in the form letters to each of the firms exempted from
the stress tests, the Board indicated that in assessing the company’s risk profile, the Board takes into consideration the company’s size, scope of operations, activities, and systemic importance. Yet, these factors vary greatly between all of the exempted
firms—for example: nonbank assets range from $0.2 billion to $65.6
billion; off balance sheet exposures range from $4.7 billion to $45.8
billion, and cross-jurisdictional activity range from $0.1 billion to
1 Regulatory Capital Rules; The Federal Reserve Board’s Framework for Implementing the
U.S. Basel III Countercyclical Capital Buffer, 12 CFR Part 217, Appendix A.
2 Minutes of the Federal Open Market Committee, November 7–8, 2018, p.8. For additional
detail on the Federal Reserve’s framework for assessing vulnerabilities in the U.S. financial system,
see
Board
(2018),
Financial
Stability
Report,
November
28,
https://
www.federalreserve.gov/publications/files/financial-stability-repmt-201811.pdf.
53
$48.1 billion. It looks like the Board categorically exempted companies within a certain asset threshold without considering each
firm’s particular risk profile.
How does the Board explain why all of these firms, which range
in complexity, have received the same treatment when it comes to
2019 stress testing?
A.3. On February 5, 2019, the Board provided certain domestic
bank holding companies with assets of between $100 billion and
$250 billion and certain U.S. intermediate holding company subsidiaries of foreign banking organizations with assets of less than
$250 billion relief from all regulatory requirements related to annual supervisory and company-run stress testing for the 2019
stress test cycle and from the requirement to submit a capital plan
to the Board on April 5, 2019. In providing this relief, the Board
considered each firm’s asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets, and off-balance sheet exposure. These factors may, individually or in combination, reflect greater complexity and risk to a banking organization
and can, depending on the firm, result in greater risk to the financial system. The Board also considered reports of examination and
other supervisory information, including a 2018 review of each
film’s Comprehensive Capital Analysis and Review (CCAR) capital
plan and capital planning processes, and the results of the Board’s
2018 Dodd–Frank Annual Stress Testing (DFAST) supervisory
stress test, as well as other publicly reported information. Each of
these firms received notice in 2018 that the Federal Reserve did
not object to its capital plan or planned capital actions. Our analysis suggested that the 2018 DFAST stress tests remained an adequate assessment of the risks of each of these firms and that no
firm had risks that would warrant an additional DFAST stress test
in 2019.
Q.4. The Fed has recently finalized proposals to make stress testing more transparent, providing more information to the financial
institutions in advance.
Why is the Fed making it easier for the largest, most complex
banks to pass their stress tests, which are one of the most important tools enacted after the crisis to ensure that institutions have
enough capital to withstand a severe economic shock?
A.4. The model disclosure enhancements increase the transparency
of the stress test, but do not make the stress test exercise easier
for firms. The stress test is one of our most important and effective
tools. The high level of credibility of the stress test has been built
over the years, in part, through careful and regular efforts to improve the transparency of the test.
We believe that our new disclosures would further enhance the
public’s understanding of the DFAST and CCAR supervisory stress
test models without undermining the effectiveness of the tool. The
new model disclosures include more detail about these supervisory
models and methodologies, which may help the public understand
and interpret the results of the stress test and thereby improve
public and market confidence in the financial system.
These disclosures may facilitate public comments on the models,
including those from academic experts, which could lead to data
54
improvements and a better understanding of the risks of particular
loan types. They also may help financial institutions better understand the capital implications of changes to their business activities
by providing general information about how the Federal Reserve’s
models treat broad classes of assets.
We carefully designed the new model disclosures to avoid allowing firms to see the full models. In particular, the amount of detail
we provide in the model disclosures would not facilitate a firm
making incremental modifications to its business practices that
have little effect on its risk profile, but could materially change its
DFAST and CCAR supervisory stress test results.
The information in the model disclosures also is not detailed
enough to enable a firm to minimize stress test losses by optimizing credit allocations across geographies or industries, as that
type of regulatory arbitrage could have unintended consequences
for credit availability.
We will continue to seek feedback on our DFAST and CCAR
stress test from a wide range of stakeholders. The Board recently
announced that it will host a stress testing conference in July that
will be open to the public. During the conference, we expect that
a number of stakeholders, including academics, public interest representatives, and financial sector representatives, will share their
thoughts on certain aspects of the stress test program, including
our current level of transparency.
Q.5. In response to my question related to maximum employment,
you replied that wages are considered as part of the maximum employment mandate.
Does the Fed consider the level of wages and benefits and whether those levels allow the employee to fully participate in the economy?
A.5. The Federal Open Market Committee considers a wide variety
of economic indicators in assessing the level of maximum employment, including information on wages and benefits. The appropriate level of wages and benefits for any given type of work is best
left to the interactions between firms demanding and workers supplying that type of work under the regulations and institutions
that govern behavior in the labor market. Average increases in
wages and benefits in the economy provide, in conjunction with
many other macroeconomic indicators, information about the balance between the overall demand and supply of labor and the presence, or absence, of inflationary pressures. The increase in the pace
of wage gains over the past few years has been a welcome development that has signaled a strengthening in the labor market and
helped move inflation toward our 2 percent objective.
Q.6. In your testimony, you describe that real wages are slightly
rising, but indicate that some of the longer-term challenges to our
economy are stagnant incomes and lack of upward economic mobility.
Do you expect wages to continue to rise in ways that are meaningful to address concerns about stagnant incomes and lack of economic mobility? How much will wages need to rise to reverse this
trend?
55
A.6. In the aggregate, the pace of wage gains has been gradually
improving. With wages now rising at a rate of roughly 3 percent
per year, and with inflation near 2 percent, we should see real
wage gains of about 1 percent per year. That is slightly better than
the pace we saw through most of the current expansion, and cumulated over time, such gains are meaningful. One important reason
we have not seen larger real wage increases is that productivity
growth has been relatively weak during this economic recovery.
I would emphasize that those are aggregate wage figures, which
apply to Americans as a whole, but do not speak to issues of income distribution or of economic mobility. As you know, I believe
those issues are of central importance to the well-being of American families; together with productivity, they determine living
standards for the bulk of our population. I encourage policymakers
to devote attention to policies to help strengthen productivity
growth as well as improve mobility and income distribution. Such
policies are largely beyond the scope of monetary policy, but the
Federal Reserve is committed to fulfilling the maximum employment element of our congressional mandate.
Q.7. As inflation hovers near the Fed’s target, a recent San Francisco Fed report noted that one component of that, ‘‘acyclical’’ inflation, had large effects. The report indicated cellular telephone services and financial services charges and fees including ‘‘charges for
deposit accounts, credit card services, and ATMs . . . ’’ made up
about half of the increase in that component. 1 Financial services
fees rose by 10 percent in the year prior to this report, and likely
disproportionately affected lower income workers and their families.
Are you concerned that financial services fees make up a significant portion of inflation? If financial services fees are a significant
contributor to inflation, and the Fed is responsible both for monetary policy and regulation of financial services, how is the Fed coordinating its efforts to ensure that inflation is not disproportionately borne by workers whose incomes have been stagnant for
years?
A.7. The measure of financial service charges and fees that was
noted in the Federal Reserve Bank of San Francisco report encompasses charges and fees associated with deposit accounts and credit
cards (e.g., overdraft and ATM fees, membership fees), as well as
some other items such as postal money orders. The price index for
this expenditure category posted large increases in late 2017 and
early 2018, contributing noticeably to inflation over the 12-month
period noted in the report. Notably, that increase followed a period
of smaller price increases. Considering the 5-year period ending
December 2018, increases in this category of prices averaged 3.1
percent per year, which is above overall inflation, but not enormously so.
We recognize that bank fees can be a burden on low-income
Americans. In 2017, according to an FDIC survey, about one-quarter of unbanked households indicated that high bank account fees
were among the reasons they did not have an account. Other more
commonly cited reasons were not having enough money to keep in
1 https://www.frbsf.org/economic-research/files/el2018-26.pdf
56
an account and a lack of trust in banks. Federal financial regulations require specific disclosure of fees and terms for bank deposits,
as well as for other financial products like credit cards and prepaid
cards, but these regulations generally do not limit the size of those
fees. 3
Q.8. Following up on the numerous questions related to the BB&T
and SunTrust merger, the Bank Holding Company Act requires
that the Fed evaluate the competitive effects of mergers, acquisitions, and other transactions when determining whether to approve
these applications. The factors for consideration include the effect
of the acquisition or merger to lessen competition in any section of
the country.
How has the Fed considered this factor in the past, and what criteria does the Fed use to evaluate the effect of a merger on the
competition in any section of the country?
A.8. The Bank Holding Company Act requires the Board to analyze
any application by a company seeking to control a bank or bank
holding company, including through merger or acquisition, to determine whether the proposal would substantially lessen competition
in any section of the country. A similar analysis is required under
the Home Owners’ Loan Act regarding applications by companies
to control savings and loan holding companies or thrifts. Courts
have held that the antitrust standards embodied in the banking
laws were intended to incorporate the antitrust standards of the
Clayton Act.
The Board analyzes the competitive effects of the proposal in the
context of local geographic banking markets where the applicant
and the target compete. In order to perform the required competitive analysis, the Board performs an initial screen similar to the
screen used by the U.S. Department of Justice (DOJ), in which deposits of the institutions are used to calculate market shares and
market concentration. In applications in which consummation of
the proposal would result in market shares or concentration levels
below certain specified thresholds, a Reserve Bank may approve
the transaction under authority delegated by the Board. However,
if the structural effects exceed the initial screening thresholds, the
Board further analyzes the proposal and determines whether the
transaction can be approved.
In its analysis of market concentration under the Bank Holding
Company Act, the Board’s review includes a close examination of
the behavior of commercial banks, thrift institutions, and credit
unions in the local banking market to determine the extent to
which they compete with each other. The review also includes factors that might mitigate the structural effects of a proposed merger
or acquisition, including the number of institutions remaining in
the market, the likelihood of entry into the market, the financial
viability of the target institution, any proposed branch divestiture
that the applicant offers to reduce the potential anticompetitive ef3 See
Regulation DD (Truth in Savings Act) at https://www.ecfr.gov/cgi-bin/textidx?c=ecfr&tpl=/ecfrbrowse/Titlel2/12cfr1030lmainl02.tpl. See Regulation Z (Truth in Lending
Act)
at
https://www.ecfr.gov/cgi-bin/text-idx?c=ecfr&tpl=/ecfrbrowse/Titlel2/
l2cfr1026lmainl02.tpl.
57
fect of the merger or acquisition in affected markets, and other factors.
In order to advance transparency concerning competitive analysis
of banking mergers and acquisitions, the Board and DOJ, in 2014,
jointly released a set of Frequently Asked Questions and responses, 4 which are posted on the Board’s public website.
Q.9. At the hearing you stated that, ‘‘S. 2155 implementation is
probably our highest priority, and we are pushing ahead.’’ The Fed
appears to have ceased work completely on several rule proposals
that would have increased regulation of large Wall Street banks.
These include proposed rules on bonus payments for top executives
and on capital for merchant banking and commodities activities.
Why did the Board shift away from finalizing rules that would
strengthen regulation, even apparently abandoning proposed rules,
and instead prioritize activity on rules that would weaken regulation? Is the Fed currently considering any rulemakings that would
strengthen regulation?
A.9. The Board, along with the other Federal banking agencies, has
spent almost a decade building the postcrisis regulatory regime.
The regulatory policies implemented since the financial crisis have
improved the safety and soundness of the financial system. The
U.S. banking system is significantly better capitalized as a result
of postcrisis regulatory capital requirements and stress testing. At
this point, the agencies have completed the bulk of the work of
postcrisis regulation; however, the agencies are still in the process
of implementing a small number of important measures to
strengthen the regulatory framework.
Recently, the Board has examined the regulations put into place
in light of our supervisory experience. We, at the Federal Reserve,
intend to maintain the core elements of the postcrisis framework
to protect the financial system’s strength and resiliency, while also
seeking ways to enhance effectiveness of our regulations. The Federal Reserve is committed to continuing to evaluate the effects of
regulation on financial stability and on the broader economy and
to making appropriate adjustments. The Board also is committed
to enhancing the transparency and efficiency with which the Federal Reserve supervises and regulates firms under our jurisdiction.
In order to enhance the strength and resiliency of the U.S. financial system, the Board has requested comment on the following proposed rulemakings: the Reduction of Interconnectedness and Contagion Risks of G–SIBs and the Net Stable Funding Ratio. When
the comment periods on these proposals close, staff will consider
the comments received and work towards the final proposed rules,
as appropriate.
Other actions the Board has recently taken to strengthen the
regulatory framework for financial organizations it regulates include finalizing a number of rulemakings such as SingleCounterparty Credit Limits and the Large Financial Institution
Rating system.
4 See
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20141009a.htm.
58
RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS
FROM JEROME H. POWELL
Q.1. I’m concerned that the community bank leverage ratio created
pursuant to S. 2155, as drafted, does little to provide actual relief
for community banks.
The Fed, OCC, and FDIC established the leverage ratio at the
very upper end of the threshold allowed under S. 2155. The 9 percent capital level that the regulators settled on is well above the
status quo for well-capitalized banks and would do little to help
any institution with assets under $10 billion. It’s hard for me to
understand why any bank would jump through the new hoops established by the regulators when the trade-off is a much higher
threshold for Prompt Corrective Action.
I’m concerned that the regulators did not do a sufficient job of
consulting with our State banking supervisors as required under
2155. You are likely aware that the Conference of State Banking
Supervisors sent you a letter on February 14th laying out its concerns in great detail.
How are you working with State regulators on the implementation of the community bank leverage ratio?
A.1. Section 201 of the Economic Growth, Regulatory Relief, and
Consumer Protection Act (EGRRCPA) directs the Federal banking
agencies (agencies) to establish a community bank leverage ratio
(CBLR) of not less than 8 percent and no more than 10 percent for
community banking organizations with less than $10 billion in
total consolidated assets that also meet certain qualifying criteria.
Under the CBLR proposed rule, 1 a firm with a CBLR above 9 percent would be considered to have met the capital ratio requirements for purposes of the agencies’ capital rule and for purposes
of being well capitalized under the agencies’ prompt corrective action (PCA) rules of section 38 of the Federal Deposit Insurance Act.
The proposed 9 percent calibration of the CBLR, in conjunction
with the qualifying criteria and simplified definitions, seeks to
strike a balance among the following objectives: maintaining strong
capital levels in the banking system, ensuring safety and soundness, and providing appropriate regulatory burden relief to as
many banking organizations as possible. For example, an 8 percent
CBLR would allow more banking organizations to opt into the
CBLR framework but could allow a large number of banking organizations to hold less regulatory capital than they do today.
The proposal is not expected to require a material change to the
amount of capital held by qualifying firms that opt into the community bank leverage ratio framework because these firms generally
hold capital well in excess of the minimum requirements. The
agencies are currently reviewing all public comments on the proposal, including those related to the proposed calibration, and will
consider them before finalizing the CBLR.
Before issuing the proposal, the agencies consulted on several occasions with State bank regulators, as well as the Conference of
State Bank Supervisors, to ensure their views were considered. The
agencies very much appreciate the perspectives provided by the
1 See
84 FR 3062 (February 8, 2019).
59
State bank regulators and plan to continue consulting with them
before finalizing the CBLR.
Q.2. Why are the agencies applying a new prompt-corrective-action
framework to banks that fall below the 9 percent community bank
leverage ratio threshold instead of simply requiring them to report
risk-based capital?
A.2. The CBLR proposal seeks to provide material burden relief, in
the form of significantly simpler capital requirements and shorter
reporting schedules, while maintaining safety and soundness in the
banking system. The agencies believe that one way of achieving
this outcome is by giving a community banking organization the
flexibility to opt-in to and opt-out of the CBLR when the firm
deems it appropriate. Consistent with section 201 of EORRCPA,
the proposal establishes procedures for a CBLR firm that falls
below 9 percent to be assigned a ‘‘proxy’’ PCA category based on
the level of its CBLR. If we were to require a firm that has optedin to the CBLR framework but that falls below the 9 percent CBLR
to immediately revert to the current capital rule’s requirements (including the substantially longer and more complex reporting requirements), we would be reducing the firm’s flexibility by not allowing it to remain in the simpler regime.
Under the proposal, a firm can opt-out of the CBLR framework
and revert to the current capital rule at any time and for any reason. The agencies provided this optionality because they believed a
CBLR firm would appreciate the flexibility to either revert to the
current capital rule or remain subject to the CBLR as opposed to
immediately being required to revert to the capital rule and associated regulatory reporting if the firm’s CBLR drops below 9 percent.
Without this flexibility, firms may feel compelled to maintain their
current regulatory capital and reporting apparatus in case their
CBLR drops below 9 percent.
The comment period for the CBLR proposal ended on April 9,
2019. The agencies are currently reviewing comments from the
public on all aspects of the proposed rule, including the optionality
embedded in the proposal, and will consider them before finalizing
the rule.
Q.3. Why is the Federal Reserve Board lowering capital standards
for the largest U.S. banking organizations while at the same time
increasing leverage capital requirements for community banking
organizations?
A.3. The agencies have proposed changes to prudential requirements that would better align regulations with a firm’s size, risk
profile, and systemic footprint, consistent with EGRRCPA. Under
the proposals, the largest firms, such as U.S. OSIBs, would continue to be subject to the most stringent requirements.
The CBLR proposal is an optional framework designed to reduce
compliance burden for qualifying community banking organizations. The CBLR proposal is not intended to materially change the
amount of capital currently required to be held under the riskbased and leverage-based capital requirements.
Q.4. You may recall that I’ve had a longstanding dialogue with the
Fed regarding the rule on the standardized approach for measuring
60
counterparty credit risk, or SA–CCR. I first raised this issue at
Vice Chairman Quarles’ confirmation hearing in July 2017, going
on 2 years ago, and have written to you about it as well as asked
about it in open hearings since that time.
Because I believe it’s easier to establish rules making our financial system safer outside of a crisis, I was glad to see that a draft
SA–CCR rule was published last October. The draft, however, falls
short. It failed to include initial margin exposure, a point that Vice
Chairman Quarles ignored when responding to my previous questions for the record. The draft rule was also overbearing in several
key areas, such as how it treats hedging risk for commodities.
Can you please share your thoughts on where the SA–CCR rule
currently stands and tell us whether or not the rule is ever going
to be finalized?
A.4. With respect to initial margin in the supplementary leverage
ratio (SLR), the Standardized Approach to Counterparty Credit
Risk (SA–CCR) proposal requests comment on an alternative approach that would permit greater recognition of initial margin for
cleared transactions under the SLR. The comment period on the
SA–CCR proposal ended on March 18, and the Board of Governors
(Board), the Office of the Comptroller of the Currency (OCC) and
the Federal Deposit Insurance Corporation (FDIC) are now reviewing the comments, including with respect to the treatment of commodities and the treatment of initial margin under the SLR.
Q.5. Last August, a number of my colleagues and I sent you a letter about the G–SIB surcharge. Our letter said in part that we
hoped you would examine excessive capital requirements in the
U.S. given the successful implementation of postcrisis reforms.
In response, you wrote back saying, ‘‘The Board is conducting a
comprehensive review of the regulations in the core areas of
postcrisis 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 addition, when responding to a question from Senator Shelby
during our recent hearing, you said that our banking system overall is quite strong, there have been no banking failures in 2018,
and that the system has much higher capital, liquidity, and risk
management than in years past.
Can you please provide an update on the comprehensive review
from your earlier letter?
Will there be an output—such as a report—as the result of this
review?
When will it conclude, and will the public have the opportunity
to comment?
A.5. In connection with postcrisis reforms and recent statutory developments, the Board has been evaluating its regulations for simplicity, efficiency, and transparency. Board staff are in the process
of reviewing core elements of the Board’s regulatory framework.
The Board will consider this analysis when developing future regulatory proposals. In addition, on October 31, 2018, the Board issued
the proposals to tailor requirements for certain banking organiza-
61
tions while also ensuring the continued safety and soundness of
their operations. 2 These proposed rulemakings seek public comment on separate proposals for tailoring enhanced prudential
standards, tailoring of capital and liquidity requirements, and
modifying stress testing requirements for certain banking organizations. In developing these proposals, the Board considered the expected impact of the rulemakings and sought comment from the
public on this question and all other aspects of the proposals.
Q.6. We all recognize that the Federal Reserve plays a critical role
in ensuring the safety and soundness of the U.S. financial system
and that you are constantly evolving your thinking on potential
risks. Last year, I asked how you are considering evaluating bank
practices in areas that are beyond the scope of the traditional supervision process. You responded that there a variety of ways the
Federal Reserve ensures it understands what best practices should
look like at the firms you supervise.
That said, it remains unclear how decisions concerning technology, HR management, and general corporate strategy present
clear safety and soundness issues. At some level, it seems the Federal Reserve’s view is that anything could create risk and therefore
you are able to dictate practices to firms.
Consider, for instance, use of new cloud technologies to store customer data. Such a decision by bank management is no different
than those made by other private companies—retailers, credit card
companies, or even a local utility. These are private companies,
with very engaged boards and investors, and well-informed senior
management teams.
As you develop expectations for firms in these types of areas, will
you make certain that there is sufficient stakeholder engagement
and that you are appropriately deferring to the judgments of private entities and not dictating what such entities must do on matters outside your traditional areas of expertise?
A.6. As emerging and evolving risks become more relevant to safety and soundness supervision, the Federal Reserve incorporates a
broad range of views into shaping potential policy. This engagement happens during the research and development phase, where
outreach and information gathering is conducted, and also through
public comment periods when proposed rules are published.
Q.7. I was pleased to see that S. 2155 included Section 402, which
would exempt cash that custody banks store at the Fed from their
leverage ratio calculation. Shortly before S. 2155 was signed into
law, however, the Fed released a new rule changing that same calculation.
In response to a question from the record from last November,
Vice Chairman Quarles said, ‘‘staff is evaluating the April 2018
proposal in light of the statutory change.’’
Can you elaborate on Vice Chairman Quarles’ response?
A.7. The Board, along with the OCC and FDIC, plan to issue a
joint proposal in April 2019, to implement Section 402(b) of the
EGRRCPA. The comment period on the proposal would end 60 days
after publication in the Federal Register.
2 See
83 FR 61408 (Nov. 29, 2018); 83 FR 66024 (Dec. 21, 2018); 84 FR 4002 (Feb. 14, 2019).
62
The April 2018 proposal to recalibrate the enhanced supplementary leverage ratio (eSLR) standards was calibrated based on
the definition of the existing denominator of that ratio. At that
time, the denominator included central bank deposits for all firms.
The April 2018 proposal noted that any subsequent and significant
changes to the SLR would likely necessitate the Board to reconsider the proposal recalibration, as it was not intended to materially change the aggregate amount of capital in the banking system.
As you note, section 402(b) directs the agencies to allow custodial
banking organizations to exclude qualifying central bank deposits
from the SLR, and therefore, would meaningfully modify the SLR
as applied to these firms. Accordingly, as the Board weighs any recalibration of the eSLR, the Board will consider the potential
changes to capital levels at custodial banking organizations resulting from the implementation of section 402, as well as the expected
impact on the aggregate level of capital in the banking system.
Q.8. Are instructions for the latest Comprehensive Capital Analysis
and Review tests forthcoming? When will they be released and why
have they been held up this year?
A.8. The instructions for the 2019 Comprehensive Capital Analysis
and Review (CCAR) were released on March 6, 2019. While the
CCAR instructions have been released in prior years on or around
the beginning of February, the release of this year’s instructions
was postponed to incorporate into them the Board’s final rule limiting the use of CCAR’s qualitative objection.
Q.9. In a recent press conference, you mentioned that the Fed
would make an announcement on changes to the countercyclical
capital buffer ‘‘in early 2019’’. The Fed has yet to take further action.
When will you make your announcement on the countercyclical
capital buffer?
A.9. The Board recently voted to maintain the level of the countercyclical capital buffer (CCyB) at zero. 3
RESPONSES TO WRITTEN QUESTIONS OF SENATOR PURDUE
FROM JEROME H. POWELL
Q.1. In April 2017, at the Global Financial Forum, you commented
that capital rules should not disincentivize derivatives clearing or
serve as an impediment to end users hedging risk. These products
are critical risk management tools for farmers, ranchers, and other
businesses in Georgia and across the country.
Unfortunately, the supplementary leverage ratio (SLR) is limiting access to derivatives risk management opportunities for the
agricultural community in my State and discouraging the central
clearing of standardized swap products by futures commission merchants (FCMs) registered with the CFTC. Since 2008, according to
the CFTC, the number of firms providing clearing services has declined from 88 to 55 in 2018.
3 The Board voted 4–1 to maintain the level of the CCyB at zero. See https://
www.federalreserve.gov/newsevents/pressreleases/bcreg20190306c.
63
In December 2018, I introduced legislation to correct this unintended consequence, and to ensure regulators properly recognize
the risk-reducing nature of client initial margin for a cleared derivative transaction. Ultimately, this will provide much-needed relief
to farmers and other consumers and free up capital for our main
street economy. As you also know, the Fed, along with the FDIC
and OCC are currently soliciting comments as they seek to implement a new approach for calculating the exposure amount of derivatives contracts under the agencies’ regulatory capital rules. The
CFTC Commissioners recently submitted a joint comment that
raises my very concerns.
Do you share my concerns about SLR and what steps can you
take to address the concerns above into consideration as you move
through the joint-comment process?
Will you commit to taking the concerns above into consideration
as you move through the joint-comment process?
A.1. The Federal Reserve Board (Board) is reviewing a number of
its rules and regulations to address any unintended consequences
and undue regulatory burden, including for the provision of central
clearing services. In this regard, on October 30, 2018, the Board,
along with the Office of the Comptroller of the Currency and the
Federal Deposit Insurance Corporation (the agencies), issued a
joint notice of proposed rulemaking to implement the standardized
approach for counterparty credit risk (SA–CCR), to determine the
exposure amount of a derivative contract. SA–CCR introduces a
new methodology for calculating exposure amount in both the riskbased capital rules and the supplementary leverage ratio (SLR)
rule. The proposal specifically requests comment on whether the
agencies should permit greater recognition of margin for purposes
of the SLR. The comment period closed March 18. We will take
your concerns into account as we review comments on the rule.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS
FROM JEROME H. POWELL
Q.1. In October of last year, the Federal Reserve (Fed) issued a request for public comment on ‘‘actions the Federal Reserve could
take to support faster payments in the United States.’’ We understand the Fed has been working collaboratively with the banks and
other private-sector stakeholders for years on how best to facilitate
faster payments. As you noted at a recent press conference, the Fed
has thus far been ‘‘more of a convener, bringing industry and the
public and public interest groups . . . around the table and . . .
playing a constructive role’’ in encouraging the private sector in
this area. In October, however, the Fed issued a request for public
comment indicating that it could instead decide to enter the market
for faster payments as a direct competitor of the private sector solutions with its own Real-Time Gross Settlement’’ (RTGS) system.
Is it possible the Fed’s proposal could hamper and delay, rather
than facilitate, the arrival of real-time payments?
A.1. In its October 2018 Federal Register Notice requesting public
comment (2018 FRN), the Board of Governors of the Federal Reserve System (Board) specifically sought feedback on whether potential Federal Reserve action(s) in faster payments settlement
64
would hasten or inhibit financial services industry adoption of faster payment services. The potential actions, which would facilitate
real-time interbank settlement of faster payments, build on collaborative work with the payment industry through the Federal Reserve System’s Strategies for Improving the U.S. Payment System
initiative. Real-time settlement avoids interbank credit risk by
aligning the speed of interbank settlement with the speed of underlying payments. As a result, broad use of real-time settlement for
faster payments could enhance the overall safety of the faster payments market in the United States. Development of a nationwide
real-time interbank settlement infrastructure by the Federal Reserve could encourage more banks to develop faster payment services, creating more choice for consumers, households, and businesses.
The 2018 FRN sought feedback on what operational and technical adjustments the private sector would need to make in order
to operate in a 24x7x365 settlement environment and potential
challenges and related costs the industry could face in the process
of transitioning to such an environment.
As part of its central mission, the Federal Reserve has a fundamental responsibility to ensure that there is a flexible and robust
infrastructure supporting the U.S. payment system on which the
private sector can develop innovative payment services that serve
the broadest public interests.
The Federal Reserve is committed to working together with the
private sector to achieve nationwide access to faster payments and
will continue to explore collaborative efforts to promote the safety
and efficiency of faster payments and to support the modernization
of the financial services sector’s provision of payment services.
Q.2. Please explain why the Fed is proposing the creation of a Government-run real-time payments system when the private sector
has already created one that is up and running?
A.2. The potential actions outlined in the 2018 FRN are intended
to promote the safety and efficiency of faster payments in the
United States and to support the modernization of the financial
services sector’s provision of payment services. The Federal Reserve has long supported these objectives in its existing services,
which provide nationwide access to check, Automated Clearing
House (ACH), and wire services to banks of all sizes. The Federal
Reserve has provided services (check, ACH, wire) alongside privatesector service providers since its inception, and the Board has established policies and processes to avoid conflicts of interest across
the various roles played by the Federal Reserve. 1
Q.3. The Fed’s own policy statement on ‘‘The Federal Reserve in
the Payments System’’ requires that the Fed satisfy three conditions before proposing a new service. Among those is a finding that
the private sector ‘‘cannot be expected to provide such service with
reasonable effectiveness, scope, and equity.’’ Has the Fed made this
finding, and, if so, on what grounds was it made?
A.3. In response to the 2018 FRN, the Board received over 400
comment letters from a broad range of market participants and in1 See
https://www.federalreserve.gov/paymentsystems/pfslstandards.htm.
65
terest groups, including consumer groups. The Board is carefully
considering all of the comments received before determining whether any potential action is appropriate, as well as the timing of such
potential action. Any resulting action would be pursued in alignment with the provisions of the Federal Reserve Act, the Monetary
Control Act, and longstanding Federal Reserve principles and criteria for the provision of payment services. The criteria specify that
the Federal Reserve must expect to (1) achieve full cost recovery
over the long run, (2) provide services that yield a public benefit,
and (3) provide services that other providers alone cannot be expected to provide with reasonable effectiveness, scope, and equity.
Q.4. How long would it take for the Fed to create its real-time system?
A.4. The Federal Reserve is not committing to any specific actions
at this time, and there are several potential approaches that could
help achieve the objective of safe, efficient, and ubiquitous faster
payments. Any implementation period will depend on what actions,
if any, the Board decides to take.
Q.5. Would the Fed’s proposed RTGS and the existing private sector real-time payments network be interoperable and, if so, why—
specifically—do you believe that will be the case?
A.5. The 2018 FRN asked for feedback on specific areas, including
interoperability with existing or potentially new Real-Time Gross
Settlement (RTGS) service providers. The Board received responses
to such questions and is assessing the comments. The Federal Reserve recognizes that a decision to undertake a 24x7x365 RTGS
settlement service will require close partnership and collaboration
with a wide range of industry stakeholders.
Q.6. If you believe the systems would interoperate, would such
interoperability require the private sector system to significantly
alter its current design?
A.6. As noted, the Board recognizes that a decision to undertake
the proposed actions, in particular the development of a 24x7x365
RTGS settlement service, will require close partnership and collaboration with industry stakeholders. Based on the comments received, the Board is assessing the implications for various industry
stakeholders including banks, service providers, merchants, and financial technology providers. One important consideration relates
to interoperability, which can involve different layers of a payment
message (e.g., rules, standards, processing). The Board is assessing
the options for interoperability between a Federal Reserve RTGS
settlement service and existing or potentially new RTGS service
providers across these layers for achieving nationwide access to
faster payments in the United States.
Q.7. As currently structured, CECL presents major capital volatility risk, affecting pricing and availability of lending for 30-year
mortgages and to borrowers of lower credit quality, especially during downturns. It is highly procyclical. There have been proposals
made that before implementing this major accounting change,
there should be a quantitative impact study (QIS) conducted to
look into these concerns. The 3-year phase in that the Fed recently
finalized does not address this underlying procyclicality issue.
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Do you see any harm in conducting such a QIS?
A.7. We recognize the importance of evaluating the quantitative
impact of a policy change. Prior to finalizing the current expected
credit loss (CECL) accounting standard, the Financial Accounting
Standards Board followed its established process, which included
cost-benefit analysis and extensive outreach with all stakeholders,
including users, preparers, auditors, and regulators. Furthermore,
various economists, institutions, and independent organizations
have produced impact analyses of CECL with varying conclusions.
We have reviewed these analyses and performed additional internal studies to support the 3-year phase-in referenced in your question as well as the Board’s announcement that it will maintain the
current modeling framework for loan allowances in its supervisory
stress test through 2021. Institutions subject to the Board’s Comprehensive Capital Analysis and Review (CCAR) will be required to
incorporate CECL into their own stress tests starting in the 2020
cycle. However, the Board will not issue supervisory findings on
those institutions’ allowance estimations in the CCAR exercise
through 2021.
Given the importance of the CECL accounting standard to the institutions we supervise and the banking industry as a whole, we
are committed to closely monitoring implementation and studying
the effect of the accounting standard on the banking system to determine if further changes to the regulatory framework are appropriate.
Q.8. The Fed has not undertaken any effort to update its rules to
provide a pathway to margin eligibility for companies traded overthe-counter (OTC) since NASDAQ became an exchange in 2006.
Margin eligibility of OTC-traded stocks can be an important part
of the growth of small and emerging companies, as it helps to improve the market quality of those securities, impacts an investor’s
willingness to purchase those securities, and as a result, has a direct impact on capital formation. U.S. investors in the ADRs for
Roche and other large, international OTC traded firms are also
negatively impacted by the Fed’s inaction on this issue.
Will you commit to following up with me on the actions the Fed
will take to revive the margin list for certain OTC securities—those
that have similar characteristics to those traded on NASDAQ before it became an exchange?
A.8. As you note, the List of Over-the-Counter Margin Stocks (OTC
List) is no longer published by the Federal Reserve Board (Board),
and, in fact, the OTC List’s publication ceased in 1998. Board staff
have continued to monitor OTC market developments in the years
since. Any expansion of the types of securities that are margin-eligible would require the Board’s careful consideration of the benefits
of such an approach, weighed against the potential increase in burdens on banks and other lenders.
We will be sure to take your concerns into account as we look
into potential approaches that may be considered, while ensuring
any changes would not pose additional regulatory burden.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN
FROM JEROME H. POWELL
Q.1. With cash flow dwindling in the farm sector amid ongoing
trade disputes, the volume of non–real estate farm debt continues
to increase at a rapid pace, driven by the growth in operating loans
which have reached a historically large average size. Bankruptcies
across the Farm Belt are rising past the highest level in at least
10 years.
Lower farm incomes, the uncertainties about ag trade, and the
growth of lending volumes has interest rates on ag loans trending
ever higher. The rapidly increasing combination of higher leverage
and rising rates continue to put pressure on operations across the
Farm Belt.
With financial performance at agricultural banks remaining relatively strong and the value of farm real estate continuing to provide ongoing support, what actions are you and regulators considering to help alleviate mounting pressure on the farm sector experiencing difficulties beyond their control?
A.1. The agricultural industry is experiencing uncertainty, as commodity prices were suppressed in 2018 and trade issues continue
to put pressure on economic growth. Some producers may be wellpositioned to withstand the prolonged challenges facing today’s agricultural sector, but others are more susceptible to financial stress.
As regulators, it is essential to ensure that banks have appropriate
processes to effectively measure and mitigate risks while maintaining safe and sound operations and serving the needs of the agricultural communities in which they operate.
In 2011, the Federal Reserve issued guidance to the industry on
‘‘Supervisory Expectations for Risk Management of Agriculture
Credit Risk’’. This guidance applies in all economic environments,
but is especially helpful to banks during periods of economic stress.
It reminds bankers that ‘‘the identification of a troubled borrower
does not [prohibit] a banker from working with the borrower,’’ and
it provides a road map for lenders to work prudently with troubled
borrowers in a way that serves the long-term interests of all stakeholders. With respect to the Community Reinvestment Act (CRA),
the current regulations consider bank activities in their assessment
areas, including bank activities in the assessment areas that are
responsive to the needs of those that have been affected by disasters.
In acknowledgement of the concerns and uncertainties surrounding the outlook of agricultural conditions, the Federal Reserve has taken measures to maintain an ongoing dialogue between
regulators, bankers, and agricultural communities. On a quarterly
basis, we conduct Agricultural Credit Conditions Surveys that
gather comments from bankers located in various Reserve Bank
Districts 1 with significant agricultural exposure. Our FedLinks and
Community Banking Connections website 2 and publications, which
could be useful to all banks, aim to improve the understanding of
supervisory expectations and provide tools to help community
1 Our survey is aimed at areas of the country with high concentrations of agricultural lending
by community banks, located primarily in Chicago, St. Louis, Minneapolis, Kansas City, and
Dallas.
2 See, https://communitybankingconnections.org/fedlinks.
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banks across the United States. Additionally, we invite bankers
and agriculture industry professionals to the annual National Agricultural Credit Conference, hosted by the Federal Reserve Bank of
Kansas City, which provides a forum for those in the industry to
discuss current developments. The most recent conference was held
at the Board of Governors of the Federal Reserve System on March
25, 2019. All of these outreach efforts allow the Federal Reserve to
hear diverse perspectives and receive feedback from both the industry and public. They also enable the Federal Reserve to have a better understanding of credit conditions and challenges in agricultural markets so that supervisory reviews can be tailored, as appropriate.
In addition to the supervisory process, the Federal Reserve System strives to incorporate perspectives from all regions of the country and from a broad range of industries, including agriculture, into
its regular monetary policy deliberations and its assessments of the
U.S. economy. We receive input on agricultural conditions from
business contacts across the country through our boards of directors at regional Reserve Banks, various advisory councils, and surveys, in addition to reports from staff who track developments in
U.S. agriculture.
Q.2. One parallel I suggest you and regulators explore and consider
for lenders is the regulatory relief granted to financial institutions
in areas affected by natural disasters, such as favorable Community Reinvestment Act consideration, extension of repayment
terms, restructuring existing loans, and easing terms for new
loans.
Would you and your staff be willing to work with my staff and
I to develop the legislation necessary to provide regulators with
this authority?
A.2. As always, we are available to provide technical assistance to
Members of Congress and their staffs. For this particular issue, our
staff can inform you and your staff about past initiatives that the
Board and the other Federal banking agencies (agencies) have
taken to provide regulatory assistance to our supervised institutions affected by a major natural disaster. On an interagency basis,
the agencies issue statements to encourage institutions operating
in a disaster area to meet the financial services needs of their communities. For example, on October 10, 2018, the agencies and the
Conference of State Bank Supervisors issued a statement that provides an overview of supervisory practices for institutions affected
by Hurricane Michael. 3 More recently, the agencies and relevant
State regulators issued interagency statements on supervisory
practices regarding financial institutions and their customers related to the flooding in the Midwest and wildfires in California. 4
3 See,
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181010a.htm.
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20190325a.htm,
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181115b.htm.
4 See,
and
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER
FROM JEROME H. POWELL
Q.1. Community Reinvestment Act—As you noted in a speech a couple weeks ago at the HBCU Mississippi Valley State University,
the loss of a branch often means ‘‘more than the loss of access to
financial services; it also meant the loss of financial advice, local
civic leadership, and an institution that brought needed customers
to nearby businesses.’’ I couldn’t agree more. You rightly mention
the Community Reinvestment Act as an important tool to encourage banking services in underserved areas.
As regulators consider updates to the regulations implementing
the Community Reinvestment Act, how can we make sure we that
we protect the folks most likely to be significantly affected by
branch closures—low income families, families of color, rural families?
A.1. Public comment and the Federal Reserve’s outreach to banks
and community stakeholders have clearly conveyed that bank
branches are an important venue for banks to engage with their
communities. Commenters have emphasized the high value that
bank branches have for retail customers, small business owners,
local leaders, and community developers, especially in underserved
communities.
One opportunity in modernizing the Community Reinvestment
Act (CRA) regulations is to better define the area in which the
agencies evaluate a bank’s CRA activities, while retaining a focus
on the credit needs of local communities. There is a complex balance between the profitability of branches and the needs of local
communities to interact with bank personnel needs to be kept in
mind as revisions to the regulations are considered. Additionally,
it would be useful to find ways to recognize how technology offers
meaningful and cost-efficient opportunities to serve consumers and
communities. 1
As the Federal Reserve works with the Office of the Comptroller
of the Currency and the Federal Deposit Insurance Corporation
(the Agencies) to develop a notice of proposed rulemaking, it is important to ensure that any modernization of assessment areas
keeps in focus the goal of encouraging banks to seek out opportunities to create incentives for CRA capital to effectively meet the
credit and banking needs of underserved communities and consumers.
Q.2. Beyond the Community Reinvestment Act, what other tools do
you as a regulator have to promote access to bank branches?
A.2. The Federal Reserve has dedicated staff in each Reserve Bank
throughout the country who work collaboratively to engage relevant stakeholders; to understand issues and challenges in lowand moderate-income (LMI) communities; and to provide research,
insights, and technical assistance to support community and economic development programs.
1 The Agencies have been aware of the impact of technology on the delivery of banking services for many years now. In 2016, the Agencies provided guidance on how examiners will evaluate the availability and effectiveness of alternative (nonbranch) product and service deliver
mechanisms. That guidance can be found at in the Interagency and Answer Guidance on Community Reinvestment (Q&A §l.24(d)(3), https://www.govinfo.gov/content/pkg/FR-2016-07-25/
pdf/2016-16693.pdf.
70
For example, staff facilitate roundtable discussions between
banks, nonprofit organizations, and Government officials to support
awareness of community needs and CRA-eligible activities, and to
provide information on possible policy options and practices that
may help serve the banking needs in LMI communities. In addition, staff work to advance Federal Reserve policymakers’ understanding of labor markets, housing markets, and other economic
and financial conditions across populations and geographies. By engaging a broad range of stakeholders, staff obtain diverse views on
issues affecting the economy and financial markets. This information helps banks identify opportunities to serve the credit and financial services needs of their communities.
Q.3. Cybersecurity Harmonization—Many financial institutions are
subject to cybersecurity supervision from a number of State and
Federal regulators. Not only are these institutions subject to, at
times, differing requirements from these regulators, there is often
not even a shared lexicon among regulators, so that when one regulator says ‘‘effective data security,’’ they actually mean something
different from what another regulator means by the same phrase.
Are there efforts underway to harmonize the cybersecurity lexicon used by State and Federal regulators? How is that effort progressing?
A.3. The Federal Reserve, in collaboration with other regulatory
agencies, continues to identify opportunities to harmonize the cybersecurity lexicon used by State and Federal regulators. Specifically, the Federal Reserve chairs a working group of the Financial
and Banking Information Infrastructure Committee (FBIIC) 2 that
is working to harmonize the cybersecurity lexicon by using the National Institute of Standards and Technology (NIST) as the primary
source of cyberterms and definitions going forward.
Q.4. What about an effort to harmonize standards?
A.4. The FBIIC provides a forum for member agencies to discuss
regulatory and supervisory practices, including opportunities for
harmonization and to leverage existing standards, such as the
NIST Cybersecurity Framework. As discussed above, the Federal
Reserve chairs a FBIIC working group that is engaged in identifying opportunities to further harmonize cyber-related standards
and supervisory activities for firms subject to the authority of multiple regulators.
In addition, the agencies, with supervisory responsibility for the
banking sector, collectively engage in efforts to promote uniformity
in the supervision of those financial institutions through the Federal Financial Institutions Examination Council (FFIEC). The
FFIEC, established in 1979, includes the Board of Governors of the
Federal Reserve System (Board), Office of the Comptroller of the
Currency (OCC), Federal Deposit Insurance Corporation (FDIC),
National Credit Union Administration, Consumer Financial Protection Bureau and the State Liaison Committee. The FFIEC promotes uniformity in the supervision of financial institutions
2 The FBIIC consists of 18 Federal and State member organizations that collectively engage
in supervisory activities for the banking, investment, and insurance sectors.
71
through the development of joint examination procedures, principles, standards, and report forms.
Q.5. Real Time Payments—I fully support the adoption in the
United States of a real time payments (RTP) system. Such a system brings with it terrific promise for innovation in financial services that meet customer demands to make payments cheaply and
instantly.
In its 2013 Strategies for Improving the U.S. Payment System,
the Federal Reserve said that it ‘‘would not consider expanding its
service provider role unless it determines that doing so is necessary
to bring about significant improvements to the payment system
and that actions of the private sector alone will likely not achieve
the desired outcomes for speed, efficiency, and safety in a timely
manner’’ and unless ‘‘other providers alone could not be expected
to provide this capability with reasonable effectiveness, scope, and
equity’’—phrases that the Federal Reserve has repeated elsewhere.
I can understand how the provision by the Federal Reserve of a
24/7/365 real time liquidity management tool that would support a
private sector RTP solution—as contemplated in the Federal Reserve’s recent proposal—would meet the test that the Federal Reserve has consistently outlined for its operational involvement. A
24/7/365 liquidity management tool would help alleviate otherwise
potentially destabilizing liquidity demands that overnight RTPs
could generate.
The development of a real time gross settlement (RTGS) system,
however, seems to be a different matter in terms of meeting the requirements the Fed set forth in its 2013 Strategies for Improving
the U.S. Payment System and the requirements of the Monetary
Control Act.
With regard to the possible development of an RTGS system, has
the Federal Reserve made a determination that Federal Reserve
provision of RTGS services meets this test? If so, on what basis?
A.5. The potential actions outlined in the Board’s October 2018
Federal Register Notice request for comment (2018 FRN) are intended to promote the safety and efficiency of faster payments in
the United States and to support the modernization of the financial
services sector’s provision of payment services. The Federal Reserve has provided services alongside the private-sector service providers since its inception that have supported both objectives while
providing nationwide access to check, Automated Clearing House
(ACH), and wire services to banks of all sizes.
The Board has received over 400 comment letters from a broad
range of market participants and interest groups, including consumer groups in response to the 2018 FRN seeking public input on
potential actions the Federal Reserve might take in regard to supporting faster payments in the United States. The Board is carefully considering all of the comments received before determining
whether any action is appropriate or the timing of such potential
action. Any resulting action the Board decides to take would be
pursued in alignment with the provisions of the Federal Reserve
Act, the Monetary Control Act, and longstanding Federal Reserve
policies and processes created to avoid conflicts of interest across
the various roles of the Federal Reserve.
72
In particular, the Congress, in part motivated to encourage and
ensure fair competition between the Federal Reserve and the private sector, passed in 1980, the MCA, requiring that the Federal
Reserve fully recover costs in providing payment services over the
long run and adopt pricing principles to avoid unfair competition
with the private sector. The Board also has established additional
criteria for the provision of new or enhanced payment services that
specify the Federal Reserve must expect to (1) achieve full cost recovery over the long run, (2) provide services that yield public benefit, and (3) provide services that other providers alone cannot be
expected to provide with reasonable effectiveness, scope, and equity. In addition to these criteria, for new services or service enhancements, the Board also conducts a competitive impact analysis
to determine whether there will be a direct and material adverse
effect on the ability of other service providers to compete effectively
in providing similar services. 3
Q.6. The Federal Reserve has also consistently supported the implementation of RTP system by 2020. I understand there is a fully
operational private sector clearing and settlement solution that has
significant adoption by depository institutions. Would a Federal Reserve-provided RTGS infrastructure be implemented by 2020? If
not, how long would such an infrastructure take to become fully
operational?
A.6. The Federal Reserve is not committing to any specific actions
at this time, and there are several potential approaches that could
help achieve the objective of safe, efficient, and ubiquitous faster
payments. Any implementation period will depend on what actions,
if any, the Board decides to take. Analysis of the input received in
response to the Board’s 2018 FRN is currently underway. The
Board is in the process of carefully considering all of the comments
received before the determining whether any action is appropriate
or the timing of such potential action(s).
Q.7. Given the Fed’s long-held goal of getting to real-time payments by 2020, is there a risk that the Fed’s suggestion that it
might, at some time in the future, enter the real-time payments
market—as a direct competitor of existing private-sector alternatives—delay, rather than facilitate, adoption of real-time payments?
A.7. In its 2018 FRN request for public comment on actions the
Board specifically sought feedback on whether potential Federal
Reserve action(s) in faster payments settlement would hasten or inhibit financial services industry adoption of faster payment services. The potential actions, which would facilitate real-time interbank settlement of faster payments, build on collaborative work
with the payment industry through the Federal Reserve System’s
Strategies for Improving the U.S. Payment System (SIPS) initiative. Real-time settlement avoids interbank credit risk by aligning
the speed of interbank settlement with the speed of underlying
payments. As a result, broad use of real-time settlement for faster
payments could enhance the overall safety of the faster payments
3 See ‘‘The Federal Reserve in the Payments System’’ (issued 1984; revised 1990), Federal Reserve Regulatory Service 9-1558.
73
market in the United States. Development of a nationwide, realtime interbank settlement infrastructure by the Federal Reserve
could encourage more banks to develop faster payment services,
creating more choice for consumers, households, and businesses.
The 2018 FRN sought feedback on what operational and technical adjustments the private sector would be required to make to
operate a 24x7x365 settlement environment and potential challenges and related costs the industry could face in the process of
transitioning to such an environment.
As part of its central mission, the Federal Reserve has a fundamental responsibility to ensure that there is a flexible and robust
infrastructure supporting the U.S. payment system on which the
private sector can develop innovative payment services that serve
the broadest public interests.
The Federal Reserve is committed to working together with the
private sector to achieve nationwide access to faster payments and
will continue to explore collaborative efforts to promote the safety
and efficiency of faster payments and to support the modernization
of the financial services sector’s provision of payment services.
Q.8. Brexit: Financial Stability Monitoring—I’m glad to see the
news that the Federal Reserve is now publishing semiannual financial stability reports. I think it’s critical that the Federal Reserve,
and the other financial regulators and FSOC, continue to monitor
for new and emerging threats to financial stability. One of the
items the Fed has highlighted in its financial stability report is
Brexit.
What are the key economic and financial risks associated with
the possibility that Britain crashes out of the EU?
A.8. European Union (EU) leaders agreed at their April 10 summit
to grant the United Kingdom (U.K.) a Brexit extension until October 31, 2019. Although this extension reduced uncertainty in the
near term, it is unclear how Brexit will play out. The EU and the
U.K. Governments reached a deal last November that would set
the terms of U.K. withdrawal from the EU, and introduce a basis
for new relations, but the U.K. Parliament has not ratified this
agreement. The possibility remains that the U.K. could leave the
EU without a ratified agreement. U.K. authorities have warned
that, under such a no-deal scenario, there likely would be logistical
issues as the two economies jump from a seamless trading environment to one involving tariffs, rules of origin of products, and border
inspections. Planned measures to address such issues likely would
not eliminate all such disruptions, which might have a significant
near-term effect on the U.K. economy and on some of the EU
economies that trade most heavily with the U.K.
The direct trade impacts on the United States likely would be
minimal. A no-deal scenario could generate some European financial stresses that could spill over to global financial markets, including in the United States. However, U.S. financial institutions
have had a long time to prepare, with oversight from U.S., U.K.,
and EU regulators, for potential spillovers resulting from Brexit.
More generally, U.S. banks currently are well capitalized, and their
exposures to Europe are fairly small relative to their capital levels.
Q.9. What is the Fed doing to prepare for such an event?
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A.9. Board staff has monitored and analyzed the U.K. expected
withdrawal from the EU, including the possibility of a no-deal scenario. As part of these efforts, staff has discussed preparedness for
a variety of scenarios with financial institutions and closely monitored political, economic, and financial sector developments. Staff
has also coordinated with other domestic financial regulatory agencies and the U.S. Department of the Treasury as well as engaged
with relevant authorities in the U.K. and EU, as appropriate. In
particular, Board staff has consulted regularly with the Bank of
England and its Prudential Regulation Authority.
Q.10. With which Federal agencies is the Fed working in preparation?
A.10. As mentioned in response above, Board staff has coordinated
and consulted with colleagues at several Federal agencies, including the U.S. Department of the Treasury, Commodity Futures
Trading Commission, Securities and Exchange Commission, OCC,
and FDIC.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHATZ
FROM JEROME H. POWELL
Q.1. The U.S. Government’s Fourth National Climate Assessment
says climate change will ‘‘cause substantial net damage to the U.S.
economy throughout this century,’’ with annual losses in some sectors projected to exceed the current GDP of many U.S. States. Climate-related extreme weather will ‘‘increasingly affect our trade
and economy, including import and export prices.’’ It will also disrupt operations and supply chains, and ‘‘lead to large-scale shifts
in the availability and prices of many agricultural products across
the world.’’
Has the Federal Reserve specifically examined data in the National Climate Assessment on the economic impact of different climate change scenarios?
A.1. The longer-term predicted impacts of climate change are generally beyond the scope of monetary policy. Although it is important for us to understand how weather is affecting the economy in
real time and respond accordingly, monetary policy is not well suited to address longer-term economic disruptions associated with severe weather events. Longer-term predictions such as those in the
Fourth National Climate Change Assessment report are an issue
for Congress and the Administration to consider.
Q.2. Has the Federal Reserve examined any data, produced by the
U.S. Government or by others, on the economic impact of increasingly severe weather and climate events, such as flooding, sea level
rise, drought, wildfires, and deadly storms?
A.2. The Federal Reserve takes into account the severity of weather events in assessing current economic conditions as part of our
deliberations about the appropriate stance of monetary policy. For
example, our staff has relied on data from the Federal Emergency
Management Agency and the Department of Energy to gauge the
disruptions to oil and gas extraction, petroleum refining, and petrochemical and plastic resin production in the wake of hurricanes
that affected the Gulf region. Our staff regularly uses daily meas-
75
ures of temperatures and snowfall from National Oceanic and Atmospheric Administration (NOAA) weather stations to understand
better, how severe weather may be affecting economic activity in
specific areas. In addition, our staff recently has begun to use credit and debit card transaction data to gauge how specific types of severe weather events might affect consumer spending in areas affected by those events.
Q.3. Have you considered how different climate change scenarios
would impact the Federal Reserve’s statutory mandate to stabilize
prices, maximize employment, and moderate long-term interest
rates?
A.3. As I have noted previously, while Congress has entrusted the
matter of addressing climate change to other agencies, the Federal
Reserve uses its authorities and tools to prepare financial institutions for vulnerabilities, including severe weather events. Over the
short-term, severe weather events have the potential to inflict serious damage to the lives of individuals and families, to devastate
local economies and even temporarily affect national economic output and employment. The Federal Reserve, in its conduct of monetary policy and related decision making, is concerned with shortand medium-term developments that may change materially over
quarters and a relatively small number of years, rather than the
decades associated with longer-term changes.
Q.4. Have you considered how different climate change scenarios
would impact the Federal Reserve’s statutory mandate to promote
the safety and soundness of supervised institutions and the stability of the overall financial system?
A.4. The Federal Reserve Board (Board) has supervisory and regulatory authority over a variety of financial institutions and activities, with the goal of promoting a safe, sound, efficient, and accessible financial system that supports the growth and stability of the
U.S. economy. In carrying out the responsibility to promote the
safety and soundness of individual financial institutions that we
supervise, we assess, among other things, supervised firms’ ability
to identify, measure, monitor, and control risks, including those related to severe weather events. The Federal Reserve has particular
tools and mechanisms for monitoring the financial system.
One of the most critical elements of safety and soundness is a financial institution’s ability to absorb substantial unexpected losses
and continue to lend to households and businesses. Severe weather
events are one potential source of such losses, especially for firms
with exposures concentrated in regions that are likely to experience
those events. We routinely examine banks’ management of concentration risk and recommend or, if necessary, enforce, enhancements, including additional capital, where warranted. For example,
our supervisors consider any evidence of a rising incidence of severe weather events, including coastal flooding, in those areas
where it is a factor.
To that end, the Board issued supervisory guidance in 1996, to
ensure that bank management takes into account all relevant risks
in their underwriting and review practices. Our guidance with respect to credit underwriting and asset quality provides supervisors
the flexibility necessary to address risks from severe weather
76
events. 1 In addition, our guidance also specifically addresses lending to sectors where assessments of these risks are critical for due
diligence and underwriting. 2
The Board also ensures that financial institutions that are core
clearing and settlement organizations, or play significant roles in
critical financial markets maintain sound practices to ensure that
they can recover and resume their activities supporting these markets following a severe weather event. In addition, the Board has
provided guidance to banking institutions directly affected by an
event that results in a Presidential declaration of a major disaster.
The supervisory approach described in the guidance provides examiners flexibility to conduct supervisory activities and formulate supervisory responses that take into account the issues confronting
institutions impacted by such events.
Q.5. Does the Federal Reserve coordinate with other central banks
and bank supervisors around the world to discuss best practices for
managing emerging risks? If no, why not? If yes, have climate risks
to financial institutions been discussed?
A.5. In its role promoting financial stability, the Federal Reserve
cooperates and coordinates with many other central banks and
bank supervisors and regulators, both bilaterally and through
international standard setting bodies, such as the Basel Committee
on Banking Supervision and the Financial Stability Board (FSB).
We discuss climate risks frequently with our international central
bank colleagues. Our engagement is intended to help identify and
address vulnerabilities in the global financial system and to develop stronger regulatory and supervisory policies in order to help
ensure a more stable and resilient global financial system.
Additionally, the Federal Reserve Board is an active participant
in the proceedings of the FSB, which was established after the financial crisis to strengthen financial systems and increase the stability of international financial markets, and has undertaken relevant work in this area. Of particular interest are efforts to promote enhanced risk management disclosure by financial institutions. In this regard, the FSB established in 2015 the Task Force
on Climate-related Financial Disclosures (TCFD), a global, industry-led effort to develop recommendations for consistent climate-related financial disclosures, for use by companies in providing information to investors, lenders, insurers, and others. The TCFD considers the physical, liability, and transition risks associated with
climate change and what constitutes effective financial disclosures
across industries.
Q.6. Your counterpart in the United Kingdom, Mark Carney, recently announced that the Bank of England is planning to include
the impact of climate change in its bank stress tests as early as
1 See, e.g., 12 CFR Part 208, App. D-1 to Part 208 (‘‘Interagency Guidelines Establishing
Standards for Safety and Soundness’’); Board of Governors of the Federal Reserve System, ‘‘SR
96-36: Guidance on Evaluating Activities Under the Responsibility of U.S. Branches, Agencies,
and Nonbank Subsidiaries of Foreign Banking Organizations (FBOs)’’ (Dec. 19, 1996), https://
www.federalreserve.gov/boarddocs/srletters/l996/sr9636.htm; Federal Deposit Insurance Corporation, ‘‘Uniform Financial Institutions Rating System’’, 62 FR 752 (Jan. 6, 1997).
2 See, e.g., Board of Governors of the Federal Reserve System, ‘‘Commercial Bank Examination Manual’’, §§2142.1 (‘‘Agricultural Credit Risk Management’’), 2150.1 (‘‘Energy Lending—Reserve-Based Loans’’) (rev. Oct. 2018), https://www.federalreserve.gov/publications/files/
cbem.pdf.
77
next year. The Bank of England is taking this step because it believes that responding to climate-related financial risks ‘‘helps ensure the Bank can fulfil its mission to maintain monetary and financial stability.’’
Are you aware of the Bank of England’s plans to incorporate climate risk into bank stress testing?
A.6. The Board is aware of the Bank of England’s (BOE) plans to
incorporate severe weather risk into bank stress testing. The BOE
has said it will conduct this analysis as part of its exploratory scenario either next year or 3 years hence. As we understand, banks
cannot pass or fail these exploratory scenarios; instead, the scenarios are designed to increase transparency and to focus on specific issues.
Q.7. Do you think it would be productive for the Federal Reserve
to learn more about the Bank of England’s efforts to incorporate
climate risks into bank stress testing?
If not, please explain why the Federal Reserve does not think it
is worth learning more about how climate risks could impact the
safety and soundness of financial institutions or the stability of the
financial system.
A.7. Federal Reserve staff meet regularly to exchange views with
our counterparts at the BOE and other global regulators. We look
forward to seeing the structure of and results of the exercise,
should the BOE ultimately decide to conduct these tests.
Q.8. In his September 2010 testimony before the Financial Crisis
Inquiry Commission, former Federal Reserve Chairman Ben
Bernanke said the most prominent trigger of the 2007–08 global financial crisis ‘‘was the prospect of significant losses on residential
mortgage loans.’’ Chairman Bernanke explained, ‘‘When house
prices declined, the equity of those homeowners was quickly wiped
out; in turn, ‘underwater’ borrowers who owed more than their
houses were worth were much more likely to default on their mortgage payments.’’
The National Climate Assessment found it is likely that ‘‘between $66 billion and $106 billion worth of real estate will be
below sea level by 2050; and $238 billion to $507 billion, by 2100.’’
It is reasonable to expect that frequent and intense coastal property damage under such scenarios will drastically reduce property
values.
We do not need to wait to 2050 to see the impact of climate
change on property values. Coastal flooding from sea level rise is
already eroding property values. A recent analysis by First Street
Foundation estimated that property value losses from coastal flooding in 17 States totaled almost $16 billion from 2005 to 2017. 3
Has the Federal Reserve assessed the risks that extreme weather
events pose to the U.S. housing market?
A.8. The Board conducts an active research program on a broad
array of topics in economics and finance. As part of this broader research mission, research staff write working papers and publish ar3 First Street Foundation, ‘‘Rising Seas Erode $15.8 billion in Home Value From Maine to
Mississippi’’, February 27, 2019, available at: https://assets.floodiq.com/2019/02/
9ddfda5c3f7295fd97d60332bb14c042-firststreet-floodiq-mid-atlantc-release.pdf.
78
ticles in peer-reviewed journals. This research includes studies on
a number of topics that pertain to modeling the economic effects of
severe weather events, modeling uncertainty and risks from such
events in financial markets, and estimating the effects of these
events on consumer and business activity, as well as on local and
aggregate real estate markets. In recent years, Board economists
have authored more than 30 papers on the impact of climate
change on the financial sector and undertaken research on the economics of weather, natural disasters, climate policy, and related
risks.
Q.9. How does the Federal Reserve assess the risk of natural disasters that are increasing in frequency and severity on the loan portfolios of supervised financial institutions and the financial system
as a whole?
A.9. The Board’s framework for monitoring the stability of the U.S.
financial system distinguishes between shocks to and
vulnerabilities of the financial system. 4 Shocks are typically surprises and are inherently difficult to predict. Vulnerabilities tend
to build up over time and are the aspects of the financial system
that are most expected to cause widespread problems in times of
stress. Thus, in our framework, severe weather events are treated
as shocks to the system. For example, the possibility of large losses
to property and casualty insurers from historically atypical timing,
intensity, or frequency of hurricane damages represents one such
potential shock. If that shock led to significant strains on capital
positions of affected firms, those losses could expose or exacerbate
other vulnerabilities, such as funding risks, through the firms’ connections to the broader financial system.
While the Board’s framework provides a systematic way to assess
financial stability, some potential risks do not fit neatly into that
framework. Some potential risks are difficult to quantify, especially
if they materialize over such a long horizon that methods beyond
near-term analysis and monitoring are appropriate. Accordingly,
we rely on ongoing research by academics, our staff, and other experts to improve our understanding and measurement of such
longer-run or difficult-to-quantify risks.
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR VAN HOLLEN FROM JEROME H. POWELL
Q.1. One of the fundamental economic challenges of our times is
to make sure that America families actually benefit from economic
growth. There is a growing gap between skyrocketing corporate
profits and CEO salaries on one side, and stagnant pay for typical
workers on the other side. At the same time, President Trump is
implementing policies that make the situation even worse, such as
huge tax cuts for millionaires and big corporations, while taking
credit for economic trends that predate his Administration.
During the hearing, I asked you about data showing that for the
typical American worker, weekly earnings are growing slower
under President Trump than they were during President Obama’s
4 See Board of Governors of the Federal Reserve System, ‘‘Financial Stability Report’’ (May
2019), https://www.federalreserve.gov/publications/files/financial-stability-report-201905.pdf.
79
second term, after adjusting for inflation. According to the Bureau
of Labor Statistics, the median usual weekly earnings for full-time
wage and salary workers was $333 in the 4th quarter of 2012, just
before President Obama’s second term began. At the end of President Obama’s second-term, in the 4th quarter of 2016, this figure
was $349. Two years into President Trump’s term, in the 4th quarter of 2018, it is $355. All of these figures are 1982–1984 constant
dollars.
Is it correct that median usual weekly earnings for workers were
increasing at an average rate of 1.18 percent per year during President Obama’s second term, compared to 0.86 percent since President Trump took office?
A.1. It is correct that, according to both of the measures you report,
inflation-adjusted labor compensation, in the aggregate, increased
a little more rapidly from 2012:Q4 to 2016:Q4 than from 2016:Q4
to 2018:Q4.
I would emphasize that the result you describe—faster real wage
gains during the 2012–2016 period—depends importantly on the
fact that oil prices fell between 2014 and 2016 and partially rebounded after that. That 2014–2016 drop in oil prices fed through
to prices of gasoline and other energy products, and so boosted
households’ purchasing power at that time. Because energy prices
can be so variable, it is useful to look at real wage gains over somewhat longer periods, to help avoid having transitory energy price
movements dominate the calculations.
Q.2. During the hearing, you identified the Employment Cost Index
(ECI) as your single favorite source for compensation data that includes both wages and benefits. The Employment Cost Index for
total compensation of all civilian workers was 117.8 in the 4th
quarter of 2012, 128.0 in the 4th quarter of 2016, and 135.2 in the
4th quarter of 2018, when indexed to a base of 100 for December
of 2005.
At the same time, inflation measured by the Consumer Price
Index for All Urban Consumers (CPI–U), was 231.369 in the 4th
quarter of 2012, 242.164 in the 4th quarter of 2016, and 252.759
in the 4th quarter of 2018, when indexed to a base of 100 for 1982–
1984 dollars.
Is it correct that ECI was increasing at an average annual rate
of 2.10 percent during President Obama’s second term, with CPI–
U increasing at an average annual rate of 1.15 percent during this
period, meaning that 0.94 percent of the average annual increase
in ECI could be attributed to real compensation growth?
A.2. See response to Question 1.
Q.3. Is it also correct that ECI has increased at an average annual
rate of 2.77 percent since President Trump took office, with CPI–
U increasing at an average annual rate of 2.16 percent during this
period, meaning that 0.60 percent of the increase in ECI can be attributed to real compensation growth?
A.3. See response to Question 1.
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RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM JEROME H. POWELL
Q.1. Inequality—A few weeks ago, you told a group of teachers you
were concerned that income growth for middle- and working-class
Americans ‘‘has really decreased,’’ while ‘‘growth at the top has
been very strong. We want prosperity to be widely shared. We need
policies to make that happen.’’
If Congress were able to pass policies that would increase the
paychecks and bank accounts of working families—raise the minimum wage, invest in infrastructure, subsidize housing and child
care for low-wage workers, support for unions, and make health
care and college more affordable—what would the impact on the
economy be? Would you see higher economic growth? Greater workforce participation? Changes to unemployment? Inflation increases?
Are there Nations that have better fiscal policies that lead to
higher wages you would recommend we consider? Which countries
and which policies lead to higher wages do you think?
A.1. Specific fiscal policy or labor market policy proposals that are
most appropriate for the United States are best decided by Congress. Generally speaking, however, policies aimed at increasing
workforce participation and raising productivity have the best
chance at boosting economic growth and raising living standards
for Americans across the economic spectrum.
We at the Federal Reserve can play a role by conducting monetary policy so as to fulfill our dual mandate of maximum employment and stable prices. In this way, we can ensure that the conditions are in place to keep labor demand high and stable for as
many workers as possible, which in turn allows workers to find
jobs that best match their abilities and that provide them with the
greatest opportunity to increase their skills, productivity, and earnings more easily.
Q.2. Economic Mobility—Earlier this month in your speech to
teachers, you pointed out that the United States used to be a global
leader in mobility—the ability of people born into poverty to move
up to the middle class or even the wealthiest echelons of society.
You said that is no longer true. You said ‘‘The U.S. lags now in mobility. And that’s not our self-image as a country, nor is it where
we want to be.’’
Are there Nations that have better fiscal policies that lead to
more economic mobility you would recommend we consider? Which
countries and which policies lead to greater economic mobility?
A.2. Research by a number of economists suggests that intergenerational economic mobility in the United States lags that of many
other advanced economies. The reasons behind this are complex
and not well understood. The Federal Reserve can do its part by
working to achieve its dual mandate of maximum employment and
price stability, as full employment improves the resources available
to lower income households.
Q.3. During the hearing, you mentioned a carpentry program for
women that paid more in benefits than they would receive from the
job for which they were training. Please provide details on this program: where it was located, for which jobs and which types of pro-
81
grams through which the recipients received benefits that provided
and income of more than ‘‘$9 or $10 an hour.’’
A.3. Last year, I visited West Virginia Women Work, a nonprofit
in Morgantown, West Virginia, founded in 2000 to help women explore, train, and secure employment in nontraditional occupations,
especially the skilled trades. The organization developed the Step
Up for Women Construction Pre-Apprenticeship, a program designed to prepare women for entry-level construction jobs and apprenticeships. Additional information on this program is available
on the West Virginia Women Work’s website at: http://
wvwomenwork.org/stepup.
Q.4. Bank Profits—Banks and other financial firms made more
than $500 billion in profits in the first three quarters of 2018.
Banks made a record $237 billion in the fourth quarter of 2018.
These are record profits.
It seems that finance (banks, insurance, and real estate) earned
more than 26 percent of all domestic corporate profits during those
first three quarters of last year. Only about 6 percent of the private
sector workforce is employed in finance but their share of corporate
profits is about $1 in every $4 dollars.
Are those figures correct? How much profits did the finance sector earn in 2018? What did finance earn compared to other private
sectors such as manufacturing and real estate? What percent of
corporate profits did finance earn? What share of people are employed in finance compared to other sectors?
What is the impact on the economy when financial firms earn
such an outsized percentage of corporate profits?
The Federal Reserve tracks a number of indicators of our Nation’s economic prosperity. If you were to prioritize the top five indicators of economic prosperity, would bank profitability be in the
top five?
A.4. Data from the Bureau of Economic Analysis (BEA) indicates
that, in the first three quarters of 2018, the corporate financial sector (including finance, insurance, bank, and other holding companies, but excluding Federal Reserve Banks) reported profits of $387
billion at an annual rate of 1.9 percent of U.S. gross domestic product (GDP), on average. 1 Data from the Federal Deposit Insurance
Corporation (FDIC) indicates that FDIC-insured commercial banks
and savings institutions earned profits of $237 billion in all of
2018.
During the first three quarters of 2018, the corporate financial
sector accounted on average for 24.8 percent of profits generated by
the domestic corporate sector, according to data from the BEA.
During the postrecession period, there has been no discernible increasing or decreasing trend in the fraction of corporate domestic
profits generated by the financial sector or in other domestic sectors. For example, the manufacturing sector has been responsible,
on average, for 22 percent of the domestic corporate sector’s profits.
The manufacturing sector’s share was 14.9 percent in the first
quarter after the last recession (2009 Q3). Its share then reached
1 On March 28, 2019, the BEA reported the profits for the fourth quarter of $372 billion at
an annual rate of 1.8 percent of GDP.
82
a peak value of 28.l percent in the last quarter of 2013, and in the
third quarter of 2018, its share was 18.4 percent.
Data from the Bureau of Labor Statistics (BLS) indicate that the
financial corporate sector’s share of total private employment has
declined slightly since the financial crisis, from 5.4 percent in 2009
to 4.9 percent in 2018. Over the same period, the share of manufacturing sector employment also has declined a bit, from 10.8 percent
to 10 percent. By contrast, the professional, scientific, and technical
services sector’s share of total private employment has increased
from 15.3 percent to 16.6 percent.
Total profits relative to the number of total employees in the corporate financial sector was $62,250 per employee in the third quarter of 2018. This relatively high profitability per worker is typical
of sectors that rely on intangible assets to create value. Intangible
assets include, but are not limited to, reputational and institutional
capital, brand value, and patents. As an example, in the third
quarter of 2018, the profit-to-employees ratio for information technology and chemicals (dominated by pharmaceuticals)—two intangible-intensive sectors—were $57,619 per employee and $56,915
per employee, respectively.
It is difficult to assess the range of economic consequences derived from the degree of profitability of the financial sector, particularly because the size and profitability of the corporate sector
are themselves the result of other economic forces. For example,
the corporate financial sector has increased in importance in the
U.S. economy during the postwar period. Academic research suggests that this rise is itself a consequence of the increase in the volume of intermediation to support economic activity, especially business credit, equity, and household credit. 2
In general, profits in the banking sector are important to the extent that they contribute to building and maintaining the capital
adequacy of the financial system. We view the resilience of bank
capital as a fundamental element of financial stability and the
health of the credit markets that support the U.S. economy. More
generally, in the Federal Open Market Committee’s (FOMC) conduct of monetary policy, to best achieve its maximum employment
objective and its symmetric 2-percent inflation objective, the Committee takes into account a wide range of information, including
measures of labor market conditions, indicators of inflation pressures and inflation expectations, and financial and international
developments. Bank profitability is only one of numerous factors
that influence the FOMC’s assessment of overall economic conditions.
Q.5. Buybacks—We need investments that help families prosper.
Instead, the majority of the Trump and GOP tax bill has gone to
share buybacks—$171 billion worth have been announced so far in
2018—more than double 2017’s total. This keeps stock markets
high. Financial Times’ columnist, Rana Foroohar, refers to the
buybacks as a ‘‘financial shell game of issuing their own [corporate]
debt at very cheap rates and handing the money back to their investors as buybacks and dividends, while also buying up the high2 See Thomas Philippon, ‘‘Has the U.S. Finance Industry Become Less Efficient?’’ American
Economic Review, 105(4), 2015.
83
er-yielding bonds of riskier companies at a favorable spread and
holding those assets offshore.’’
What happens when the buybacks stop?
A.5. While it is too early to conclude the overall effects of the 2017
tax legislation on firm investment and share repurchase decisions,
it is likely that companies allocated at least some portion of earnings repatriated from abroad to share buybacks following changes
in the tax treatment of foreign earnings. In dollar volume, share
buybacks in 2018 were up substantially from 2017 and are at their
highest annual level on record since 1983. However, when measured relative to operating earnings, share buybacks appear somewhat closer to their historical range. For the first three quarters
of 2018, buybacks for nonfinancial companies averaged about 22
percent of companies’ operating income, and we estimate, based on
partial data available to date, that buybacks were 26 percent of operating income in the fourth quarter. By comparison, share
buybacks also averaged 22 percent of operating income from 2014
to 2016, but buybacks fell to 16 percent of operating income in
2017.
Companies generally repurchase shares when they deem these
repurchases to be the highest value use of those particular funds
for the company. U.S. companies have been quite profitable in recent decades and those profits have allowed companies to accumulate cash, pay dividends, and repurchase shares, in addition to investing and hiring.
A reduction in share repurchases would not, however, necessarily
translate into an increase in investment. For example, in lieu of
share buybacks, a given company may choose to distribute funds
to shareholders by other means (e.g., regular or special dividends)
or retain a larger share of the funds by accumulating cash or other
liquid assets.
Q.6. Discrimination in Lending—These questions follow up on our
discussion during the hearing about how Fed examiners evaluate
financial institution for fair lending compliance.
Please expand on the type of indicators or red flags examiners
look for in determining compliance with the Equal Credit Opportunity Act or the Fair Lending Act? It’s not just credit scores and
loan-to-value ratios. What types of lending products? Would examiners consider incentive pay tied to higher-priced loans? Would the
existence of bonuses for bank staff that provided a loan with higher
fees and interest rates be a red flag? Please be specific and comprehensive in your response.
A.6. The Federal Reserve’s fair lending supervisory program reflects our commitment to promoting financial inclusion and ensuring that the financial institutions under our supervision fully comply with applicable Federal consumer protection laws and regulations. For all State member banks, we enforce the Fair Housing Act
which provides us authority to review all Federal Reserve regulated institutions for potential discrimination with respect to mortgages, including potential redlining, pricing, and underwriting discrimination. For State member banks of $10 billion dollars or less
in assets, we also enforce the Equal Credit Opportunity Act
(ECOA), which provides us authority to review these State member
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banks for potential discrimination concerning any credit product.
Together, these laws prohibit discrimination on the basis of race,
color, national origin, sex, religion, marital status, familial status,
age, handicap/disability, receipt of public assistance, and the good
faith exercise of rights under the Consumer Credit Protection Act
(collectively, the ‘‘prohibited basis’’).
We evaluate fair lending risk at every consumer compliance
exam based on the risk factors set forth in the Federal Financial
Institutions Examination Council’s interagency fair lending examination procedures. 3 These procedures include risk factors related
to potential discrimination in pricing, underwriting, redlining, and
steering. Our examiners commonly review mortgage products and
consumer products reportable under the Home Mortgage Disclosure
Act for fair lending risk, although a State member bank’s lending
record will determine the loan products that are reviewed in a particular exam.
The presence of any financial incentives, including incentive pay
tied to higher-price loans or bonuses for staff originating such
loans, is a risk factor that the Federal Reserve considers, consistent
with the interagency fair lending procedures. Since April 2011,
Regulation Z’s mortgage loan originator compensation rule has prohibited banks from providing financial incentives based on the
terms or conditions of a loan, including the price. Although this
rule has decreased the risk of financial incentives influencing mortgage pricing, it has not eliminated such risk. In our outreach efforts to State member banks and the public, including in our publication, Consumer Compliance Supervision Bulletin, 4 we have been
clear in explaining how fair lending risk may be increased by financial incentives. During our consumer compliance exams, we continue to evaluate any financial incentives in place at a State member bank for compliance with both Regulation Z and the fair lending laws by reviewing the bank’s compensation structure along
with any other existing fair lending risk factors.
Q.7. Climate Change—Chapter 3 of the Monetary Report includes
a section on Uncertainty and Risks. It includes uncertainty about
the funds rate and the impact of trade and tariffs but nothing
about climate change. A recent paper by V.V. Chari of the Federal
Reserve of Minneapolis 5 urged social scientists to take the findings
of climate scientists about the effects of global warming on the atmosphere, climate, land, and oceans and understand and communicate the consequences of these physical changes on the economic,
social, and political well-being of humanity.
Central Banks and economists have a role to play to guide policy
recommendations to respond to climate change. Last year, William
Nordhaus and Paul Romer received the Nobel Memorial Prize in
Economic Sciences for pioneering the analysis of the economic effects of climate change.
3 See https://www.ffiec.gov/pdf/fairlend.pdf.
4 See
www.federalreserve.gov/publications/2018-july-consumer-compliance-supervision-bulletin.htm.
5 Chari, V.V., ‘‘The Role of Uncertainty and Risk in Climate Change Economics’’. The Federal
Reserve Bank of Minneapolis: Research Division. December 2018. Available at: https://
www.minneapolisfed.org/research/sr/sr576.pdf.
85
Do you agree with Janet Yellen who, along with 3,300 economists, signed a statement supporting a carbon tax to prevent devastating droughts, fires, and hurricanes? 6
A.7. I think that it is appropriate for the details of fiscal policy decisions to be left to Congress and the Administration.
Q.8. What role will the Federal Reserve play in communicating the
effects of alternative policies aimed at addressing climate change?
Will the Fed include economic models to respond?
A.8. Addressing climate change is a responsibility that Congress
has entrusted to other agencies. That said, the Federal Reserve
uses its authorities and tools to prepare financial institutions for
severe weather events. Over the short term, these events have the
potential to inflict serious damage on the lives of individuals and
families, devastate local economies (including financial institutions), and even temporarily affect national economic output and
employment. As such, these events may affect economic conditions,
which we take into account in our assessment of the outlook for the
economy.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SMITH
FROM JEROME H. POWELL
Q.1. In November, the Minneapolis Fed reported that the number
of farms filing for Chapter 12 bankruptcy has doubled in Ninth
District States over the past 4 years. We have watched this problem evolve for years. The overproduction of certain commodities
like grains and dairy has led to low prices which, combined with
recent trade disputes, has made it nearly impossible for family
farms to turn a profit. In the years following the Great Recession,
low interest rates made it easier for farmers to take on debt, upgrade equipment and facilities, and buy new land. Steadily rising
interest rates in the last 3 years have made it more difficult for
farmers with already small margins to pay off their debts. The
Beige Book put out by the Minneapolis Fed in the fourth quarter
of 2018 says that approximately three in five lenders reported seeing a decrease in farm incomes and in capital spending. It is clear
that downturns in the farm economy can have big impacts on consumer spending and regional economic prosperity.
How do you expect the rise in farm bankruptcies to impact the
state of our economy, both regionally and nationally?
A.1. The U.S. farm economy has remained in a prolonged downturn
for the past several years, alongside persistently low agricultural
commodity prices. Nationally, farm income is expected to rise in
2019 due, in part, to Government support programs announced in
recent months. Some agricultural prices have also increased significantly due to widespread weather disruptions that affected planting in May and June. Looking ahead, however, agricultural commodity prices and farm incomes are generally expected to remain
low beyond 2019.
6 Jackson, Hugh, ‘‘Did AOC Nudge Economists (Including 12 From Nevada) To Back a Carbon
Tax?’’ Nevada Current. February 20, 2019. Available at: https://www.nevadacurrent.com/2019/
02/20/did-aoc-nudge-economists-including-12-from-nevada-to-back-a-carbon-tax.
86
Amid reduced incomes, financial stress in the agricultural sector
has continued to build at a gradual pace. At commercial banks, delinquencies on farm loans have increased slightly in recent years,
but remain less than in 2010, and well below those of the 1980s,
a period often referred to as the U.S. farm crisis, which included
a number of bank failures and other significant challenges in rural
communities.
Similar to the uptick in delinquencies on farm loans, farm bankruptcies also have edged higher since 2014. Nationally, Chapter 12
bankruptcy filings have increased from 360 in 2014 to 498 in 2018.
The increase in bankruptcies appears to be most pronounced in
States with a high concentration of dairies, as well as States focused on corn and soybean production. In Minnesota, for example,
there were an average of thirteen Chapter 12 filings per year from
2014 to 2017, increasing to twenty-six in 2018.
Despite the ongoing challenges of low farm incomes and an uptick in farm bankruptcies, measures of solvency have generally remained strong, and the increase in bankruptcies appears to be having a limited effect on broader economic conditions. The debt-toasset ratio for the U.S. farm sector is expected to rise only slightly
in 2019 to 13.9 percent, as farm real estate values remain relatively stable. Although the severe planting delays this spring may
affect financial conditions for some producers, Government payments will provide some support and, thus far, there appears to be
limited impacts on broader regional economies. Moreover, unemployment has remained historically low, even in rural areas focused
on agriculture, where job growth has been weaker in recent years.
As these conditions evolve, the Board of Governors of the Federal
Reserve System (Board) will continue to monitor developments in
agriculture and the potential for implications in other segments of
the national or regional economy.
Q.2. Can you speak to how future changes in the Federal funds
rate may impact the agricultural economy?
A.2. While it cannot be said with certainty what actions will be
taken in response to the future state of the economy, the Federal
Reserve System strives to incorporate perspectives from all regions
of the country and from a broad range of industries, including agriculture, into its regular monetary policy deliberations and its assessments of the U.S. economy. We receive input on agricultural
conditions from business contacts across the country through our
boards of directors at the Federal Reserve Banks, various advisory
councils, and surveys, in addition to reports from staff who track
developments in U.S. agriculture.
Although interest rates on farm loans are typically not indexed
or explicitly tied to the Federal funds rate, the rates on these loans
have increased in recent years. The increases have been relatively
modest, and some financial stress has been mitigated by the relative strength of farm real estate values. Since the end of 2015, the
average interest rate on farm operating loans at commercial banks
has increased about 1.9 percent, but still remains less than prevailing interest rates on these farm loans as recently as 2012.
Interest expenses on farm debt also account for a relatively small
share of overall expenses in the U.S. farm sector. Moreover, despite
87
the modest increase in interest rates, farm real estate values have
remained relatively strong and have supported farm borrower balance sheets.
Q.3. Wage growth has been stagnant for many Americans over the
last decade or longer. One of the causes of this concerning slowdown has been a decline in worker productivity growth—only about
1 percent annually over the last decade. This figure is well below
historic norms and is not, in my estimation, sustainable if we want
strong, long-term wage growth.
Why is there slower growth in productivity?
A.3. The reasons for the slowing in productivity growth over the
last decade or so are not clear. Some explanations assign a large
role to the Great Recession and its aftermath, which dramatically
reduced the level of investment in equipment, software, and research and development, and which also likely reduced credit available for business startups. Other research suggests, instead, that
the slowing occurred prior to the Great Recession and may be due
to a relative scarcity of new, general-purpose, high-impact technologies. If the slowdown has been due largely to factors associated
with the Great Recession, then as the expansion continues, productivity growth should pick up. Last year, productivity did rise at a
relatively robust rate of nearly 2 percent, but we would need to see
this higher rate of growth persist before concluding that the period
of low growth was behind us.
Q.4. To what extent, if any, is this slowdown affected—either now
or potentially in the future—by high levels of stock buybacks
crowding out investment in workforce, technology and capital improvements?
A.4. Companies generally repurchase shares when they deem these
repurchases to be the highest value use of those particular funds
for the company. U.S. companies have been quite profitable in recent decades, and those profits have allowed companies to accumulate cash, pay dividends, and repurchase shares, in addition to investing and hiring. Businesses without profitable investment opportunities are more likely to return income to shareholders than
invest. Shareholders are then free to invest the funds in businesses
that have profitable investment opportunities.
Q.5. Around the world, countries have begun shifting to nearly instantaneous, 24/7 payment systems. But while consumers can send
money in pseudo–real time using apps like Venmo, those transactions are only instantaneous for the consumer—they’re usually
not fully settled for the bank or retailer until days later. Two years
ago, the Fed’s Faster Payments Task Force embraced a goal of having a true, ubiquitous, 24/7 real-time payment system in the
United States by 2020—which is necessary to keep pace with foreign countries that are developing or already implementing similar
systems. Last year, the Fed sought comments on how to implement
a faster payments system, and asked what role, if any, the Fed
should play in developing it.
Do you think the United States is on track to meet the Task
Force’s goal of having a ubiquitous real-time payment system in
place by 2020?
88
A.5. The Faster Payments Task Force (FPTF), an industry work
group established by the Federal Reserve in 2015, called on all
stakeholders in its 2017 final report to facilitate a vision of ‘‘a payment system in the United States that is faster, ubiquitous, broadly inclusive, safe, highly secure, and efficient by 2020.’’ The Federal
Reserve continues to applaud the FPTF’s aspirational goal and the
industry’s progress to date. Also as part of that final report, the
FPTF requested that ‘‘the Federal Reserve develop a 24x7x365 settlement service’’ and to assess other operational roles ‘‘to support
ubiquity, competition, and equitable access to faster payments.’’
The Federal Reserve agreed to consider both requests of the FPTF,
and the Board sought, in an October 2018 Federal Register Notice,
public input on potential actions the Federal Reserve might take in
regard to supporting faster payments in the United States.
While those requests focused on infrastructure needs in the
United States to support faster payments, the FPTF also identified
a need for ongoing industry collaboration to build the foundation
for a highly functioning faster payments ecosystem and asked the
Federal Reserve to facilitate an industry group to establish a governance framework. Late last year, the industry announced the formation of the U.S. Faster Payments Council to develop collaborative approaches to accelerate U.S. adoption of faster payments.
All of these efforts by the Federal Reserve and industry are intended to create a strong foundation for collective efforts to promote the safety and efficiency of faster payments in the United
States and to support the modernization of the financial services
sector’s provision of payment services.
Q.6. With the 2020 deadline quickly approaching, when do you expect the Fed to take next steps on this issue?
A.6. The Board has received over 400 comment letters from a broad
range of market participants and interest groups, including consumer groups, in response to the October 2018 Federal Register Notice. The Board is carefully considering all of the comments received before determining whether any action is appropriate or the
timing of such potential action. Any resulting action the Board decides to take would be pursued in alignment with existing, longstanding Federal Reserve principles and criteria for the provision
of payment services.
Q.7. Are you monitoring actions of foreign countries to develop
real-time payment systems, and if so, how are those developments
informing your decision making?
A.7. Globally, the Federal Reserve is not unique in considering settlement infrastructure to support faster payments—several jurisdictions around the world have undertaken similar processes and
implemented settlement infrastructures to support real-time payments in their jurisdictions. The Federal Reserve has been actively
monitoring these efforts and considering the models for faster payment settlement in other countries, including real-time gross settlement (RTGS) and deferred net settlement (DNS), as part of its
analysis.
Q.8. You remarked recently that income inequality is our country’s
biggest economic challenge in the next decade—and said that: ‘‘We
89
want prosperity to be widely shared,’’ and, ‘‘We need policies to
make that happen.’’ I agree with this assessment. Many have
pointed to the recent strength in both the U.S. stock market and
overall GDP growth as evidence that Americans are doing better.
But I’m not sure these are the right indicators to be looking at to
assess how the average American family is faring these days. The
recent stock market highs and tax cut legislation do not benefit the
average American household to nearly the same extent as it benefits the very wealthiest households. In 2016, the top 10 percent of
American households owned 84 percent of all stocks, and the top
20 percent received about 70 percent the benefits of the 2017 tax
bill. Banks have done well in this economy too—with last years’
profits up 44 percent from 2017, including $29 billion in profits attributable to the Trump tax cuts alone. But instead of steering
these profits and tax windfalls toward new investment in jobs and
technology, banks and corporations have instead rewarded wealthy
investors with record stock buybacks—over $1 trillion worth in
2018.
Would you say that the 2017 tax bill, on balance, has increased
or decreased income and wealth inequality in the U.S., and would
you consider it an example of a policy that creates the ‘‘widely
shared prosperity’’ that you called for recently?
A.8. For a number of reasons, estimates of the distributional effects
of the Tax Cuts and Jobs Act of 2017 are subject to considerable
uncertainty. For example, the changes in the personal income tax
laws were very complicated and have affected different families in
various ways, in part reflecting the new limits on deductibility of
State and local income taxes and the end of personal exemptions.
Similarly, the distributional effects of corporate income taxes are
very complex. A corporate income tax cut may benefit working people if the tax cut induces more investment that results in higher
productivity and real wages. But estimating the magnitude of these
effects from tax cuts is highly uncertain. More generally, policies
to reduce economic inequality, including tax policies, are appropriate for Congress to decide.
Q.9. How committed is the Fed to studying the macroeconomic effects of our record-high levels of inequality, and how are the findings being incorporating into the Fed’s policymaking and its assessment of the economic outlook?
A.9. The Federal Reserve tries to understand the root causes and
economy-wide implications of the uneven distribution of income
and wealth. For example, we support two household surveys, the
annual Survey of Household Economics and Decision Making
(SHED) and the triennial Survey of Consumer Finances (SCF), to
study household finances. In addition, we recently released the Distributional Financial Accounts, which we also hope will add to our
understanding of changes in the income and wealth distributions.
And, we have included analyses of various forms of economic disparities in several recent issues of the Federal Reserve’s Monetary
Policy Report. With regard to monetary policy, the Federal Reserve
is limited in the extent to which its tools can specifically address
inequality. However, our dual mandate includes maximum employment, which has a direct impact on the most vulnerable families
90
who depend on their labor income. More generally, and regardless
of its effects on growth, inequality is an important and complicated
issue that is appropriately addressed by Congress.
Q.10. Recent Bureau of Labor Statistics data has shown unemployment rates to be approaching record lows—hovering around 4 percent. But the headline picture obscures key compositional effects.
When these numbers are broken down by race, we see significant
disparities, with notably higher unemployment rates for African
Americans and other traditionally marginalized communities. Compared to white unemployment, which remains below 4 percent,
black and hispanic workers face 6.8 percent and 4.9 percent unemployment rates, respectively. These disparities reflect structural
barriers but also demonstrate that there is some slack in the labor
market with the potential to reintegrate traditionally marginalized
individuals into the labor force. The Fed has suggested previously
that as a whole, the economy is at or near full employment.
Are communities of color at full employment as well?
A.10. The unemployment rate has fallen sharply in recent years for
all major racial and ethnic groups. In particular, the unemployment rate of African Americans recently reached its lowest level on
record (data began being collected in the early 1970s). Despite
these encouraging developments, as you note, the unemployment
rate of black workers remains well above that of whites. This troubling differential in unemployment rates is not new; it has persisted for several decades, regardless of the state of the business
cycle. Indeed, one relevant study 1 prepared by Federal Reserve
staff made two important findings. First, the black–white unemployment rate gap is highly cyclical, widening in recessions and
narrowing in expansions. That said, beyond the cyclical variation,
there has been very little secular improvement in this gap in the
past four decades. Second, the black–white unemployment rate
gap—as well as its cyclicality—is primarily driven by large and
persistent differences in the rate of job loss (rather than in the rate
of job finding) between black and white workers. In particular, in
economic downturns, black workers lose their jobs at a much higher rate than white workers, perpetuating large gaps in unemployment rates.
One important implication is that the Federal Reserve can be
most helpful by focusing on our dual mandate of fostering full employment and price stability. Setting monetary policy that is not
consistent with the dual mandate could lead to high price inflation
or financial imbalances, and thereby set the stage for an economic
downturn, which would appear to be especially harmful to African
American workers. Meanwhile, progress to further narrow the differentials in unemployment rates by race and ethnicity is more
likely to be found in structural policies aimed at addressing longerrun disparities. This is an important issue that is appropriately addressed by Congress.
1 Cajner, Tomaz, Tyler Radler, David Ratner, and Ivan Vidangos (2017), ‘‘Racial Gaps in
Labor Market Outcomes in the Last Four Decades and Over the Business Cycle’’, Finance and
Economics Discussion Series 2017-071. Washington: Board of Governors of the Federal Reserve
System, https://www.federalreserve.gov/econres/feds/files/2017071pap.pdf.
91
Q.11. How does the Federal Reserve and the FOMC consider disparities in the headline unemployment data when it comes to fulfilling its maximum employment mandate?
A.11. In setting monetary policy to be consistent with the dual
mandate of maximum employment and price stability for the economy as a whole, the Federal Open Market Committee (FOMC) considers a range of experiences and economic outcomes across the
country. For example, at every FOMC meeting, Reserve Bank
presidents describe economic conditions in their Districts, and the
Committee reviews a wide range of information on the strength of
the labor market, including data on the labor market conditions experienced by different demographic groups. Similarly, in advance of
every FOMC meeting, Federal Reserve staff provide to the Committee their review of labor market developments, including analyses of labor market conditions across groups defined by age, gender, race, and ethnicity. Finally, Federal Reserve staff regularly
conduct research aimed at better understanding differences in economic outcomes across demographic groups; the study cited previously is one example.
Q.12. One of most important powers given to FSOC in Dodd–Frank
was the ability to subject nonbank financial institutions to the
same enhanced regulatory scrutiny as the largest banks. This
power is crucial for keeping our financial system safe. Large
nonbank firms like AIG played a major role in crashing our economy in 2008 through their risky bets and excessive leverage, and
they were able to do so largely beyond the reach of the existing regulatory regime. Despite the importance of this regulatory power, as
of October 2018, all four nonbank SIFIs have been dedesignated—
leaving no nonbank institution, no matter how large or how risky,
under higher scrutiny from regulators to protect our Nation’s financial stability. Most recently, both MetLife and Prudential have successfully fought to shed their enhanced SIFI oversight—but not by
significantly deleveraging and radically changing their business
models like GE Capital and AIG did. The Treasury Department
under Secretary Mnuchin proposed in a 2017 report that FSOC’s
systemic risk oversight of nonbanks should shift to an activitiesbased approach rather than an entity-based approach, which would
make it more difficult and time-consuming to place SIFI status on
a nonbank entity. Former Chair Yellen, however, argued in a
Brookings interview last month that individual nonbank entities do
pose systemic risks, and when they do so it is important to supervise and regulate them.
Do you today believe that no nonbank financial institution currently warrants SIFI-level enhanced supervision, and do you agree
with the 2017 Treasury report proposing to make it more difficult
for FSOC to impose SIFI designations on nonbank entities?
A.12. Maintaining stability of the U.S. financial system remains a
top priority for the Federal Reserve. The Federal Reserve actively
monitors potential risks to U.S. financial stability in a variety of
ways, including reviewing the resilience of key financial intermediaries. As noted in the Federal Reserve’s Financial Stability
Report, the largest U.S. banks remain strongly capitalized; the leverage of broker-dealers is substantially below precrisis levels; in-
92
surance companies appear to be in relatively strong financial positions; and hedge fund leverage appears to have declined. 2
In terms of nonbank designations, the Financial Stability Oversight Council’s (FSOC’s) October 2018 decision to rescind the designation of Prudential Financial, Inc. (Prudential) was based upon
its reevaluation of the risks posed by the firm. This reevaluation
determined that the original designation likely overstated the negative consequences of potential asset liquidation should Prudential
experience material financial distress. For MetLife, Inc., in March
2016, the U.S. District Court overturned FSOC’s determination
that MetLife poses a threat to U.S. financial stability. It should be
noted that, in the summer of 2017, MetLife shrank substantially
by spinning off a portion of its U.S. retail life insurance and annuity segment into Brighthouse Financial.
The FSOC published proposed amendments to its guidance on
nonbank financial company determinations for public comment on
March 6, 2019. The proposed guidance, which was drafted following
the 2017 Treasury report, promotes an activities-based approach
for identifying and mitigating risks to financial stability. However,
FSOC also maintains the important tool of designating individual
entities as systemically important in cases where the activitiesbased approach cannot address the potential risks or threats. The
proposed guidance represents a disciplined framework that can
more effectively identify and address underlying sources of risk to
financial stability.
Still, individual nonbank entities can pose systemic risks, and
therefore it is critical that FSOC maintains the option to designate
these firms when appropriate. The activities-based approach described in the proposed guidance is intended to enhance the
FSOC’s process for evaluating individual nonbank financial companies for designation by increasing transparency, analytical rigor,
and public engagement. It is viewed as a valuable complement to
entity designations, rather than a substitute for the current entitybased approach of managing systemic risk.
Q.13. In the same Brookings interview, former Chair Yellen stated
that the Trump administration’s support for the SIFI designation
standards from the MetLife court would, ‘‘all but eliminate the
chances of future designations’’—do you agree with this assessment, and is it a concern for you?
A.13. As I noted in my response above, we continue to believe that
individual nonbank entities can pose systemic risks. The proposed
activities-based is viewed as a valuable complement to entity designations, rather than as a replacement for the current entitybased approach of managing systemic risk.
Q.14. In your testimony, you said ‘‘there are some things in the
Federal tax code where people lose their benefits with their first
dollar of earnings,’’ and you noted this effect could cause individuals to avoid entering the labor market.
Specifically, which tax credits were you referring to?
2 See
‘‘Federal Reserve Board Financial Stability Report’’ (April 2019),
www.federalreserve.gov/publications/files/financial-stability-report-201905.pdf.
https://
93
A.14. In general, safety-net programs are typically designed so that
benefits fall as incomes rise. As a consequence, for low- and moderate-income households, any improvement to household finances
from increased work is partially offset by the loss of benefits that
occurs as household income rises. Researchers have found that programs with a rapid phase-out of benefits and the interaction among
various safety-net programs sometimes leads to relatively high effective marginal tax rates. This, in turn, may discourage work, particularly for potential second earners. Researchers have found that
programs where the phase-out range is relatively long reduce potential disincentive effects.
It is up to Congress to determine how best to ensure safety-net
programs provide the lowest work disincentives as possible while
still achieving the social goals of the programs. For our part, the
Federal Reserve is focused on pursuing our congressionally mandated goals of maximum employment and price stability, and making the best decisions we can in the interest of the public.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
FROM JEROME H. POWELL
Q.1. Arizonans continue to be concerned about the Administration’s
trade policy. This unnecessary trade war hurts Arizona farmers
and businesses, stifling job creation. On February 17th, the Commerce Department submitted its national security report to the
President under Section 232 of the Trade Expansion Act.
While the details of this report aren’t public and the President
is not necessarily bound by the report’s recommendations, it is possible that this report recommends additional tariffs on automobiles
and automobile parts, levied as high as 25 percent.
What is your assessment on the effect these additional tariffs
would have on investment, the labor market, and the economy
overall—both in Arizona and nationally?
Modeling all but certain retaliatory tariffs from impacted Nations, which have historically targeted American farmers and agriculture.
What is your assessment on the collective effect this decision to
escalate the trade war would have on investment, the labor market, and the economy overall—both in Arizona and nationally?
A.1. In response to both of your questions, it is important to note
that the Federal Reserve Board is responsible for formulating monetary policy to achieve price stability and maximum sustainable
employment. Matters of trade policy are the responsibility of Congress and the Administration.
In pursuit of our mandated objectives, we monitor the effects of
various developments, including trade policy, on the economy. Tariff increases, by both the United States and other countries, already have affected individual businesses and industries. As indicated in the Federal Open Market Committee minutes and the
Beige Book, our business contacts report that trade policy developments are increasing input costs and creating policy uncertainty,
causing some firms to delay investments.
Similarly, potential tariffs on the auto industry could raise input
costs and could cause some firms to delay plans for investment or
94
hiring. Such tariffs also may disrupt the extensive supply chains
that link the auto industries in the United States, Canada, and
Mexico. Consumers could face higher prices for new automobiles.
However, the particular effects would depend on the precise implementation of tariffs and may be mitigated by certain types of
agreements with Canada and Mexico.
Retaliatory tariffs by other countries have impacted certain U.S.
industries, most notably agriculture, with farmers facing lower demand and prices for their crops, such as soybeans. Additional retaliatory tariffs could put further strain on farmers and other affected
businesses.
The overall process of trade negotiations is ongoing, and it is unclear how it will play out. If the end result is a world with higher
tariffs in many countries, then experience suggests there will be
negative effects for the U.S. economy as we miss out on some of
the benefits of trade. However, if the end result is a world with
lower trade barriers and a more level playing field, then the U.S.
economy should benefit.
95
ADDITIONAL MATERIAL SUPPLIED
FOR THE
RECORD
For use at 11:00 a.m., EST
ftbnwy 22, 2019
MoNETARY Poucv REPORT
February 22, 2019
Board of Governors of the Federal Reserve System
96
LETIER OF TRANSMITIAL
BOARD Of GOVER~ORS Of TilE
FEDERAL RESI:RVE Sl'STEM
Washington, O.C, February 22, 2019
THE PREStO£~• Of TilE SeN,m
THE SPEAKER OF THE HollSE OF REPRESENTATIVES
The Board of Governors is pleased to submit its Monet(lr)' Policy Repqtt pursuant to
section 28 of the Federal Resen·e Act.
Sincerely,
Jerome H. Powell, Chairman
97
STATEMENT ON n.oNGER·RUN GOALS AND MONETARY POLICY STRATEGY
Adopted ~ffectiv~ January 24, 2012; as amended effeclile /anuary 29,2019
The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory
mandate fromthe Congress of promoting maximum employment, stable prices, and moderate
long-term interest rates The Committee seeks !Oexplain its monetary policy decisions to the public
as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and
businesses, r.'duces economic and financialuncertaint)', incre~ses the elfectil'eness of monetary
policy, and enhances transparency and accountability, which are essential in a democratic society.
Inflation. employment, and long-term interest rate$ fluctuate o1·er time in response to economic and
financial disturbances Moreover, monetary policyactions tend to influence economic activity and
prices with a Jag. Therefore. the Committee's policy decisions reflect its longer-run goals, its mediumtermoutlook, 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 01·er 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 Committeereaftirms 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 o1·er the longer run 11~th the
Federal Reserve's Statutory mandate. The Committee would be concerned if inflation were nmning
persistently above or below this objective. Communicating this symmetric inflation goal clearly to the
public helps keep longer-term inflationexpectations 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 significant economic disturbances Tile maximum level of employment
is largely determined by nonmonetary factors that aft'ectthc structure and dynamics of the labor
market. These factors may change OI'Cr time and may not be dir<>ctly measurable. Consequently,
it would not be appropriate to specify a fixed goal for employment: rather. the Committee's policy
decisions must be informed by assessments of the maximum lerel 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
rmnt projections, the median of FOMC participants' estimates of the longer-run normal rate of
unemployment was 4.4 percent.
In setting monetary policy. the Committee ~ks to mitigate deviations of inflation from its
longer-run goal and deviations of employment from the Committees assessments of its maximum
level. TI!ese objectives are generallycomplementary. However, under circumstances in which the
Committeejudges that the objeetiloes are not complementary. it follo11~ a balanced approach in
promoting them. taking into account the magnitude of the deviations and the potentially dift'erent
time horizons over which employment and inflation are projected to return to levels judged
consistent with its mandate.
The Committee intends to reaftirm these principles and to make adjustments as appropriate at its
annual organizational meeting each January.
98
CONTENTS
Summary ...•.••.•.....•...........•..•........•.......•..•• 1
Economic and Financial Developments . . . . . . . .. . . . . . . .. ... . . . . .. . . . . . . .... . . . . . 1
Monetary Policy .
Special Topics.. .. . . .. . .
.. .. ..... . ........... 2
.. .. ... .. ... . .. 3
Part 1: Recent Economic and Financial Developments................. 5
Domestic Developments.
.. .. .. . .. .. .
.. 5
Financial Developments.... ..
. . .. . . . . . .. . .. . . ... . .. ... ... . . . .. .. . .. ... 22
International Developments .. . ..... .. ... . ...... . ........ . . . .... . ... . .... . . . . 29
Part 2: Monetary Policy . .. .. .... ...• ..•.... .. ........ . ....... • 33
Part 3: Summary of Economic Projections......................... 47
The Outlook for Economic Activity..
. .. • . .. .. .. .. . •. .. . • .. . .. . . . .
The Outlook for Inflation . .. . .... . ... .. .. ... . . .... . .... . . . .. .. ... .. ...... . ..
Appropriate Monetary Policy . . . . . ... .... . ...... . ..... .. . . . . .... . .. . . .... . . . .
Uncertainty and Risk~. .
. . .. ......... .. .. . .. ....... . ..... .. ....... ..
48
50
51
51
Abbreviations ............. . .. . .. . .. . ..... . .... .. . .... .. .. . . 65
List of Boxes
EmpiO)'ment Disparities between Rural and Urban Areas ..... •.... . .. ... •....... . .. 10
Developments Related to Financial Slability. . .... . . . . . .... . . . . . . . .. . . . . . .... . . . . 26
Monetary Policy Rules and Systematic Monetary Policy . . . .. . ... .. . .... . . ....... .. 36
The Role of liabilities in Determining the Size of the Federal Reserve's Balance Sheet ..... 41
Federal Reserve Transparency: Rationale and New Initiatives .... . . . .... . . . . . .... . . . . 45
Forecast Uncertainty. .. .. .. .. . . .. .
.. . . ... .... ... 62
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~UC.IbN.ffili.l:tsfiOfchN!b¥dp.lrtyl~~~·rep~oc'ol<ltf~.~or ~itd.~">!bt~~d~·~~
X<UI~r~lbt~&ss~fNil;ttS«1oriN~fi'Uq>OI\S~~~.tndtiiSthttS&P l»A ~ lndiccs llC.():).,·toflesTr~Hokling5
llC.IhfY•~rnthNI.IW<IJ)al!)·lictn:l(':nltl.tll ~~ a"'f l~lityforMI)'tn~O'IIi!6ions,orine('fn.p:ioni;of¥Jy~ or the-d.iu~therM
99
SuMMARY
Economic activity in the United Stales
appears to have increased at a solid pace, on
balance, over the S<'COnd half of 2018, and the
labor market strength~ncd further. Inflation
has been near the Federnl Open Market
Commillee"s (FOMC) longer·run objective
of 2 percent aside from the transitory eft"ccts
of n.>tenl energy price movement& In this
environment the FOMC judged that on
balance, current and prospective economic
conditions called for a further gradual removal
of policy accommodation. In particular. the
FOMC rnised the target range for the federal
funds rnte twice in the second half of 2018,
pulling its level at 2Y. to 2'h percent following
the December meeting.ln light of softer
global economic and financial conditions late
in the year and muted inflation pressures, the
FOMC indicated at its January meeting that
it will be patient as it determines what future
adjustments to the federnl funds rnte may
be appropriate to support the Commi11ee's
congre$Sionally mandated objectives of
maximum employment and price stability.
Economic and Financial
Developments
The labor market. The labor market has
cominued to strengthen since the middle of
last year. Payroll employment growth has
remained strong, averaging 224,000 per month
since June 2018. The unemployment rate
has been about unchanged over this period.
avernging a lillie under 4 percent- a low le1-el
by historical standards.-while the labor force
participation rnte has moved up despite 1he
ongoing downward influence from an aging
population. Wage grol\1h has also picked
up recently.
Inflation. Consumer price inflation, as
measured by lhe 12·month change in the price
index for perwnal consumption expenditure&
moved down from a little abo1-e the FOMC"s
objectil•e of 2 percent un the middle of las1
year to an eslimated 1.1 percelll in December.
restrnined by recent dedines in consumer
energy prices Tile 12·month measure of
inflation Ihat excludes food and energy items
(so-<:alled core inflation), which historically
has been a bcuer indicator of where overall
infla1ion will be in the future than the headline
measure thai includes those items, is estimaled
10 have been 1.9 percem in December- up
\1, percentage point from a year ago. Survey·
based measures of longer·run inflation
expectations haw genernlly been stable,
though market·based measures of inflation
compensalion have moved down some since
the first half of 2018.
Economic gro11th. A1-ailable indicators suggest
1ha1 real gross domestic product (GDP)
increased al a solid rnle. on balance, in 1he
second half of last year and rose a lillie under
3 percent for the year as a whole- a no1iceable
pickup from the pace in recent years.
Consumer spending expanded at a strong
rntc for mosl of the second half. supported by
robust job gains, past increases in household
wealth, and higher disposable income due in
partlo the Tax Cuts and Jobs Act, though
spending appears to ha1>e weakened toward
yeaHnd. Business investment grew as well.
though growth seems 10 have slowed somewhat
from a sizable gain in I he first half. However,
housing market actil•ity declined last year
amid rising mortgage interest rntes and higher
material and labor cosls. Indicators of both
consumer and business senliment remain
at fa1'0rable levels, but some measui\.'S have
sofiened since the fall, likelya reflection of
financial market volatilily and increased
concems about the global oUllook.
Financial condilions. Domestic financial
conditions for businesses and households have
become less supponive of economic growth
since July. Financial market panicipants'
appelite for risk deteriorated markedly in the
laner part of last year amid investor concems
100
2
SUMI\1\RY
about do1171side risks tot he growth outlook
and rising trade tensions between the United
States and China. As a result. Treasury );elds
and risl.)' asset prices declined substantially
between early October and late December in
the midst of heightened volatility, although
those moves partially retraced early this year.
On balance since July, the expected path of the
federal funds rate over the next several years
shitied do11n, long-term Treasury yields and
mortgage rates mo1·ed lower, broad measures
of U.S. equity prices increased somewhat,
and spreads of yields on corporate bonds
over those on comparable-maturity Treasury
securities widened modestly. Credit to large
nonfinancial firms remained solid in the second
half of 2018; corporate bond issuance slowed
considerably toward the end of the year but
has rebounded since then. Despite increases
in interest rates for consumer loans, consumer
credit expanded at a solid pace, and financing
conditions for consumers largely remain
supportive of growth in ilousehold spending.
The foreign exchange value of the U.S dollar
strengthened slightly against the currencies of
the U.S. economy's trading partners.
Financial stabilit)'· The U.S. financial system
remains substantially more resilient than
in the decade preceding the financial crisis.
Pressures associated with asset valuations
eased compared with July 2018. particularly
in the equit)', corporate bond, and leveraged
loan market& Regulatory capital and liquidity
ratios of key financial inS1itution& including
large bank~ are at historically high level&
Funding risks in the financial system are
low relative to the period leading up to the
crisi~ Borrowing by households has risen
roughly in line with household incomes and
is concentrated among prime borrowers.
While debt owed by businesses is high and
credit standard~pecially within segments
of the loan market focused on lower-rated or
unrated firms- deteriorated in the second half
of 2018, issuance of these loans has slowed
more recently.
International Derelopments. Foreign economic
growth stepped down significantlylast year
from the brisk pace in 2017. Aggregate growth
in the advanced foreign economies slowed
marked!)', especially in the euro area, and
several Latin American economies continued
to underperform. The pace of eccnomic
activity in China slowed noticeably in the
second half of 2018. lnHation pressures in
major advanced foreign economies remain
subdued, prompting central banks to maintain
accommodative monetary policies.
Financial conditions abroad tightened in the
second half of 2018, in pan reHecting political
uncertainty in Europe and Latin America,
trade policy developments in the United States
and its trading partners. as well as concerns
about moderating global growth. Although
financial conditions abroad impro1·ed in recent
weeks, alongside those in the United States. on
balance since July 2018, global equity prices
were lower, sovereign yields in many economies
declined, and sovereign credit spreads in the
European periphery and the most vulnerable
emerging market economies increased
somewhat. Market-implied paths of policy
rates in ad1-anced foreigu economies generally
edged down.
Monetary Policy
Interest rate policy. i\s the labor market
continued to strengthen and economic
acti1•ity expanded at a strong rate, the FOMC
increased the target range for the federal
funds rate gradually over the second half of
2018. Specifically, the FOMC decided to raise
the federal funds rate in September and in
December. bringing it to the current range of
2V. to 2\1, percent.
In December, against the backdrop of
increased concerns about global growth,
trade tensions, and volatility in financial
markets, the Committee indicated it would
monitor global economic and financial
de1•elopments and assess their implications for
101
M(N.lAR\ POtlCY ll(I'ORT: fE6RUAAY 2019
the economic outlook. In Jan~I'). the FOMC
stated that it continued to ,;ew sustained
expansion of economic acti\ it)'. strong labor
market conditions. and in"ation near the
Committee's 2 percxnt objeeti,·e as the most
likely outcomes. Nonelheless in light of
global economic and financial dc\'elopments
and muted inflation pressures. the Committe~:
noted that it "ill be palient as it determines
"hat future adjustments to the target range
for the federal funds rate may be appropriate
to support these outcomes. FOMC
communications continued to emphasize
that the Committee's approach to setting the
stance of policy should be importantly guided
by the implications of incoming data for the
economic outlook. In particular. the timing
and sile of future adjustments to the target
ran~ for the federal funds rate-.ill depend
on the Committee's assessment of rtalized
and expected economic conditions relatire to
its maximum-employment objectht and its
symmetric 2 percent inflation objecti,·e.
Balance sheet policy. The FOM Ccontinued
to implement the balanct sheet normalization
program that has been under wa) since
October 2017. Specifically. tbe FO~IC
reduced its holdings ofTrtaSUI') and agency
securities in a gradual and predictable manner
by rtin\'esting only principal pa) ments it
recci\'ed from these securities that exceeded
grndually rising caps. Consequently, the
Federal Reserve's total assets declined by about
S260 billion sinct the middle of last year,
ending the period close to~ trillion.
T~ther \\ith the January postmeeting
statement. the Commiuee released an
updated Statement Regarding Moneta I')'
l'olicy lmplementatio111 and Balanct Sheet
Normali1.ation to pro~ide additional
information about its plans to implement
monetary policy orer the longer run. In
particular, the FO~IC stated that it intends
to continue to implement monetal') policy
in a regime "ith an ample suppl) of resents
so thatacti'~ management of resentS is not
3
required. In addition. the Committee noted
that it is prepared to adjust any of the details
for completing balance sheet normalization in
light of economic and financial derelopment~
Special Topics
labor markets in urban 1mus rur.ll areas.
The f<'OO\'tl') in the U.S. labor marltet since
the end of the I'CC'CS>ion has been une>-en
across the countl')·. \\ith rural areas shO\\ing
markedly less impro,-ement than cities and
their surrounding metropolitan area& In
particular. the employment-to-population
ratio and labor force participation rnte in rural
areas remain wdl below their pre-recession
le>-els. \\hile the n:tO\CI')' in urban areas has
been more complete. Differences in the mi.' of
industries in ruraJ and urban artaS-alargnsbare of manufacturing in rural areas and a
grtater concentration of fast-gro\\ing serrices
industries in urban areas- ha\'e contributed to
the stronger rebound in urban area& (See the
box "Employment OiSI>arities between Rural
and Urban Areas" in Part 1.)
) lonttal} polk) rules. In Mluating the
stance of mon<tal') policy. polic)makers
consider a \\ide range of information on the
current economic conditions and the outlook.
Policymakers also consult prescriptions for the
policy interest rate deri'td from a rariety of
policy rules for guidance, without mechanically
follo"ing the prescriptions of any specific
rule. The FO~IC's approach for conducting
S)>tematic monetaI')' policy pfO\ides sufficient
tle.libilit)to address the intrinsic complexities
and uncertainties in the economy \\nile
keeping monetary policy predictable and
transparent. (See the box "Monetal')' Polic)'
Rules and S)stematic Monetary Policy" in
Part2.)
Balance sheet normali1ation and monetar)·
policy implrmeotalion. Since the financial
crisis. the sQ( of the Federal Reserw·s balance
sheet has been determined in large part
by its decisions about aSStt purchases for
102
4
SU.I\1\o\RY
economic stimulus, with gro111h in total assets
primarily matched by hig)ler reserve balances
of depository institutions. However, liabilities
other than reserves have grown significantly
owr the past decade. In t~e longer run, the
size of the balance sheet will be importantly
determined by the variottS factors affecting the
demand for Federal Reserve liabilities (See the
box '"The Role of Liabilities in Determining
the Size of the Federal Reserve's Balance
Sheet"" in Part 2.)
Federal Resme transpare;ncy and
acoountability. For central bank~ transparency
provides an essential basis for accountability.
Transparency also enhances the effectiveness
of monetary policy and a central bank·s
eftorts to promote financial stability. For
these reason~ 1he Federal Reserve uses a
wide variety of communications to explain
its policymaking approach and decisions
as clearly as possible. Through se1<eral new
initiatives including a review of its monetary
policy framework that 11ill include outreach
to a broad range of stakeholders, the Federal
Reserve seeks to enhance transparency and
accountability regarding how it pursues
its statutory responsibilities (See the box
'·Federal Reserre Transparency: Rationale
and New Initiatives·· in Part 2.)
103
PART 1
RECENT ECONOMIC AND fiNANCIAL DEVELOPMENTS
Domestic Developments
The labor market strengthened further
during the second half of 2018 and early
this )ear ...
Pa) roll empiO)ment gains h;nc remaiool
strong. amagjng 224.000 per month sinct
June 2018(figure 1). This pact is similar to the
pace in the first half of last year. and it is faster
than thca1-erage pace of job gains in 2016
and 201 7.
Thestrong pace of job gains 0\tr this ptriod
has primarily been manifest in a rising labor
forte participation rate (lFPR}-the share
of the population that is either working
or acthely looking for work rather than
a da:lining unemplo)ment rate' Since
June 2018. the lFPR has mol'ed up about
Y. percentage point and was 63.2 percent in
Januar)'- a bit higher than the narrow range it
has maintained in recent )'ears (figure 2). The
impro1ement is especial~· notable because the
aging of the population-and. in particular.
the m01ement of members of the bab)·
boomcohort into their retirement )ears--has
othel'l,ise imparted a downward in8uence on
the LFPR. Indeed. the LFPR for individuals
be!II'CCn 25 and 54 year.; old 11 hich is much
less sensitive to population aging has
I. Th< obstmd pact of poyroY job pm> •ould 1111'
b<to IU.'Iici<nl 10pu.b lllt uii<Oipio)..., 121< loot1 bod
IW LfPR"'" rbn.IDdMI. 1110111111) l'l)rollpmin
111< fliJ1itoC I!S.OOOioi~5.1XXl•J>Il'2r<'08>bl<ftl •ilh
a
j)lll'<lll
In un.chang.'d~W~Dploymt~t IllIt aroulld
and on unchang<d LFPR around 61.9 P,'l\'<lll l•hid>
'"' Ihe Jun< 20ih!.lu<S of'""' r.JI<S). If in!l•'ad
1he LFPR ,..,. d«:lining0.2 pe~"""I!C poinc per
ym rouiJ>l)' th< inftu<n« of popul3liona~n& 1he
"IIi< ofjob gains needed tolll3intain an und!ang<d
u~~tmplo)lntnl rat< •~uld be ahoul .W.IXXI per month
looer 1bt1t ~- ui!Ctflaml) arouod 111<1t
P'Yroll pins
tiiii!YI<\ 1> abed~"""'"'
aod..,plo)m<DI<il>o!l<'frocalll<Cormu 1\lpolatioo
Sun<) (Ill<""'"" oC 11>< untmplo)lll<lll r.Jit 10d LFPRI
-•hi)
an b:quilc \obtik 0\'(1' ~on p:riod~
- .....
...
-~
-'!00
.101)
-
_..,
_.,.
\cYrl: . . . . ., . . .. . .:a,~
b n lkmlotl.lboc~\.al:t.,ttAU)'b.":t.
2. Lobo< fOR'C p311kipotion rates 311<1
tmpi0)111<11H01"'PUIJiioo raa;.
-
-
--~
so,
tfl·ll"ll
~l
~:
),IJ&
X
nc.,.__..,
~tt
- ~
I
If
))I}
=:t:6
)J(t
nt,....~Mw,........•
··~ollk~ ...!liOlllbotoll<rlm'**"=eq&>)~~lll»l/l't~cfllc~
!Jfdl6d0fltr
~tn: I!Wtalolt...bor$&111\o!J('Ioi!IKl'oftANI)'I.Ics..
104
6 PART 1: R£aNTECOKO.\liCA-'OflNAKCW.0MlOf'MENTS
3. Mcasuf'I.'S of labor undmrlil izatioo
_,,
-
16
-
·~
- u
-.
-10
- '
I,
I
ll)ll
:«11£:
I
I
ZOIJ
ro1s
wn
I
!(119
L'~~o.~m.:tllllk~ lo)U]-.:n~"Ntia~otlbe~~. IJ..4~Wuo..-q4.1)~pm~"d•'Od:m.asa
~oflho:bOOrfi:Jttt~~·od"ttS..V!stol.r.l~~·octtn:wcaSlbdofm:.tpflll.l)• lllllr.."h..~•llrl:ftS•tlo~t r..'tcmmllyb:ting.bv.«<l
~~·lle!IC\tr.oj..~arc,'libb«korth.-m.U-.S~esi<GII:D.'ftl9~\'d~allupar~~t31h:bbof~.asap.T~of~bbcf
fotttP:usp.'I'«<Srwpal':tWt."MliOdltbb«f«~. !I~·~..'Orl.'tt$wno~iftth.:-tlborkm.•-at~~:•t•hua\'li~b•'M:.ai'Jdh.twb*C'd
ror,jobin~~l211*llbs.U.Cnx-~k'al~mcq~ytdplustll~~· a~tt.-bc-oJ•'OI't...~pl\b~~-coJ~af«~r.:-"-ICiCJ.)!;~
p.'f~oflb:bbortom-~all~ll)lllldt.'oi"''(lltco.TbcWcS.'IJI>M~'S*P."fK'dOI'busirbH~as~:ofuxd~· IM~!8ur.;a~;(J(
[(oo)mic Rccsc-JI'd\.
Sc..Wf:
~otutuSIII!SbC5,Utbw•Aaai)m.
improved considerably more !han !he overall
LFPR, including a '1: percenlage PQinl rise
since June 2018.'
AI the same lime, 1he uncmploymem r.lle has
remained linle changed and has generail)'
~~~ running a linle under 4 percent.'
Nevenheless.lhe unemployment rate remains
al a hislorically low level and is \1, percemage
PQinl below I he median of the Federal Open
Markel Comminee (FOMC) participants'
estimates of ils longer·run normal level
(figure 3).' Combining the mo,•ements in both
unemploymem and labor force panicipation.
1. Since 1015. 111< incr<asc in 111< prime•a!JC LFPRfor
women w~ nearly l peR:tntagc points. while the iocre.as.e
forTilfn was onlyabout I peKtntagc point.lnJanuary.
!lie LFPRfor primo-3!1< · - • '"" slighrly abo\~
\\ heft it Stood in 2007. 1\'herea~ ror own it \l'lSStill about
2 pertentage points betow.
3. The uotmploymtl'lt rate in J3nua~' was 4.0 pcm.'tlt.
boosted somewhat by the P'utial g\)\l:rnrntnl shutdown.
"somc furloug)l«< f«<ml•wk<rs and rtmpornrily laid·
oft' feckrnlcontrnctors are treated as- unemployed inllle
houSI:'hold employment sun'e):
4. Set tile Summary of Economic Projections in Part 3
of 1his r<pon.
105
,\ \ON!TAR\' POliCY REI'ORT: HBRUARI' 2019
the emplo)~ncnHo-population ratio for
indi1~duals 16 and Oltr- the share of that
segment of the population 11110 are workingwas 60.7 perrent in January and has bren
gradually increasing since 2011.
Other indicators are also consistent 11ith
a strong labor market. As reported in the
Job Openings and Labor Turnover Survey
(JOLTS), the job openings rate has moved
higher since the first half of 2018. and in
December, it was at its highest Jerel since
the data began in 2000. The quits rate in the
JOLTS is also near the top of its historical
range, an indication that workers have become
more confident that they can successfully
switch jobs when they wish tO. In addition,
the JOLTS layoff rate has remained low. and
the number of people filing initial claims for
unemplo)'ment insurance benefits has also
remained low. Sun·e)' evidence indicates that
households perceive jobs as plentiful and that
businesses sre vacancies as hard to fill.
. . . and unemployment rates have fallen
for all major demographic groups over
the past several years
The flauening in unemployment since mid2018 has bren evident across racial and ethnic
groups (figure 4). E1~11 so, 01-er the past
several years. the decline in the unemployment
rates for blacks or African Americans and
for Hispanics has bren particularly notable,
and the unemplo)~nent rates for these groups
are near their lowest readings since these
series began in the earl)' 1970s. Dillerences in
unemplo)'ment rates across ethnic and racial
groups have narrowed in m-cm y~ars, as they
typically do during economic expansions. after
having widened during the recession; on net,
unemployment rates for African Americans
and Hispanics remain substantially above
those for whites and Asians. 11~th differentials
generally a bit below pre-recession levels.
The rise in LFPRs for prime-age indi1iduals
over the past few years has also bren apparent
in each of these racial and ethnic groups.
Nonetheless. the LFPR for whites remains
7
106
8 PART 1: R£aNTECOKO.\liCA-'O flNAKCW.0MlOf'MENTS
4. Unanplo)'mrnl ra!c by r.lCC' and cthnidty
-
18
-16
-
1.:
-
12
-
10
-
6
I
I
2019
Noll:: l:~Do.-nii)I(D.~.:'$r.obluntmpbj\'dtilJ'tl\"CW~olthtblx"'b~.~"'""'*~""Yasi&atifi(!Jas H~«~IN)·b.:o(
~D.'C'.lhtM:dN'iN..'».':S;apMOOc,fbusiixs:sla.~as&~b)·lk K~Ba~o(Erunomk Rtstat\.il
&l.ltt: Burtalo(Llbx~\l.atb\'l't'Miat)'tics.
S. Prim<->s<bbor foo:<p311~ip31ion <11< by r.lCt 3lld
etllntcity
-
&I
-
81
_.,
_,.
-II
-
19
-11
-
"j6
Sorelb:~bb«f<oc«p!i."'ipxi)nr.;:cis~r-~orw
~apil:S10~ P~•b-~·isidttlli6..~as H~«
lxmiDI)' N cllll)·rJOt.1b:dmct )('~~Nb)'BNrdw.ff
DJ~ J..cDootb ....lllg 1\~"S.lk ~N' ~' pc00Jo(
~"-ita.~as&I'D.\!b) th.:-NaticU Bwtaao1E«<.''IIIii:~il..
S.:..ut=Bo:<1l!iloft.abor~
higher lhan lhal forolher groups(figure 5).
lmportanl differences in oconomic ou1comes
persisl across olher charac1eris1ics as well
(see, for example.lhe box "Employmenl
Disparilies belween Rural and Urban Areas,"
which highlighls 1ha11here has been less
improvemenl since 2010 in1he LFPRand
cmploymeni·IO·populalion ra1io for prime-age
individuals in rural areas compared 'vilh
urban areas).
Increases in labor compensation have
picked up recently but remain moderate
by historical standards ...
Mosl available indicalors sugges11ha1 gro111h
of hourly compensa1ion has s1epped up funher
since June 2018 afler having firmed somewhal
over 1he pasl few years: however. gro\\1h ra1es
remain moderale compan.>d 11~1h Ihose Ihal
prevailed in Ihe docade before Ihe recession.
Compensalion per hour in Ihe business
seclor-a broad-based measure of wages and
benefi1~ btll one 1ha1 is qui1e ''olalile-rose
2'4 perren1over Ihe four quar1crs ending
in 2018:Q3, abou11he same as Ihe average
annual increase O\' tr Ihe pasl seven years or so
(figure 6). The employmenl cos1index. a less
,·olalile measure of both "'ages and 1he cos1
107
IIO,!lA!tY POliCY R£1'0RT: fEBRUARY 1019
to emplo)ers of p101iding bendits. inerwcd
3 perrent 01er the same period, 11hile a1-erage
hourlyearnings- whkh do not take account
of benefits- increased 3.2 perrent over the
12 momhs ending in January of this year. the
annual increases in both of these measures
\\CCC the suongest in nearly 10 )tal'S. The
measure of wage gro11'!b computed b) the
Federal Resme Bank of Allanta that tracks
median 12-rnomb wage p1h of indhiduals
reponing to the Curren! Population Sui'\e)
sho\\ed an increase of 3.7 perrem in January.
near the upper end of its readings in the past
three years and well aboo1•e the average increase
in the preceding few years.l
... and have likely been restrained by
slowgrowth of labor producti1 ity 01er
much of the expansion
Th<Se moderate rates of compensation
gains likely reflect the offsetting inHuencn
of a strong labor market and productivity
growth that has been weak through much
of the expansion. From 2008to 2017. 1abor
productility increased a little more than
I perrent per year, on average. well beiOII'
the 111era~e putt fR)!Il 1996to 2007of nearly
3perrent and also below the 111mge gain
in the 1974-95 period (figure 7). Although
considerable debate remains about the
reasons for the slowdown over this period, 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 rcco1ery that follo11'td.
More rttent~' h0111!1"er.labor producti1ityis
1$1imated to h111-e increased almost 2 perrent
at an annual rate in the first three quaners of
2018 still moderate relatire to earlier period~
but its fastest three-quarter gain since 2010.
While it is uncenain whether this faster rate
of growth 11ill persist, a sustained pickup in
producti1ity gto\\1h, as well as additional labor
market strengthening. would likely support
stronger gains in labor compensation.
5. Tilt AlbDia r..r. 111<:15111tdJJfm (1\1111 othm on
1h:11 11 mc.Jlu~<>lhc:•>g<gro.th on~ of•orl.m•bo
""" <mpiO)<d bolh in oh< cumn1 SUM) monoh and
12monlhHa~i<r.
9
~t:~~~tf.OCI I ~~~
Nstsand t\~-.!OI S~-' l«lkpmi~Ma.UtatbJWIIIroll
lldrt.rhlllt•ll'crdtl!_.a*c•lbrll!tlb."ldiofr~o.ioq~~Wr.
*pci\'ISMt\1011\ttlf'lloltt)~ .. -~u.-..pma~
~
.t tt..-p. •
''-\il ~~. ftf lire~ rots u·• c:a..•
Tta.i.cr,6t61a11t . . . . ,,....._.. . "CfVcllkl!--'
"""".....
Soltet: llrcafi'*~'·Hn:t.~fo&r11~
Bd:fiU....'&·C...·T'*-"..7
-·
-
I
_,
"-= ~--.thaO't16t~"Ca'~~
..,.,.,...O'ol""'-',_....,.,....,..,,...:'0,• ..,...
pa. . . . !tt~~ ...... :O!\C)l••......_
51);11(1; . . .tii,.N-.,,• .,..11'~
108
Employment Disparities between Rural and Urban Areas
The U.S. labo< mark('( has tOCOI'efed subslanlially
since 2010. For people in their prime llllding rears
(ages 2> 10 541, the unemployment rare has
down Slea<fily ro le~~ls below the previous business
cycle peak in 2007, the labor force participation rate
(lFPR) has r('(r.IC<d much oi i~ decline, and the share
of the population who are empiO)td-known as the
emplorment.ro.popularion rAtio, or EPOI' rati<>has rtlurned to aboot its 1.,..~1 bdore the recession.
Howe>'«, the labo< mar~ teCO\~ has been une~w
aaoss the counlly, 1\ith •rvral" (or nonme';o) areas
mowing mar~edly less imptO\-ement than cities llnd
their surroundings (metro arm}.'
The extent of the init~l decline and subsequent
imprO\oement in the EPOP ratio \'<lried by metropolitan
S!Jtus. The gap bolween the El'OP ratios in rural and
larger urban area~ is now noticeably \\ider than it was
before the recessioo, and the q~lical rec""')' st.lrted
later in rural areas. Specifoc•ll)\ as shown in figureA.
the pri...,.;ge EPOP is 1101• slightly above its prerecession fevel in larget urban areas, \\~eas it is just
below its pre-recessioo .,..,.~ in Stn.1ller urb>n areas
and much below its pre-recession !4:\-el in rural arcas.1
The El'OP ratio can u~ully be viei1.C ;s
summarizing both the LFPR---1hat is, the share of
the populatioo that either has a job or is aoti1~ly
looking for 111ld-ond the unetllplormenr rate. 11llich
m..sutt<s the shate of the labo< force without a job and
adivel}•se.uching.1 The di\'f'fgenct" in rural and urbdn
EPOP r,uios during the ecooomic expansion. afmost.
entirely refleas di\'<fgences in LFPRs rather than in
unempiO)'mer>t rates (figures 8 and Q. In p;rti<ular, the
rural and urban unemp\O)'Metlt rates hal-e tracked ea<h
A. EmploymcnHo-popul::nion rntios
,.,..o
_.,
-
$0
- 1'!
I 11. 1
am
-
7~
-
74
•'11'1 11~'7,,,,,,-,?l
:.'001
zros
2«1t
zoto rou
I»l~ ~''
~~~: D&t.~ttforpmcGS.-dlS ~ s.&.~~lbll~
X".::~S (MS.\s)~ ~fWJ.OOO~"'\l'k«~Dl SINII« MSAi~!t
ofiOOifh~q!(O.((OPNPk. 'l'br:~Nl:)~p.orh.'\b oS ~
tl\.~;l5&frtM!\Ibrr!w: Naoo.wa &imu ~ f~rt~'tb.
S«tn: ~tnt."l:$li:I6N.Ixa.DCCtl.
.....
-
-
(coounuedi
_,
1. Folcom"enieocf, we relet lomtttopolitancoun=iEs with
$trOrl8 CUim"~t.llillg t*s lo ,m Ufbilnilt'd c~ as "urb.lrt" .'lnd
not'M'I'Ie««;lpp/~iln counties th.lt bdSIJCh tie> !lS 'f'Uroll...
2. Follll fi&urt'Sinthisdiscwioo.lber;r..,•d.Jta.uefrom
tho U5. (....., 8omo, C..r.,..il>pu!Jl;on Sun<r,th.lt the Burt.!u oi l.tbcx' SUtisfiCS is in\d\td in the StU\ty
p<e>C<'SS for ill< C..r.,.ll>pu!at;on Som"). Cakubt;on, ol
tht~!J><I,,·nartald!l«i1Jo!dinAii!onW~<d!n
n
UOI 'l>bo< Marfo< O...:omes iii.W.<ropolitan and
Noo-I'J'l(l(f(lp()~n Are<Js: Signs d Crowing Oi~rities:
HD> Nc<<S 1\Vo\SIIing;oooBo.lrd ol Goi'O!t«S ol the
Restf\1!' System, Sepctmber 2St w\\\1 .ftdef;alt'I.OSM't.
f..,.,.I
p·t'(()IW~notes.1«h-~1,abor.f!U;flet-<JUI~in
ft'lt'tt0pollt.\n-.lnd-1'101"1-ll'-'t'ltcl!)Cilir..an~~Hig:ns--oi·~I'(J'.vlng·
cr:~p.uiltts·2017~2Htm. 'The f~tes ~ 12·monthn)()'lo~ng
3\'0!Ig<lolillemon:hl)'t -;,_
3. Spe<if>eali)', ill< EI'OPratio"!"lkltfi'I(J x(l ~ment r-ite), where LFf'R isdelined.ts ' Llbcw fotcd
.
.
10
·" "" Dlo<cf«-op.~!)~)l.""''~'"'""'"
re.K (MS.\s)~ot'SOO,O»~orm..'IK.JO!~MS..U~
oCICO.O:O'-'XO.O:O"'"\'fPk. Thts\adNNrs ~ p.'t'it'ds of ~
1\'\.'t."a.WW#&fllltdbyt!l.: NDmi Bu:c-au ot ~~
S«m: lk~tl'lrri'<"'lrilo.! • ~~ !.
""""~""'- '"" tht ,nomp~q,_,
''";,del'...,"..,..,.,.
unemp/o)rolabot fot(t: n... """""''" roohipl;ed by
100 for pr~tloo putposes in the ftg'lres.
109
MONETARY POLICY REPORT: fi8RUARYIOt9
othe< Llirly closely in this e'J)<lnsion, thoogh they hal'e
<f•~ a linle in the pa~ few )~•IS. in conua11, the
diffe<ence be~'~" rural and utban Lff>Rs has wioo..d
signifoc,.tly """ rhe past <i«.lde.
On average, people in rural areas tend to ha'•e
iewe< years of ~hooling !han people in utban are.11,
and because ihe EPOP «tio tends to be lower for
indi,·iduals with leis edUCJtion, this demographic
diffe<ence has CO!ltributed to ihe pe<>i~<fll rurai-<Jtban
dil'ide. Howe'"'· these educatiO!lal differences do not
appear responsible for ihe fact that ihe g•p between
ruroland utban EPOP ratios ha'~ wid<>ned. Fogore 0
11
C. labor ron.-e p.micipation r.l!CS
shows 1h..:t~ in recent )'eil~, rur.al.and u!ban EPOP
ratios divefged subs.tanli.a11)1 e'\'en within educaliooal
categories, similar to lhe di\-etgence in EPOPs I'AOfe
generally. The left panel of frgur< 0 s""-" that ihe
EPOP ratio of non-coll~ucated adul~ age< 25 to
54 ~ been muc;h 'ower in rurJI areolS than in urban
ones beginning in 2012. The right p.1nel of figure 0
s""-'' that ihe EPOP ratio of collegt-educated adults
used to be highef in rur,11 areas than in urban ones,
but that is no longer so.lhus, tbe receot wid<>ning oi
tbe ruraklrb.ln disparity in EPOP ratios ha. not beeo
plimarily dri,·en br differences in )ear< of education.
Newrtheless, because ihe rec"'~' in the EPOP
ratio i01 non-coii~UCJted adults in rural areas
SO'n:
0.wtbpmt'C11>~2-SDS.l.lqr~IIM~
IIC&S(}I$..\.s)c..~ol$00.0:0pt~.'<pk«m«t.-.Ji0111lcr.\IS}.~~
ott(l).<>OO~m<>OO~.n."""'~""'"'""'~""">.r""""'
r~•«f6:'db)Qic~'ftlt.181RluofEotoxtUcRNaldl.
Soi.VI; Rtf«tco.~INN•bo.tDOCtl
(CO<ltinued on ne.<t page)
D. Employm..,Ho-popul>tion "tios
Nooroli<ge adult$
scm: [)Jt.aafct~~~l5toS4.MSA is.mt<ropoliua~Ra.. Thrsludtdtws~pcm.korhNxs:5r~as&liMdb)'tb:
- - . r -......t.
Soi,'JlCt:Rtf~&<dii:l'bo.tfiQC.:l
110
Employment Disparities (coorinuedl
h.ls been particulorly w..k. it islikelr lh.lr brooder
macroeconomic trends-including the oogoing shift in
!abo< dem.nd lh.lt has ii!\<>red individuals with more
education-ha\e h.ld mo<e ad\erse <OO<eGuen<e<
ior the popuLttioos in rural are.1s than in urban areas.
fo< example, manufa<turing. \\l>e<e empfO)~lent has
ltilgnate<l, accounts for a la.ger sh.lre oi employm<nt
in tut.al ar~Ms than in urban areas, wbile fast-gtzy.\·ing
sen•ices industries. such as hea!th-<:are and professional
services th.lt tend to employ """'" ' with mo<e
educ.ation, are more concentrated in urban areCJs.
Indeed, empto,ment in manufacturing has not l'tt
fully "'«•~red from the recession. And, despite
the ~rength in the past ~'" years, the share of tOial
employmenl in m.muic1e1uring h.ls remained near irs
pos.t·recession lew.
The fact lh.lt most of the EPOP do'tlgence is seen
in \abo< force participation rathe< than unen1ployment
rates "'ggests lh.lt """l' "'"' """'"' "ilo e>perienced
a permanent job loss, perhaps due to a factory closing.
decided to eventuallr exit (he labor f01ce rather lh.ln
cootinue their job search. Some individuals "ilo h.ld
been \\O<king. despite ongoing health problen~, may
"''" responded to job loss ""od poor renmployment
oppoounities by applying for Social Stcurity Dis.lbility
!""'ranee ISSDIJ beneti~. and, in fac~ t.1k..up
increased alittle more in rur.J;I ar~ than il did in urban
ones 0\'tl the pa~ deade.'
When ~tgions are faced \\ith ad\-erse ch.lnges
in labor dem.nd. some residen11 mar respond by
migrJting to more prosperous ar..s. The more out·
migrationthat occurs from areas with rel3th-elr fe\\tf
labor matlret oppo<tunities, the smaller should be the
obsened decline in loc•l·area EPOPs.' Hal,~..,. son>e
research suggescs that the a'l'erage migration response
to adl'elst dem.nd shocks h'l decreased in recent
dec•des. "~ich could ampliiy the \abo< marl:et elfec~
of loc.JI shod< and le.d to pe<si<tent disparities in
EPOP r~tios across areas.•
4. This incre;se cou\d retlea growing publk ~alth
problems (\>~i<h "'J"nds the pool cl indiv;ru,k "ilo qwl;!y
lot SSOI) and ~ugg;.h bbot dooland in rural arm (\\~idl
incrt.lS<StheP<CJ900Si<yclind,~lsooapplyic<SSOI
bettefits\
S. Although a high«"" cl "'"I oot-migration """ld help
close the I POl' depopobOOII mighl t.\aCe<batt rxooom~
d"d't'iculties fOt those \,ho ttmain in rurAl olteds,
6. See, i"' "'~ Mai Oao, \RI;de F.-i, and Prala.h
l.oongani aoi7J, ·Reg;o.al ubot •lalket Adjustment in the
United St.lte" Trend and C)<f<; II.Mewol£cooomicsand
Sllliflicos. '"'· 99 ~\tayl. pp. W -57.
w.
111
MONETARY POLICY REPORT: fi8RUAAYI019 13
Price inflation is close to 2 percent
Consumer price inflation has ftucwated
around the FOMC's objectire of2 percent,
largely reflecting movements in energy prices
As measun;d by the 12-momh change in
the price index for personal consumption
expenditures (PCE). inflation is estimated
to hare been 1.7 percent in December after
being above 2 percent for much of 2018
(figure 8).' Core PCE inflation- that is,
inflation excluding c01~sumer food and energy
prices- is estimated to have been 1.9 percent
in December. Because food and energy prices
are often quite I'Oiatile, core inflation typically
provides a bener indication than the total
measure of 1111ere Ol-er.all inflation will be
in the future. Total inflation was below core
inflation for the year as a whole not only
because of softness in energy prices. but also
because food price inflation has remained
relatirely low.
Core inflation has moi'Cd up since 2017. when
inflation was held dow11 by some unusually
large price declines in a few relatirely small
categories of spending, such as mobile phone
services. The trimmed mean PCE price index,
produced by the Federal Rese11-e Bank of
Dallas, pro1~des an altern atire way to purge
inflation of transitory influences. and it
may be less sensitire than the core index
to idiosyncratic price movements such as
those noted earlier. The 12-month change
in this measure did not decline as much
as core PCE inflation in 2017, and it was
2.0 percent in Nowmber.' lnftation likely has
been increasingly supported by the strong
labor market in an em~ronment of stable
inflation expectations: inflation last ymwas
6. The panial gO\·tmlll<ol shuldO\m has delarro
publicalion of 1he 8umu o( Economic Anai)>iss
t$1imate for PCE prict inRa1ion in IA'X'«nbe:r. and
111< numbers "'pon<d """' ""'"'ima1es baS«! on 1he
Ot.\.<tmber consumerand producw ~ indt.'<I.'S.
7. The trimmed mean indt'\: exdudl.'$ whiche\'er poo.-s
showtd 111< larges1 in<~.,ses or de<~.,ses in a gh•n
month. Note that on~r the past 20 }t.ars. changes: in lhe
uimrnOO m~n index haw ao.-e-rng4.'d about %~1\"'!'nlil&¢
point abowoore PCE inRation and 0.1 ptl'l"tnlagt poin1
abo\'C total PCE in"ation.
8. Cb>nge inIll< price index for pe,..,..lroliSUmplion
expendittm.':S
-
J..O
x.n: ~jjo,C«wool""-'io;rood o>d=rt<>J<OI"""'P
l).•((c:;..\:t
):11$: (ll'li1J ,·.ab.'$ltl:suf'f~imalc$. Tk~'\l dal:l C\~
tlltouPNvt~ ~lS.
Sot.t o:
f«~e.'*l,Ft\i.'ftl Rr<tf\e B.cl oi Dalbl;:b' d ~
Elur'Nuof~ A~~ · \Q Hal.·tt .w!)~
112
also boosted slightly by the tariffs that were
imposed throughout 2018.
Oil prices have dropped markedly in
recent months . ..
9. Spound fulun'S prim for <1\Jdo oil
-
IJO
-
IN
110
-
,.
!I)
"'10
-
..
"'
.&0
JO
N
As noted. the slower pace of total inflation
in late 2018 relative to core inflation largely
reflected softening in consumer energy prices
toward the end of the year. After peaking
at about $86 per barrel in earlyOctober, the
price of crude oil subsequentlr fell sharply
and has al'eraged around S60 per barrel this
year (figure 9). The retent decline in oil prices
has led to moderate reductions in the cost
of gasoline and heating oil. Supply factors.
including surging oil production in Saudi
Arabia. Russia. and the United States. appear
to be most responsible for the recent price
decline~ but concerns about weaker global
growth likely also played a role.
... while prices of imports other than
energy have also declined
10. Nonfucl impoo prim >J1<I ind•orialm<13~ indc<<S
10-\;2:
,.
,,. _
w-
_,.,
-
,,.
-
9S
-
96
-
..
10-
\<c:fid~~.. -
10 -
10 -
After climbing steadily since their early
20161ows, nonfuel import prices peaked in
May 2018 and declined for much of the rest
of 2018 in response to dollar appreciation,
lower foreig11 inflation, and declines in
commodity prices. In particular, metal prioes
fell markedly in the second half of 2018. partly
reflecting concems about prospects for the
global economy (figure 10). Nonfuel import
prices, before accounting lor the effects of
tariffs on the price of imported goods, had
roughly a neutral influence on U.S. price
inflation in 2018.
Survey-based measures of inflation
expectations have been stable ...
~r&lb:d:laforo.-c.~"'llllpat FO>~al'l: ~. TbC' ~b
~l!lr((J;ba:c ~~· J,~ofd»l)·daulmi~~
f~lUlll.
Sol.tu:F«Q)IlflXt~pO.xt.~o(LitiOr~t«
~
Aflll:,, l($.
mcs4. S..U GSCI
I~ ~~~
%« bh ,u lh·ott
Expectations of inflation likely influence
actual inflation by affecting wage· and pricesetting decision~ Survey-based measures of
inflation expectations at medium· and longer·
term horizons ha'-e remained generallystable
O\'er the second half of 2018. In the Sur,~y
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 Ol'er the
113
15
.110\EIARYPOI.ICYRII'ORI: FIBRUAA\'2019
-
nt't 10 )ears has been 1ery dOSt to 2 perttnt
for the paSI screral years (figure II ). In
the Uni1ersily of Michigan Sune)S of
Consumers. the median value for inflation
expectations over the next 5to 10 years has
been around 21-S percent since the end of
2016. though this Jerel is about '/. percentage
poin1l011er than had pre~-ailed through
2014.1n contrast. in tht Survey of Consumer
E'p«tations. conducted b) the Fedenl
Resene Bank of New York. the median of
respondents' exp«ted inflation Tale thn.'C )~rs
hence-while rclatiwly stable around 3 percent
since early 201S-is none1 heless at the top of
the range it has occupied over the past couple
of)ears.
-
I
... 11hile market-based measure.> of
inOation compensation ha1-e come do\\0
since the first half of 2018
Inflation e.,pectations can also be gauged
by market-based measures of inflation
compensation. However, the inference
is not straightforward. because market·
based mmures can be importantly affected
by changes in premiums 1hat p101 ide
compensation for bearing inflation and
liquidit) risks. Measure; of longer-term
inflation compensation-denied ei1her from
differences bem-een yields on nominal Treasury
socurities and 1hose on comparable-maturity
Treasury Inflation-Protected Securities (TIPS)
or from inflation swaps-moved down in
the fall and are below lerels that prerailcd
earlier in 2018 (figure 12).' The TIPS-based
measure of 5-to-10-ycar-forn-ard inflation
compensation and the analogous measure
from inflation 511-aps are 110\1 about I' i percent
8. lnfi31ionrompcnsation impli.:d by1hcTIPS
bn:ake\.tn infla1ion rate is b:lsed on lh<ddfcrtnt\~, at
\"'mparablc maturities. betv..ttn }ields on nominal
Tr"WIJ' ""'rili<s and yields on TIP& wh~h ,,. indt<.:d
10 111< 101al ronsurn<r price index (CPt ). lnBa~ion
'" ronlra<li iu11icli on< pan) nW.<$ p.1)lll<tlb of
"''P'
C<fbllllltdiiOOlioaiJIIIOUilbio~"'<»>llloo>
tlul ar< llldtW tocua:ubliw CP1 ..a.1.,. 01«..,.,.
llonzon.lnlblioaromp<n131ioto dnilro fflllllonl!.ooa
i'A~PII)~) r<«<ds TIJ'S.b3>«1 romp:n>11ion. bul
'o\1.\"i.·tO."A<'Ck MO\'tiTh."'ts ill tbt t\\0 m._'3SUI'tS 3ft h1ghf}
comb1ro.
...,
••
_,"
_,.
dqt!pdl
1<117
1<119
\o'J:]. l\c'dlltlllt•~ ~·'lf' ot 4Wydlud C'\~
...
f~U.!'814 T!Pi • 1r..,I~~~S.:..~
SiAl(t; f~~, ... fl '<'w\'a\.~Ffdcnl~a..l
..,_
.
114
and 2V. percenl. respeclil'ely. wilh both
measures below their respec1i1'e ranges 1ha1
persisoed for moll of ohe 10 years before the
slart of Ihe notablededines in mid-2014.'
Real gross domestic product growth
was solid, on balance, in the second
half of 2018
13. Chong¢ in r<:~l gro<s dom<Sii< p<OdiiOt and gro<s
do~i< iDCOrnt
QJ
-'
_,
HI
-
;
- I
-
I
14. Clnng.e inreal ~rsooal consumptioo e.xp..'"nditures
and disposabk"""""" inoome
1'-"""'-'"""· ~p..'I'S(Qij iD.~
--
...
- 6
_,
HIQ) _
-
'
)
_,
-
I
-
I
-
)
Real gross domeslic produc1 (GOP) rose al an
annual ra1e of 3~ percen1 in Ihe 1hird quaner.
and available indicators point to a moderate
gain in the founh quarler.ro For I he year, GOP
growth appears 10 hare been a lillie less 1han
3 percen1, up from the 2~ percent pace in 2017
and I he 2percent pace in 1he preceding 1wo
years (figure 13). Lasl year's growth reflect~ in
pan. solid growoh in household and business
spending. on balance, as well as an increase
in goremmen1 purehascs of goods and
sen~ces: by conlrasl, housing-seclor actirity
turned down lasl year. Privaoe domeslic
final purehases-1ha1 i~ final purchases by
households and busin~ which lend 10
provide a beucr indica!ion of fu1ure GOP
growth than mosl other componen1s of overall
spending- likely posled a mong gain for
the year.
Some measures of consumer and business
sen1iment hal'c recenlly softened- likely
reftecoing concerns abou1 financial market
I'Oiaoility, the global economic outlook,
trade policy tension~ and 1he go1•ernmeou
shuodown- and consumer spending appears
to hare weakened a11he end of 1he year.
Neverthel~ I he economic expansion
continues 10 be supporled by steady job
gain~ paso increases in household wealth.
expansionary fiscal policy, and still·favorable
_,
domestic financial condilion~ including
9. Asthest mcasum:arc:- based on CPI inflation. one
should probal>lr subora<1 abouo Y. i>"«nl3gc point- the
awrn:sedifferential \\ith PCE inflation owr the pa$t 11\'0
d«:~des-to infer in8aoion rompcnsationona PCE basi>.
10. The init~l esoimaoe of GOP by the Bureou of
Eoonom~ Analysis for oh< founh quarter""' delayed
b«ouS< of 111< panial gowrnm<nt shutdown ond 11ill
nowb< ..Oeas<d on Februal)' 2S.
115
MONETARYPOLICY REPORT: fi8RUAAYIOt9 17
moderJte borrowing costs and easy access to
credit for many households and businesses.
'"""
Ongoing improvements in the labor
market continue to support household
income and consumer spending ...
Real consumer spending picked up after some
transitory weakness in the first half of 2018,
rising at a strongannual rate of 3\', percent
in the third quarter and increasing robustly
through November (figure 14). However,
de>pite anecdotal reports of favorable holiday
sales. retail sales were reported to ha11:
declined sharply in Doccmber. Real disposable
personal income-that is, income after taxes
and adjusted for price changes- looks to
have increased around 3 percent over the
year, boosted b)' ongoing improvements in
the labor market and the reduction in income
taxes due to the implementation of the Tax
Cuts and Jobs Act (TCJA). With consumer
spending rising at about the same rate as gains
in disposable income in 2018through the third
quarter (the latest data a1-ailable), the personal
saving rate was rough!)' unchanged. on net.
om this period (figure 15).
... although wealth gains have
moderated and consumer confidence has
recently softened
While increases in household wealth have likely
continued to support c·onsumer spending.
gains in net worth slowed last year. House
prirescontinued to move up in 2018, boosting
the wealth of homeowners, but the pace of
growth moderated (figure 16). U.S. equity
prires are. on net, similar to their levels at
the end of2017. Still, the level of equityand
housing wealth relative to income remains very
high by historical standards (figure !7)-"
-
II
-
10
- *
-
-
Dm<IICOJ"""'" """"""lOtl
Sot,.1 0; iJut~aoiEcwomi.:"A::la~~\iatlll~i\IW)'t.lcf.
t6. Prie<s ofc.<isting sing!<-familyhouses
,U'.Ca'<'$f'-JI"'
-
IS
-
10
m!Wino.X'<
- '
- '
- to
1009
2011
10B
~u
:oon
,
m1t
~! Th:&liiOr~ stP Clsc..sslkri:.i~C-1.1Cnd~~~
1'01lTh:4a&af«thcC«d.Olit:in&1 t'l:ltOd~~201&.
SOI.:t('f: («~ Hill'llt ~ II'Ab: Zil~; S.II:P('~lkr U.S.
~Komtrn.-t lnda TlxS.t::PCw-Sbilbbhlu:pt'l.'btofs.tP
().)oro lxlts l~ U..CDi« llSll'lilir.es.(F« ~· Jol'tr.~ln.ka.
~~~«tb.'~~rt.con0:C~~.•
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-
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n."'nt period for whicll data are ''~ilabl<-houscllold net
"unh was Sl.'\'tn times Ihe '~ueof disposabk income.
the hi!)l<sl-<wr m~ding for that ratio. 11hi<h dates bock
to 1947. HO\\\.'Wr. rollO\\ing thedtdine in stoc-k pffi.'tS
since the summer. this r.ui~ has likel)' rallensomewhat
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1997 2000 lm l006 2009 !Oil lOIS l(IIS
'-011: Om.a.l.'Od~101&.Q3. Th:scn:$Kib:~o(~
n.rt li'OCihCO~ p.TS«W~
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"'f"~~Qflb:t;:dcd~-:for in."lXI'Ire, &mclol£®.-e:i:
~jiJ,itlb\tr~tir.-:ol.
116
IS. Indexes ofC005tlmct'SI.'"flli!llCfll
170-
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ltio;f<'bn.utydata•e~·.Tb:C¢.tf«<C'C8oard@I;Wtiodt\~IO
IOOiD 19S5.1bc- ,lkttipn~()daum~C'd., IOOD 1966.
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Consumer sentiment as measured by the
Michigan surve)' Hattened out at a high lel'el
through much of 2018. and the sentiment
measure from the Conference .Board survey
climbed through most of the year, 11~th both
measures posting their highest annual averages
since 2000 (figure IS). However, consumer
sentiment has IUrned down since around
year-end, on net. with the declines primarily
reHeeting consumers' expectations for future
conditions rather than their assessment of
current condition& Consumer altitudes about
car bu)~ng ha1•e also weakened. Nevertheless,
these indicators of consumers' outlook remain
at generally favorable level~ likely reHeeting
rising income, job gain& and low inHation.
Borrowing conditions for consumers
remain generally favorable despite
interest rates being near the high end of
their post·recession range
Despite increases in interest rates for consumer
loans and some reported further tightening
in credit card lending standard~ financing
conditions for consumers largely remain
supportive of gro111h in household spending.
and consumer credit growth in 2018 expanded
further at a solid pace (figure 19). Mortgage
credit has cominued to be readily a1'ailable
for households with solid credit profile& For
borrowers 11ith low credit score& mortgage
underwriting standards have eased somewhat
since the first half of 2018 but remain
noticeably tighter than before the recession.
Financing conditions in the studemloan
market remain stable. with over 90 percent
of such credit being extended by the federal
governmem. Delinquencies on such loans.
though staying elevated, continued to improve
gradually on net.
Business investment growth has
moderated after strong gains early
in 2018 ...
ln1•es1ment spending by businesses rose
rapidly in the first half of last year, and the
available data are consistent with gr0111h
having slowed in the second half (figure 20).
117
MONETARYPOLICYRIPORT: fi8RUAAYI019
19
The apparent slowd01vn reflect~ in part. more
moderate growth in investment in equipment
and intangibles as well as a likely decline in
investment in nonresidential structures after
strong gains earlier in the year. Forwardlooking indicators of business spendingsuch as business sentiment, eapital spending
plan~ and profit expeetations from industry
analysts- hal'e softenoo T<-ocently but remain
positil'e orerall. And while new orders of
capital goods flattened out toward the end of
last year. the backlog of unfilled orders for this
equipment has continued to rise.
... as corporate financing conditions
tightened somewhat but remained
accommodative overall
Spreads of yields on nonfinancial corporate
bonds over those on comparable-maturity
Treasury securities wiclened modestly, on
balance, since the middle of 2018 as in\'estors'
risk appetite appeared to recede some.
Nonetheless, a net decrease in Treasury
yields 01-er the past several months has left
interest rates on corporate bonds still low by
historical standards. and financing conditions
appear to hal'e remained accommodative
overall. Aggregate net flows of credit to large
nonfinancial firms remained solid in the third
quarter (figure 21). The gross issuance of
corporate bonds and new issuance of lewraged
loans both fell considerably toward the end of
the year but have since rebounded, mirroring
movements in financial market volatility.
Respondents to the January Senior Loan
Officer Opinion Surrey on Bank Lending
Practic~ or SLOOS. reported that lending
standards for commercial and indumial (C&I)
loans remained basically unchanged in the
fourth quarter after having reported easing
standards over the pasl se1·eral quarters.
However, banks reported tightening lending
standards on all categories of commercial
real estate(CRE) loans in the fourth quarter
on net.
Meanwhile. financing conditions for
small businesses ha,•e remained generally
21.
S<l«:l<d<OOijJOII<fl~ Ofn<l<kblfin3Jl(ing for
nonfii131K'ial busin~
-
10
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A«oon!Softki.'~Sa:ts.-
Z.l. -r-lfiii'INl
118
accommodative. lending volumes to small
businesses rebounded a bit in recent month~
and indicators of recent loan performance
stayed strong.
Activity in the housing sector has been
declining
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b~r~fttd!io! ~lx~· ~~ MlfkrtSW\"ey.
Residential im-estment declined in 2018, as
housing starts held about ftat and sales of
existing homes mo,·ed lower (figures 22
and 23). The drop in residential investment
reflects rising mortgage rates-which remain
higher than in 2017 despite coming down some
recently-as well as higher material and labor
building costs, which have likely restrained new
home construction. Consumers· perceptions of
homebuying conditions deteriorated sharply
O\'er 2018, consistent with the decline in the
alfordability of housing associated with both
higher mortgage rates and still·rising house
prices (figure 24).
Net exports likely subtracted from GOP
growth in 2018
Aller a strong performance in the first half
of last year supported by robust exports of
agricultural products. re~l exports dedined
in the third quarter, and available indicators
suggest only a partial rebound in the fourth
quarter (figure 25). At the same time, growth
in real imports seems to have picked up in
the second half of 2018. As a result, real net
exports- which lifted U.S. real GDP gro"1h
during the first half of 2018- appear to ha\'e
subtracted from growth in the second half.
For the year as a whole. net exports likel)'
subtracted a little from real GDP growth,
similar to 2016 and 2017. The nominal trade
deficit and the current account deficit in 2018
were little changed as a percent of GDP from
2017 (figure 26).
Federal fiscal policy actions boosted
economic growth in 2018 ...
Fiscal policy at the federal level boosted
GDP gro\\1h in 2018, both because of lower
income and business taxes from the TCJA and
119
21
MONETARYPOUCYRIPORT: fi8RUAAYIOI9
because federal purchases appear to have risen
significantly faster than in 2017as a result of
the Bipartisan Sudget Act of 2018 (figure 27)-"
The panial go1·ernmcn t shutdo1111, which
was in elfect from D~mber 22 through
January25, likely held down GDP growth in
the fi~t quarter of this year somewhat largely
because of the lost work of furloughed federal
government workers and temporarily atl'ected
federal contractors.
The federal unified deficit widened in fiscal
year 2018to 3Y. percent of nominal GDP
because receipts moved lower. to rougltly
J6Y, percent of GDP(figure 28). Expenditures
edged down, 10 20Y. percent of GDP, but
remain above the Je,·els that prevailed in
the decade before the start of the 2007-09
recession. The ratio of federal debt held by the
public 10 nominal GDPequaled 78 perce111
at the end of fisca12018 and remains quite
elevated relative 10 historical nonns (figure 29).
The Congressional Budget Oftice projects that
this ratio will rise om the next several years.
, , , and the fiscal position of most state
and local governmemts is stable
The fiscal position of most state and local
governments is stable, although there is a range
of experiences across these government~ After
several years of slow growth, revenue gains
of state govemments strengthened notably as
sales and income tax collections have picked
up over the past few quarters. At the loc~l
le1~l. property tax collections continue 10 rise
at a solid clip, pushed higher by past house
price gain~ After decli~inga bit in 2017, real
state and local government purchases grew
moderately last year. driren largelybya boost
in construction but aiS() reflecting modest
growth inemployment at these go1-ernment~
11. The Joint Committee: on Taxation es:tim:alf!d 1ha1
1he TCJA"~uld n:du« """geannuallil:< re~<nue by a
liule mmt~han t p<re<n< of G DP s~aningin lOIS and
ftlr SC\'traJ ~'ta~ thereaf'ter. This mtnue ~imate does
not 3~lll'l:t for the potenlial maC'l'Oe('Onomic tff«ts or
111< kgi>lation.
1S. Clungdn real imports and " ponsor goods
aOOsmi(\"S
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~: D$1"«2018artlbcncn;tol'O!~dwtqlt.k"'ffiol'th.::)'t"~,
alan~ra~t. GDPil~~i.::pn.\bt.
Sotut
27.
kc.uol&\.-oomic~l)l4s\U.!il'"a"AAIJ)'tiN.
Chang~: in n.-al goYcmmentexpenditures on
coosumptioo and im~menl
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Financial Developments
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.c~Q{6!al};:m.(~~.,.~s..~~fi'(IN.~~
(GOPI~.at~ b'lb:fQC.Irqu.r.~~II)Q}.
Soll<t:~"!'ol~..:n.."''!!~~'ia Hflo«~tic:l.
29. From! go'" """"' debt h<ldby tile public
The expected path of the federal funds
rate over the next several years has
moved down
Despite the further strengthening in the
labor market and continued e'pansion in the
U.S. economy, market-based measures of
the expected path for the federal funds rate
om the next sereral years have declined, on
net. since the middle of last year(figure 30).
Various factors contributed to this shift.
including increased in,·estor concerns about
downside risks to the global economic
outlook and rising trade tension~ as well as
FOMC communications that were 11ewed as
signaling patience and greater fiexibility in the
conduct of moneta!)' policy in response to
ad1~rse macroeconomic or financial market
de1~lopments.
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A.a."'OIll.,;o(thtl.'M:d~·
Survey-based measures of the expected path
of the policy rate through 2020 also shifted
down, on net, relative to the le1~ls observed
in the first half of 2018. According to the
results of the most recent Survey of Primary
Dealers and Survey of Market Participants,
both conducted by the Federal Resem
Bank of New York just before the January
FOMC meeting, the median of respondents'
modal projections for the path of the federal
funds rate implies two additiona12S basis
point rate increases in 2019. Relatil·e to
the December survey, these increases are
expected to oecur later in 2019. Looking
further ahead, respondents to the January
sur~·ey for<'caSt no rate increases in 2020
and in2021. 11 Meanwhile, market-based
measures of uncertaintyabout the policy rate
approximately one to two years ahead were
little changed, on balance. from their le1"eiSat
the end of last June.
1l. Th: ""ults of the Sun"l' or Primary !A'3Im
and IlK Survey or ~larkct P.Jnicipants are <nililablc
on 11tt ffflcral R~nt Bankof New Yort·s \\'Cbsite on
bttP>iAiww.~~<~•yorkf<d.orglmark<t>lprim>T)d<Jkr_
SUM)·_qu,'Slion,.html and httP>il•ww.nt\\)OrH<d.org/
marktts!sunt)'_llt)rket_p.'l.r1kipanb.. respe"\tiwl)~
121
23
MONETARY POLICY REPORT: fi8RUAAYI019
The nominal Treasury yield curve
continued to flatten
The nominal Treasury yield cun·e ftanened
somewhat further since the first half of 2018,
with the 2·year nominal Treasuryyield lillie
changed and the 5- and 10-)'ear nominal
Treasury yields declining about25 basis points
on net (figure 31). At the same time. yields
on inflation-protected Treasurysecurities
edged up, lea1ingmarket-based measures of
inflation compensation moderately lower.
In explaining movements in Treasury yields
since mid-2018, market participants hal'e
pointed to dmlopments related to the global
economic outlook and trade tension~ FOMC
communication~ and fluctuations in oil pri~
Option-implied I'Oiatility on swap rates-an
indicator of uncertainty about Trtasury
yieldH eclined slightlyon net.
Consistent with changes in yields on nominal
Treasury securities, )1elds on 30-year agency
mortgage-backed securities (MBS}--an
important determinant of mortgage interest
rates-decreased about 20 basis point~ on
balance. since the middle of last year and
remain low by historical standards (figure 32).
Meanwhile. l~elds on both investment-grade
and high-yield corporate debt declined a
bit (figure 33). As a result. the spreads on
corporate bond yields orer comparablematurity TreJSUT)' )'ields are modestly 11~der
than at the end of June. The cumulative
increases over the past year have Jefi spreads
tor high-yield and imtStment-grnde corporate
bonds close to their historical median~ with
both spreads notably above the 1·ery low !CI'cls
that prevailed a year ago.
Broad equity price indexes
increased somewhat
Broad U.S. stock market indexes increased
somewhat since the middle of last year, on
net. amid substantial volatility (figure 34).
Concerns o1•er the sustainability of corporate
earnings groMh, the global growth outlook,
international trade tensions, and some Federal
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Ndr)1.
Solm:Oiox\'ob:ihl}lodt\J(\'IX I)~~na81.~
Reserve communications that were percei1'ed
as less accommoda1ive than expeeted weighed
on investor sentiment for a time. There were
considerable diftcrences in stock returns across
sectors. reHecting their varying degn.>es of
sensitivities to energy price declines, trade
tensions, and rising interest rates. In particular.
stock prices of companies in the utilities
sector- which tend to benefit from falling
interest rates-11nd in the heallh<are sector
outperlormed broader indexes Conversely,
stock prices in the energy sector substantially
underperformed the broad indexes as oil
prices dropped sharply. Basic materials--a
sector that was particularly sensiti1·e to
concems about the global growth outlook
and trade tensions- also underperfonned.
Bank stock prioesdeclined slightly, on net,
as the yield curve flattened and funding costs
rose. Measures of implied and realized stock
price volatility for the S&P 500 index- the
VIXand the 20-day realized I'Oiatilityincreased sharply in the fourth quarter of
last year to near the high lel'els observed
inearly February 2018 amid sharp equity
price declines These volatility measures
partially retraced following the turn of the
year. with the VLXreturning to near the
30th percentile of its historical distribution
and with realized I'Oiatilityending the period
close to the ?01h percentile of its historical
range (figure 35). (For a discussion of financial
stability issues, see the box "Developments
Related to Financial Stabilit( ')
Markets for Treasury securities, mortgagebacked securities, and municipal bonds
have functioned well
Available indicators of Treasury market
functioning hal'c generally remained stable
since the first half of2018. with a 1•ariety of
liquidity metrics-including bid-ask spreads,
bid sizes, and estimates of transaction costsdisplaying few signs of liquidity pressures
liquidity conditions in the agency MBS
market were also generally stable. 01'Crall,
the functioning of Treasuryand agency MBS
markets has not been materially aft'ected by
123
MONETARY POLICY REPORT: fi8RUAAYI019
25
the implementation of the Federal Reserve's
balance sheet normalization program O\'er
the past year and a half. Credit conditions
in municipal bond markets ha\'e remained
stable since the middle of last year, though
yield spreads on 20·year general obligation
municipal bonds over comparable-maturity
Treasury securities 11~re modestly higher
on net.
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
since the beginning of the summer. Increases
in the FOMCs target range were transmitted
efti:ctil'ely through money markets, with yields
on a broad set of money market instruments
mo\'ing higher in response to the FOMC's
policy actions in September and December.
The effecti\'e federal funds rate moved to parity
with the interest rate paid on rescn~ and was
closely tracked by the O\'ernight Eurodollar
rate. Other short·term interest rates, including
those oncommercial paper and negotiable
certificates of deposits. also mol'ed up in light
of increases in the policy rate.
36. Ratio oft01al commercial b:W: cn."'::itto nominal gross
domestic produd
Bank credit continued to expand, and
bank profitability improved
Afl#y;i$\'ialk."ttAW)ti'<.
Aggregate credit provided byccmmercial
banks expanded through the seccod half of
2018at a stronger pace than the oneobsenw
in the first half of last year, as the strength
in C&l loan growth more than oft'setthc
moderation in the growth in CRE loans and
loans to household~ In the Jounh quarter of
last year, the pace of bank credit expansion
was about in line with 1hat of nominal GOP,
leaving the ratio of total commercial bank
credit to current·dollar GOP little changed
relatil'e to last June (figure 36). 01'erall.
measures of bank profitability improved
further in the third quarter despite a ftanening
yield cuf\'e. but they remain below their pre·
crisis le1<els (figure 37).
)J. Pcofi~biti1yofl:onk holdingcompani"
_/ \J_,.
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-
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R.o;k.f;!;:
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-~8>ol:llo1qC_.,_
124
Developments Related to Financial Stability
The Federal Reserve Board's financial
stability monitoring!ramework
The fromt\,IJ<I< uS«! by 1he Feder•l Rose~~ Soard to
monitor fon.1nciai<!.Jbility distinguishes between <hocks
to and ,~lner•bilities of the fin.Jncialsy!(em. Shod!,
such., sudden changes 10 financial or <eonomic
condition<, "e t)]>ic311)·1Urprise< and are inherendy
diiticult to pred"IC1. ~ner.as '"lnerabili~es tend 10
build up"'"' time and are the a<pe<1< of the financial
S)>lem !Nt are most e>:j.1<(led IOCM< "i<lesp<eod
problems in limos of 1lteSS. Some wlner.tlilitie are
"clic.ll in narure, rising.!nd f.!lling a.tr time,"~~'~
cdlots are -l.:.n>mi"' ftom iongt<-lfml
iom5 sll.lping the ..rureoi emf~ inltmiO<foation. As.
resu11. the &ame\\ll& iocuots primarilv on 1110111l011ng
,1J~nmbi!i!ies and~ iwr brood ra:<gcn<s
bosed on acodemi< ...-h
1. Elt\1ltd
prOSSIIm.,. sip>altd 1>.·...a
prices lhalare high rda:ii.. IO ~ hmdunoolals
ex his!Dricol norms and.,. oiton elm~ lw.. inr...!td
'"U."""sofim'I'SlOI< 10 ul;eon risi:.As..m.
.r..~ttd ,.r...oon p<1!SSUteS inl>h' a greattr poiSibiloty
of OUI<iztd drops in ...a prias.
2. £xcessi-~ bono\\·ing by bu!4ntSS<S and
llouseholds lt.n<S them \1llnerab~ 10 dilli'<SS of their
incomes decline or the.,.,. they own fall in .alue.
3. Excessn·el01~rage "ilhin the financialsedor
increases the risk that financial instiMions \\ill not ha\'t
theabilityroab!orblos&es " l>en hit by ad\...,. shocks.
~. Funding risl<s expose the fon.lncials)<tem to the
possibilil)' thai irn-estors \\ill •run" bywithdlowing
their funds fronl a particular i~itution or sectOf.
Facinga run, iin\lndal instilutions rmy need to~~~
as!ffl quidly a1 ·oire <ale" prices, thereby incurring
wbslantiollosses ond polentially "~ bo<:oming
insol\'ti"'t. Historians and economists oiten refer to
~\ idespre.ad im~ runs: IS "fioancic.l panics.•
\Vhile this ftJme'\\'Ofi.: pro...idn a system31ic \\"Y
tO assess financial stability, some potential risk< do
noc irt neatly inro it beuuse they are flO\-.I or diffkult
10 quanoiy. sud! a~ q~nl)' 01 tl@o.-elopnwnll
in Ct)~assefs-ln addiOOn, 5001e \1Jintrabilities are
dilticull to meawre "ith <Urrendy O>ail.ll* d.u.l. •nd
the 1<1 of \'UIIItl'abilities mav .,'<)I,~ 0\-er timt. Gi\~
tl!o!t li"'iWions, "~continually rei) on ongoing
,.,..tion
,-. .,·
a.ru.,..;,...olrht..,..rn,........,.,,.,...
ood ....."""""' ... Tobioso\Oiao. .-C..ill.
ood ,_.~~1>. "F-~
-~,...·ofr....o.J{c_,,.._,
IIIJ.lS:-9>.
0..:-·
researchb)• 1he FcdeMI Resc~t Slolff, 3(3(fcnoies. ond
othertxP1'15.
Sinre !he publrcation of the fedi-fal R('SM'C Soard's
forstlilldncu/ St~brlity Rcpotl on NO\-embe< 28, 2018.
some are~s where \·~IUJtion ptt'SSUrCS were fl concern
h.ne cooled. p>rticul~~) !hose rel.lted to belo"'
omes~ment-wade corporate deb!.' Regulalory copil<ll
•nd hqurd•ty ratiO! of~ fin.1ncral in~otuttons.
tsptei.lll) large b>nl.s, are at hi>tori<~lly hrgh 101<1>.
fundrng nsl<s on tlw fonanci.ll !)~tl'll are low rebli\~
10 the period leodong up 10 tlw cnsr~ Borrol•ing by
hcoustholcb hos l1!t<1 rooghlv in lrnt \\ rth ~
lftCOri'<S and hos botn COftCtl'\lt<~ted among pnme
..,.,.,«So~$. dfbta.,tdbybWoes!esi>
high. and ~4 !landWs, t<pCCiollv \\>lhin sqrnoo:s
of the loan INII.tl fo(u!td on lo\\ft·taztd ex Ulll'.iled
linn!, dori!ocx.o:ed rn rht !«ond!I.V of2018.
As!CI 'aluolions W.C~a!td 10 lilt hifl end of their
llstoncol"11;<> on mony
2017 and the
iint b.ti c/2018, ~ b)• the ;olid «onomc
......,...and an~ rncre~ttrnom'I'SICn'
appr'lltelar rrsl Hol'""'·'..,..,.red"•tlr ~ 2018,
,.,.nd the trme cl the P'"' >OU! llotM'Ytr l'oUcy
1/.oporl. ,aluahon ptt'SIUr!'S h.n~ ta!td -b.t
on the~•IV, <orporatt bond. and k'"''ged loan
morl.ers. o,., the <amt ptrrod, amod wbl!.lntial markot
\'Oiatrhty, the fon,ard ('(juoty prrce-r~•mrng~oatro of
S&P SOO fonns, a mt~rrc of "luations in oquity mar~e1s,
declined •touch, on ne1. and it currently !land; jllll
beiO\Y the lop quanile oi its his!Orical disuibution
lfrgure A). Spreads on bolh on\tstmenl· and speculoti'~
gr•de corporote bonds Ol'er comparabl..m.~turi~·
Trwwry ""urities widened ~tly to 11:\<ls close
to the medi.1ns of their hl~ooicalranges since 1997
tfrgurc 8). Spre.1ds on nt:\,1y i<wcd le\~r;ged lo.1ns
widened 111arll'dly in the founh quantr of 2018. tn
rt.11 <Slate noar~el!. comnoerciol reol <SlJte prices h.l\'e
betn SIO'' ing f;~er th.ln ren~ for St\eral l••~.le3\'ing
,.,luations ~retched.
Srnre the 2007-o<J ~.household d<!>l and
bvsi~s debt h.J,t di'trgtd lfrgurt (). 0\trlhe
p.l!l St\eral )e.ors. borra."ng b)· ilouseholds lt.ls 11>)-ed
on lint'"tlr income pth •nd has betn concer>o
u.utd among..,.,.,.., '"th Slnlng credit his!Ories.
....U.S"'"'
lcon~II!Jt'IJJ
......olf\t_al_tS,-
2 ~-oter.
•2018 .l.....cOIIS!Jb&,.., •II..,...,.. llolrdol
er.-.•'201~~
....- lcpl; -~·~
....
125
MONETARY POLICY REPORT: fi8RUARYI019
I
!!!
am
II
! !or!l!ol!/
1~
am
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~~#.J~I.)F~N-2019.
Sox'Ul:: ftdml ~~ lkw;! wff ~
RMili\•
~ptfl(dsd~r~a,dd'IOCdbylfl(o~BI.rmvf
~~itGOPR!. p~&tmNi.:-~
~lbxltloo~}.IBESJ~
~oflbcUoilcd~"':.&.muolE~.wl}11S'il""-n
B. Corpor.>l' bond spl<3ds IO~mibr-m>l,rity
~~ ~ Q.~ .J ~"1 ».~
D..~PI'OOo."tlbrdM2ifal.~
!N!a
Sou~
D.u 1ft pk11y aaj oi<'Cid lhr•10\S.Q3. 1'k Wdrni Nrs
Sol.a tt F~ Rtst:f\1: &w\1.
~ R.tk~
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T~-wySl'CUrities
-
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-
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-
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- ,.
!ttl!ll!lllll!
!Ill
1998 2001 :'004 zoo; 2010 ))13
!Ill
lOt~
2(11~
Noll: TlxlO.~~tripk-8:d"k\'tS6eet't<l.'tile)I<'Uollbt1CESo!A\IL
1·~~>-l~'~:it Cf~C"k-8 lLS. C«pcn'!< ltlib (C.&.\.&). W tbr IG-)'C'II'
h!Pyidd rt~dltrfft\~'( )'idJofik ICEIWAMl.7-40-lG-yQfUS.
hy Hit;\ Ydllrdt\ (J.M~ 11~' ~lridi 6\w ~ !,~
('~
(Vtl.'f:~t\t("'(Oio(l'.c»rto.$(\'t:t'itics.
S«.m~ K'EDI&a~U<.~•llh~~ottbr:
Tu~.
Br cont~ borrowing by businesses, including riskier
firms, has expanded signiftcanlly. ror !p«Uialn-egrolde and unr.lled firms, the raoio of debtlo asS«s has
incre<lled ~eadily since 2010 and remains near i~
histori<al peak. Furthe<, _growlh in debt to buli""""
wilh fowtc credit rctfings and wi1h air~· ele\•ated
'"~Is of borrowing. such"' high-yield bonds and
I.,..,aged loons, has been subst.Jnual Cl'er the pas1
~'" 1~ars (f~Sure 01. kswnceof thele illllrumen~
si0\1~ signif~ntly in NCI~tbe< and Oe«nlhe< 2018
be<ause olthe sharply highe< lpfeads demanded by
inl'e!tors 10 hold 1he<n, bul issuance has rebounded
somewhat in e.uly 2019.
Credit s~ndards for new 1..-eMged loons
deleriOt<lted "'"'1he second half oi 2018. The share
of newly issued large loons to CO<pOrations wilh high
le~'erage-<lefined as those with ralios of debt to
EBITOA (earnin~ before inlerest, Ia'"'· depreciation,
and amo<tilation)abo-.e ~increased lhrough
2018\o le~-els e:<ceeding pre~ious peaks ~ed
in 2007 and 2014. when undeo1ri1ing qualily ""'
notably poor. In a<ldition, isswnce of CCI-enonl-lite
loans-loans with few or no tr-.tditional maintenance
CCI~nanls-remained high during the second half
of 2018, although this elevated le~-el may reilec~ in
pan. a greate< pre~·alence of in~"'!ors 11ilo<lo not
traditionally monitor and exercise loon COI'roants.'
Nonelheless, the strong economy has helped ws~in
solid credit performance of iel"eraged loons in 2018,
with !he defaul1 rate on such foaM near the ICiv end of
its historicdl r~nge.
(continued on net~ page!
3. Collatera1t~:ed b.ln obli~ ""ich qce predomil\a:Mfy
bod«! byiel«as<d lo.l,, hol-e grown ~Ap<ily01« 11-otJ"''
)"ear aod,.lSof )'f.JN~od2018, pur<hase abo!A 60 percooaof
iel«as<d lo.llls" origiflolOO<l ~mibth: mu<"l lund$ hold
abou110 fl"<''I ol lel•raged ioofiS.
126
Financial Stability (oon~IWI!d!
-
and • deeper rec.,sion tlloln in 1018 as 11~11 as
~-pically large declines in financial asset pri«s.
-~- Capi~ll.-~ls at insurance cornpanie< and broke<·
dealers also remained relatil~ly robusl b)•historical
8 lrN..cWI\Uk'-lDl'>'d"'• HtsJ!·)idlandlllnlcJJNnds
~andards. A range oi indicators suggest that hedge fund
- Tool
le~-erage11~s roughly on(hanged 01-er 10t8; ""'''""'·
cornprehensil~ dota, a~·•ilablewith a signifiQJnt ume
lag. from earl)· 1018 showed thatle-..-age remained at
the upper end oi iB ronge over the pas~ eight yeors.
Vulnerc'lbiliti~ associated with iunding risk~t
is, the financing of illiquid assets or l011g-maturity
asse~ with sbort-m.lturity debt-<ontinue to be iol1;
in pan because of the post-crisi> implementation of
liquidity regulation< for banks and the 1016 money
I I I 1 I I
I! t I
I I 1 I !I
marl<et reforms' 6anl:s are holding higbe< le~~s of
l'0:6 :COS NJO 2012 ZON ZG16 1(11&
liquid asleiS, 11~ile their use ol short-term wholesale
Solr: Tou.IM~ofnJk:.· &tc"'lbt~o(thcacc~ « Cun<rtng a:s ashafe of liabiliti~ is near histoe-ical rows..
~'llbti\~pdt·CIInltlf~*'ldlc<.~klw..Thtdxaan!
~s undet man.agement at prime funds, institutions
b.l'..qD~~t«f!IO\'itcl\~
Soutt; M.:l\- . r"~ lm.~ Sc\~ ~ (fi'SD): ~P th.lt fl<C!I-ed ~~lnetableto run< in the past, Ml~ riSI'n
~I.C\~'\iC~&D.ML
somt\\~t in recent monlhs tx.n remained far beiO\v
pre-relormiel..ts.
The cre<Jit quality of noofllldncial high-yield
Potential downside ri$ks to intem..1tional financial
corpo<ate boods was roughly ~able<11·er the pasl
~abili~· include a dC111~turn in global gr0111h,
SOI"tf<ll rea~. with the share of high-yield bonds
pOlitical and pOlicy uncenainty, an in:ensification
outs~anding that are rated 8318- or bel<11v ~aring
of trade ten>ions, and broadening stress in emerging
il.lt and below the financial crisis peak. In contrast,
marl<et economies (L\IEsl. In maO)• adl~nced foreign
the dis~ibuti011 of rating> among ini"\'Simenl·grade
ecooomies, financial conditions tightened SOO'le\\hat
corpornte bonds ooeriorat.O. The sha<e of bonds rated in the secOild half of 1018, pa~lr reilecting a
at the IC!II"elt in1""ment·grade lt~~l (for wmple, an
d<>terior,llion in the foscal outlook of Italy and Brexit
S&P rating of kiple.S) rtached nt<lr-<ecord le~-els. As of uncertainty. The Unite<! Kingdom and the European
December 1018, around 42 percent of corpornte bords Union lEU! have not )el ratified the terms for the
outslanding were at the'"""" end of the im-estment·
United Kingdom's Mard> 2019withrlrawal iron> the EU
grade segment, amounting 'o about S3 trillion.
IBrexiO.Without such a withdrawal agreemer~ thete
Vulnerabiliues from financial-sector le~-erage
will be no uansition period for important trade and
continue 10 be low rel.ative to historical S!a:ndclrds, in
financial interactions bet\veeo U.K. and EU reideflts,
pan because of regulatory reforms enacted since the
and, despite preparations for a •no-deal Brexit" a wide
financial aisis. Core 1inancial intermediaries. including range of economic and financial adivities could be
large bonks, irliUrance companies, and broket·de•lers. disrupled. EMEs also experien<ed ~ghtened financial
appe.ar well positioned to weather econotnic str~s. As ~r.,s in the second half ol1018. Although tllolt sues<
of the third quartet of1018, regulatory capitol ratios for 1m receded 10111<11-bat more recent!)", many L\IEs
the U.S. global s~emicall)• imporunt bonks rem•ined (Ofllinue to harbor impor~ant wllliililbilities, retlecling
well iibo\'e regulat<>r)' requirernet~IS and were dose
one or more of >obstantial corpo<ate 1.-~rage, fiscal
to historical highs. Tbose bonks will be subject to the
concems. or excessi\"e reli.1nct on foreign funding.
1019 Dodd-Fr<nkAct stre<s tests and Cornp<ehensi1't
C.pital Assessment and R01oiew. Consistent 11ilh the
4. S..li.S.Srorri!;.sand Exchange Commissioo (20t4~
federal Re<en~ Board's po~lic framework thi> )~.u'<
'S!CAdopls •'IOOe)' M•~<t Fund Relorm Rules," pr<SS rei<..._
scenarios feature a IJrgtr increase in unemp!~ment
Myll. ··~""·"".go-.·.,...,~-1"""-''*""'~ot<-t•l.
_.,
_.,
127
MONETARYPOLICY REPORT: fi8RUAAYI019 29
International Developments
Economic activity in most foreign
economies weakened in the second half
of2018
After expanding briskly in 2017. foreign GDP
growth moderated in 2018. While part of this
slowdown is likely due to temporary factors,
it also appears to reftect weaker underlying
momentum against the backdrop of somewhat
tighter financial Condit ions. increased policy
uncertainty. and ongoing debt deleveraging.
)$.
RC3t gnm dottiC;1k prodU<t gro"1h inscl«t<d
ad\'atlC«< roo:ign oconorni«
The growth slowdown was particularly
pronounced in advanced foreign
economies
Real GDP growth in several advanced
foreign economies (AFEs) slo11~d markedly
in the second half of the year (figure 38).
This slowdown was concentrated in the
manufacturing settor against the backdrop
of softening global trade !lows. In Japan, n.-al
GOP contracted in the second half of 2018,
as economic actil1ty, which was disrupted by a
series of natural disasters in the third quarter,
rebounded only partly in the fourth quarter.
Gro111h in the euro area slo11~d in the seoond
half of the year: Transportation bottlenecks
and complications in meeting tighter emissions
standards for new motor 1~hicles weighed
on German economic activity, while output
contracted in Italy. Although some of these
headwinds appear to be fading. recent
indicators-especially lor the manufacturing
sector- point to only a limited recoveryof
activity in the euro area at the start of 2019.
Inflation pressures remain contained in
advanced foreign economies . . .
In recent months. headline inHation has fallen
below central bank targets in many major
AFEs, reflecting large declines in energy prices
(figure 39). In the euro area and Japan, low
headline inflation rates also reflect subdued
core inflation. In Canada and the United
Kingdom. instead, core inflation rates hal'e
been close to 2 percent.
-
l
-·
lOIS
~ The
Zi~IS
l>ltl
))16
dw. for lhr f\W IU.t. ~ ~ lk U.K. llllwp.nlt
for lOI~, The~ for C'auk ole'lld ~
~~, C'il:iaws
lli8:Qt
Sol....; f«lbo:l.'~ ~~OJ'l'...~f« ~--~~~
C~O!Y'I('('.~~of~t:.~C..NO~og.Ut;~~('-*
~c~~ \ilHlwtA~ti:s.
-
39. CooSWOO' prict iotl3tion inscl«tcd adv311Cl.-d for.:ign
\.'\"'f''Imics.
~
..._.
_.f
E•oM
I I
I
I
WI~
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I
1
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-
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:\ol( ; Th:liluf'«Ot.N"'~Q~4b;lla:s!l~for~·
lO)t9. Tbcdooi«Lh<t:... ~"""<l--,l>l>to>t)• lO)... Tbc
.... l«c.o.l>ood""""'"""'..Pll>.~l<ltl
Scuo:
f«lhrl."ri'..-d K~OJTa."t'f«~l~blapm.
\~ r:l~ Atbits w.I CUICDI~ b lhrN'\'Ift.l.
S:.llistic.aiOff~o.>toltl.::~C~Ii-s:f«eza..ta.~
CarJ.a:alf\iaKI\WAml)'tio."S.
128
.. . prompting central banks to withdraw
accommodation only gradually
.;o. Equity indcx<"S ror sdl"\"".tOO roo.ign eoonomies
- I.,
-
IJO
-
110
-
110
-
100
!0
- so
lOIS
!016
~ fh:dl':llk 'fi'C'd.l)' ~'~ t.>fdailydl:.a d c).knd ~
Fdruxy10, Ml~.
SOtlt'l: F«ftii'O arr:L. OJ ED S:o:t..~ f»:\;f« ~ TOPlX&o..-k
IDl-:ci«'UiL'\l K. . . . fTSEIOO&o..-i bh:all 'li B~g..
41. Norninal l0-)'t31 go,-._mmerl[ bond yields in
scl"1«13d'-.n«<< economics
-
lS
-
l.D
-
l.S
-!.0
- u
- u
~
-
J
~ Jb:c!)l;a tt~•~ mn£tSO~~·txoctam.-lr: yi.:l45~ o"!<'Od
....., ,~ 20. !019.
Soo.l<C-~
With underlying inflation still subdued. the
Bank of Japan and the European Central
Bank (ECB) kept their short-term policy
rates at negati1<e levels. Although the ECB
concluded its asset purchase program in
Dettmber, it sig~1aled an only very gradual
removal of policy accommodation going
forward. The Bank of England (BOE) and the
Bank of Canada. which both began raising
interest rates in 2017. increased their policy
rates further in the second half of 2018 but to
levels that are still low by historical standards.
The BOE noted that ele1•ated uncertainty
around the United Kingdom's exit from
the European Union (EU) weigl1ed on the
country's economic outlock.
Political uncertainty and slower
economic growth weighed on AFE
asset prices
Moderation in global growth, protracted
budget negotiations between the Italian
government and the EU, and developments
related to the United Kingdom's withdrawal
from the EUweighed on AFE asset prices
in the second half of2018 (figure 40). Broad
stock price indexes in the AFEs fell, interest
rates on sovereig11bonds in several countries
in the European periphery remained elevated.
and European bank shares underperformed,
although these m01'tS have partially retraced in
rettnt weeks. Market-implied paths of policy
in major AFEs and long-term sovereign bond
yields declined somewhat. as economic data
disappointed (figure 41).
Growth slowed in many emerging market
economies
Chinese GDP gro111h slowed in the second
half of 2018 as an earlier tightening of credit
policy. aimed at restraining the buildup of
debt. c-aused infrastruclure investment to fall
sharply and squeezed household spending
(figure 42). However, increased concerns
about a sharper-than-expected slowdown in
129
MONETARYPOLICVRIPORT: fi8RUAAYI019 31
gro111h. as 11~11 as prospecti,·e eft'ects of trade
policies prompted Chinese authorities to
ease moneta£)' and fiscal policy somewhat.
Elsewhere in emerging Asia. gro111h remained
well below its 201 7 pace amid head11inds from
moderating global growth. Tighter financial
conditions also weighe-d on growth in other
EMEs- notably. Argell!ina and Turkey.
~~. Rtat gross domes!ic pt0<1\1<1 growth inscl«ool
c:mcrging rnarket economiC'S
-"
-
s
-
Financial condilions in many emerging
market economies IVere volalile but are,
on net, little changed since July
Financial conditions in the EM Es generally
tightened in the second half of 2018, as
inrestor concerns about vulnerabilities in
several EM Es intensified against the backdrop
of higher policy uncertainty, slowing global
gro111h. and rising U.S. interest rates Trade
policy tensions between the United States
and China weighed on asset prices. especially
in China and other Asian economies. Broad
measures of EM Esovereign bond spreads
orer U.S. Treasuryyields rose, and benchmark
EME equity indexes dedi ned. Ho11~1·er,
6
- '
Economic aclivily strengthened
somewhat in Mexico and Brazil, but
uncertainty about policy developments
remains elevated
In Mexico, eoonomicactirityincreased
at a more rapid rate in the third quarter
after modest advances earlier in the year.
However. gro111h weak~ned again in the fourth
quarter, as perceptions that the newly elected
gorernment would pursue less market-friendly
policies led to a sharp tightening in financial
condition& Amid a shmp peso depreciation
and abore-target inHarion, the Bank of
Mexico raised its policy rate to 8.25 percent
in December. Brazilian real GDP growth
rebounded in the third quarter alier being
held down by a nationwide trucker's strike
in May. and financial markets hare rallied on
expectations that Brazil's newg01·ermnent
will pursue economic policies that support
growth. However, investors continued to focus
on whether the new administration would pass
significant fiscal reform&
10
"'"
.!016
-
l
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6
:'OIS
~: lk&uiOrClmare~~b)· hd~lbrdatl
(.:c K.« a. ~1.."""'0. JDdlbnl Kt~· ~bycbtw ~"'i\~
g<l'~ ~~The 4au (IK Kon-:a, an4 !ok\i..'o) ~
pmimiox)· estinm-s. b
~I&Qo&, lb:
4.u for 8!W akcd
~~
lOll<()~
$ol.'l(t:
f"«~Ct\i(u{\)I)."(QQ~o(~)l!Ci:fot K~&l'lk
ofKOI'Q!foc .\l~lf$rtlllO~dt£Judi-.!ita ~· ~~&:.f«
81'l1ill~~rodt~f~e~IC".a:all,\ilh\\"f~~
130
I BooJ'=J~lt~aW)
SOl -
I Eq:.il)(edlbu(ri&lll"'is)
-
6G
_.,
L<o -
-
;I)
Non;lb:lx'OIIDJ~timdfkMsdafa.w~Joli!ISof"\'dt)'
lb:a f:vm llauxy I.!OI~. IOD..,"mmt.'-.., ll. WIS.WIIIOIICbl) lli'!IScf
financial conditions improved significantly
in rectnt month~ supported in part by more
positive policy del'elopments-including the
U.S.-Mexico-Canada Agn.>emcnt and progn.'SS
on U.S.-China trade negotiations- and
FOMC communications indicating a mol\!
gradual normalization of U.S. interest rates.
EME mutual fund inflows resumed in rectnt
months after experiencing outflows in the
middle of 2018 (figure 43). While movements
in asset prices and capital flows ha1'e been
sizable for a number of etonomies, broad
indicators of financialstress in EMEs are
below those seen during other periods of stress
in rectnt years.
,.-~~daulfromlnm)·I,2(11~.10Fd:lnw}· 20..:~m.lb:flld!M:ra-sC.
~(~b.~ il!l (liN. The JJI·. '"~ f'.m<'Q:lll$ ~M:m &a$
b1"1: Pbi; ~E.\18!-·) 6w: l!~ votcl:b' alm;.,~ ol 4W)• dlb anJ ~lt.'td
~r~l9,l'li'J.
Solm: f-cth:6JW~Wd~-s.EPI"R:G~:~EM61 . J.P.
M{'(p:t[m.'fSiac_,\\.attitu:Boodlodnl'b,uB~'IJ.
-14. U.S. dolbr t.:xdnng.e ratt indtxes
•«t:~~f.:O:.JS•IOI)
-
IS<I
-
100
-
llO
-
Ill)
-
11(1
100
- .,
£..
I
I
I
ZOIS
I
1 I I
2016
I
I
I
I
I
I
'I.
I
Z\117'
201&
I
I
:0019
S~;~tr.: Tbo:&u..•'bdllN ia ~n!IT~')'IIIibpo."''doliu.alC~
i'l~d~l)·d2tllr:l4~!t:l'l6.~F~·20.!019.Ai~by
0: wrot~. ixr.:~ ~~!.he da ftt!rct:CtiiiJ.S..doiLu~...,
®~~US.«<at~i«L
F-td«il Resmt lkct4.
E_...._.
Sol,'l(~
S-:ll~
Rtbsc lllt\,
~
The dollar appreciated slightly
The foreign exchange l'lliue of the U.S.
dollar is bit a higher than in Jul)' (figure 44).
Concerns about the global outlook.
uncertaintyabout trade policy, and monetary
policy nornlalization in the United States
contributed to the appreciation of the dollar.
The Chinese renminbi depreciated against the
dollar slightly, on net, amid ongoing trnde
negotiations and increased concerns about
growth prospects in China. The Mexican
peso has been volatile amid ongoing political
de1•elopments and trnde negotiations but has,
on net, detlined only modestly against the
dollar. Sharp declines in oil prices also 11tighed
on the currencies of some energy-exporting
etonomics.
131
33
PART 2
MoNETARY Poucv
The Federal Open Market Committee
continued to gradually increase the
federal funds rate in the second half of
last year
From late 20t5 through the first half of last
year, the Federal Open Market Comminee
(FOMC) gradually increased its target range
for the federal funds rate as the economy
continued to make progress toward the
Comminee's congressionally mandated
objectil-es of maximum employment and
price stability. In the second half of 2018.
the FOMC continued this gradual process
of monetary policy normalization, raising
the federal funds rate at its September and
December meetings, bringing the target range
tO 2\1, to 2\1 percem (figure45)." The FOMC's
decisions to increase the federal funds rate
14. S« Boord of Gomnorsof ohe F<dernl R«<~~
S)>O<m (2018)... F,>der.ol Resent Issues FO~tC
SoaO<rncno:· pn:ss rel<ase, Sepo<mb<r 16. hoops:!/
\\'WW,f«j~r3(rest"I'\"C',gO\IDCU'SC\t[IU;1prtssrt1cav;f/
monmryWI80'Jl63.hom: and Boord of Gowmorsof
ohe Fedml Resm< S)>lem (2018)...F«lernl R...,~,
l><ues FOMC Sl31<mtnt." pres< rtl<aSt. D<o!mb<r 19.
https:h\\\w,·,fedmlrese.ro~.go,irtr'll~\tntSipres:srdruesl
monm~2018111~•.hon>.
reflected the solid performance of the U.S.
economy. !he conlinued strengthening of the
labor market, and the fact that inflation had
moved near the Comminees2 percent longerrun objective.
Looking ahead, the FOMC will be patient
as it determines what future adjustments
to the target range for the federal funds
rate may be appropriate
With the gradual reductions in the amount
of policy accommodation to date, the federal
funds rate is now at the lower end of the range
of estimates of its longer-run neutral lel-elthat i~ the level of the federal funds rate that is
neither expansionary nor contractionar)'·
Developments at the time of the December
FOMC meeting, including rolatility in
financial markets and increased concerns
abom global gro111h, made the appropriate
extent and timing of future rate increases
more uncertain than earlier. Against that
backdrop, I he Committee indicated it would
monitor global etonomic and financial
developments and assess their implications
for the economic outlook. In the Summary
-
l
-·
-
l
_,
_,
-0
1(138
2009
2010
roll
2012
lOB
MI-l
20:1S
:M16
2011
Nou::: lla.:Z·)~ mj lt).)U"lr~uryt~~n•clk<'OilStlnl..atrinitkf>.NsOO u. t!.: ~T~CNat1i\'t\'y tnd.:d s..'wili.-s..
Scutt [).~ollh!Tr~~ rmli R~"<:Bl\W.
2018
2019
132
34
PART2: ,\ION!TAAY 1'0\«:Y
of Economic Projections (SEP) from the
December meeting- the most recent SEP
available- participants generally revised down
their individual assessments of the appropriate
path for monetary policy relative to their
assessments at the time of the September
meeting.15
In January, the Committee stated that it
continued to view sustained e.~pansion
of economic activity, strong labor market
conditions. and inflation 11ear the Committee's
symmetric 2 percent objective as the most
likelyoutcomes. Nonethdess. in light of
global economic and financial derelopments
and muted inflation pressures, the Committee
will be patient as it determines what future
adjustments to the federal funds rate maybe
appropriate to support these outcomes.
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 the actual path of monetary policy will
depend on the evolution of theeconomic
outlook as informed by incomingdata.
Specifically. in deciding on the timing and size
of future adjustments to I he federal funds
rate. the Committee will assess realized and
expected economic condi1ions relative to its
objectives of maximum employment and
1 percent inflation. This assessment will take
into account a 11ide range of information.
including measures of labor market conditions.
indicators of inflation pressures and inflation
expectations, and readings on financial and
international developments.
prescriptions for the policy interest rate
from a variety of rules, which can serve as
useful guidance 10 the FOMC. However,
many practical considerations make it
undesirable for the FOMC to mechanically
follow the prescriptions of any specific rule.
Consequently. the FOMC's framework
for conducting systematic monetary
policy respects key principles of good
monetary policy and, at the same time,
provides flexibility 10 address many of the
limitations of these policy rules (see the box
"Monetary Policy Rules and Systematic
Monetary Policy'').
The FOMC has continued to implement
its program to gradually reduce the
Federal Reserve's balance sheet
The Commiuee has continued to implement
the balance sheet normalization program that
has been under way since October 2017."
Under this program, the FOMC has been
reducing its holdings ofTreasury and agency
securities in a gradual and predictable manner
by decreasing its reinvestment of the principal
payments it received from these securities.
Specifically. such payments ha1-e been
reim·ested only to the extent that they exceeded
gradually risingcaps (figure 46).
In the third quarter of 2018.. the Federal
Reserve reinvested principal payments from
its holdings of Treasury securities maturing
during each calendar month in excess of
$24 billion. It also reinvested in agency
mortgage-backed securities (M BS) the amount
of principal pa)•ments from its holdings of
agency debt and agency MBS received during
eachcalendar momh inexress of Sl6 billion.
In addition to e1-aluating a wide range
of economic and financial data and
information gathered from business contacts
and other intonned parties around the
country, policymakers routinely consult
In the fourth quarter, the FOMC increased
the caps for Treasury securities and for agency
securities to their t'I.'Spective maximums
of S30 billion and $20 billion. Of note,
15. St< the t:lcrember Sumn.aryof Eronon>ic
Proj<ctions. ~bich •Pl>"lred as an addendum to the
minutO<of the D«<mb<r IS-t9. 20t8. me<ting of tit¢
FOMC and ~ pre><nted in Pan Jof this repon.
lhe Policy Normaliza.lion J>rinciplt:sand Plan;;.. ~ticb
isa,•ilabl< on the ll<>aro"s "<bsite at httJbJI»w~
f«kralr<s<nt.go,lmon<t31)poticylfik'lit"OMC_
t6. For moo: infom1ation. ""the Add<ndum to
Poltey~onnati<ation.2011061lpdf.
133
MONETARY POUCYRIPORT: fi8RUARYI019
35
46. Principal payments on SOMA se<:uriti<:S
Trtasmystrurilies
I R.-_
l ftrin,~'fltS.
-
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- so
- -'!~("·
-l'O
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- so
- so
-
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r++llt-h~ lll
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- 10
,~I I I I MI I I I I Inl~, ~
l019
lOIS
~17
Rrift,-otm."'''lmdn\km"llOcurri(IUII{so(Trc.ISIIrySCI.'\Iritksa~crroP,'tioo5.)Uru.,iafd>nw)WI9. Rfin,'a~JflmlilDJr~iocuiDOI.Illlls
ol~~;o6..1Jt;aJIJmor1~'''·bkt<:d~~~~'1ioni:~ ii F'~·lJII). C~p~,Meproj..,'tiotb~...d~lilldJWI~.Tht1.bunt..'IXI
tl'II\XI$1'10..'\~Y:'OI9.
:'\on;
SOI.:to: F~U Resm~ lbnk DC~ YOtt: FNer.d RNn~ lkwt.l sufn\:ubliocK
47. Federal Reserve assels :md liabili1ies
200S
~
1010
2011
2012
101J
2()1~
NilS
2Cll~
2()1J
2018
2019
:wu: '"('fNit .d~tyticilib.."$-~o((lriowr)•.!a.'«<Cbf}'. Di~cm.lit~-.'1ioo<t*(\"'''ll11Nd:~· .)1111p!':.SI.IppOftfor
M~ lane'. Bc:w S:cam$.. and MG: :atldotbct mdil la..-ilili<$.tOCJuditls lb.:- Prirn.y i):akr('redit fkilify, lbt As.~·&rl:(lj C~ hp:t MCC~CY
~b:k~M~fur4l~· Faci.tily.~~P'~~fM'ilic)•.~r:b:TttmA'i;SI('I.fb.i:N~~f._-i5!y, ""()bcrttS(t..ird»."$
~~~andd~oos<..'\"Vl~~~~:andotbo:r!Dbiri6.-$-indobi\'\<TSC~a£l\'~tb:U..S. T~
Go>'nl-""'lh<".S. T""'")'~r........A""" ll.d<o"'-""lM'Ogi>T.....,.H.l019.
SI;Ayt~: f~Rc$M~Bootd.SW~Rtboic11..4.1.·F~Aff.!\'tio$RC"M-e~·
reinvestments of agencydebt and agency MBS
ceased in October as principal payments fell
below the maximumredemption cap~
The Federal Reserve's total assets have
continued to decline from about S4.3 trillion
last July to about $4.0 trillion at present,
with holdings of Treasury securities at
approximately S2.2 trillion and holdings of
agency debt and agency MBS at approximately
$1.6 trillion (fignre 47).
As the Federal Reserve has continued tO
gradually reduce its securities holdings. the
level of reserve balances in the banking
system has declined. In particular, the le-.tl
of reserve balances has decreased by about
S350 billion since the middle of last year, and
134
36 PART2: .IION!TAAY 1'0\«:Y
Monetary Policy Rules and Systematic Monetary Policy
Mone~a~· policy rul~ are matlltmaric~l formulas
lhJt relate a policy inter<slrdte. such as the federal
funds rate. to a small number of other «onomic
ooriabl~pically induding the deviation of inilation
irom its wget V"afue oilod a rneawre oi tesource sJack in
the economy. The pre<criptions for the polic.y interest
rate from these rules can prol'ide helpful guidance for
the r:.deral Op.n Marlet C<lmmittee(fOMQ. This
discussion providts information on how policy rules
infonn the FO.MC's sy>tematic conduct of m<>ne~ary
polic)~ as well as I)I<ICfical considerations that make
it undesir•ble for the FO.IIC to mechanicolly follow
the pre<criptions of any spe<ifi< rule. The FO~IC's
awroach for conducting n>Onel.lry policy p<ovidts
Econornilll hare analyzed man,· mone~.~~· poliC)'
rules, includingthe ~~~11-known Tarlo< (19'!3) rule.
Olhet rules include the 'balall(ed awroach' rule, the
'adju~edTarloo- (19'!3)' rule, the "price lt.•el' rule, and
the "GM diiierence• rule (figUieAJ.' These policy rules
embody the three key p<inciples of good monetary
polky and ~ke into account estimates of how far the
economr is from the r:.deral Re<oo'O's dual-mandate
goals of maximum empiO)'mentand price s~bility. four
of the fi1'0 rules include the difference bet\1-the rate
of uoempbymenllhal is StJSt.linable in 1he longer run
and the current unemployment rate {the un<mplopneot
rate gap); the f,r;t.difference rule includes the change
in the unernplorment gap rathe< lhJn i~ level.' In
suificient flexibility to Clddress the intrinsic comp!e;{ilies addition. iour of the fio'< rules inclode the diiie.ence
and uncertdinties in the e<::OOOfll)' whi!e ketping
(continued!
m<lnel.l')' poli()' predictal>!e and lr<lnsparent
3. The Taylortt<J'IJI "'~"·" wgges<<d U.)o/ln B. T.>ylo<
(199!1 ·Oiscrt<ion '""'" ll>lityR•Ies in f'r.Kt<~· Ui~
R«htsltf Confe.<nceS<ri<> on Mlil: Pori:)·. '"'· l9
([)o:emb«), PI' 195-214. The bai.Jnct'd-woach rule""
The effect~-.ness of mone~ry policy is enhanced
'"'1)1«1 in )o/ln 8. T.lyb (19991. 'A Hiltorkal An.l~>is ol
11hen it is" ell unde<stood br the public.' In simple
Alorott"Y Policy
in)OI>n 8. TO)ior, «!., "'"'"''~ II>!icy
models of the economy. good economic performdnce
Rules(Chicago: un•mityol<l>iugo Pr"''· Pl'lt<J-It. The
can he achie\'ed b)• following a spe<ifK monetary
.diiiSI«<T3)1or (t99)) rvlew" •ud<din O..i<l Re;fschoeide<
and)ohnC. ll'oll~ms(20001. "'Th<<tl"""" iO< Mon<<a~·
poli()• rulelhJI foste~> public undef>tandingand
!\>lie)' in a low-Inflation Erj]; Jouttwlol Alooey. Ut.Yli! Mid
that incorpoMtes key princrplesof good mone~ry
IJonlir!g_ ,'01. l2
pp. 93~. A price-leoti rule
poli()•.' One such p<inciple is lhJt monetary policy
'"" dO<usled in Rollett!. Hall tt984). ' 'lontW)' S<ra"S)'
should respond in a predic!able "")' to changes in
\ \ilh an Ebstic P'rice Sl.lnd.lrd,... in Price SUbilify and PtJbl;c
economic cooditions and the economic outlook. A
Policy. proc...ting>ola~""""""'lpOIISOit'd by the fod«at
"''''"IJo~' ol Karll>S C"ll)', held in Jac(ooo Hoi<, ll'i"second principle is that mon<~')' policy should he
Augvst2-J
LK.l""' Gry: f<detal Resen~ SankoiKa""'
accommodative 11hen intla tion is helow policymalers' City), pp. t)i-59,
h!tpo;IA,ww.l.o""sci~1<d.O<fJXI!>I<a!'
longer-run inflation objecti•~ and emplormenl is below sy""""")q!J4,'S3-I.pdi. Final~. the i.rs~.cfif"-:e rule is
Policy Rules and Historical Prescriptions
Rv"":
t""'""""''·
i~ maximum su~ainable l•rel; C001'efsely, monet.Jry
policy should he restrictio~ 11nen the opposite holds.
Athird principle is tha~ 10 stabili>e infution, the policy
l>ll<donarv~~byAIIoanasiosO<phanMJ<s(200J),
'His<orical•too<t"Y il>licy Ana~>is and the Taylo< R,f<;
/oumalo/Mon<Utylcooomi<;, o<l. SOI)IJ~I. pp. 981-1022.
A<~'• r"iew olpol()·rules is ;nJol>n 8. T3)1o<
rate should he adj~ed by more lhJn one-for-one in
response 10 peqi~l incrf.ases or decre.J"SeS
and)ohn(.\l'oll~ms{)Otl), ' Simple and llobust R•1es for
1\\onetal)' Polk)~' in 8eoj.Jmin M. rriedman and Midtael
in inlkltion.
Woodford. Ed<., HanrlbocJ. o(,lfon<Ur)' fCOOOlllk$, od. )8
""""'""'"'' NMh·Hdldndl, pp. 819-19. The"""' '<lume
I. For • discvssion ol how tho P<A>I<'s unc"'••ndingol
01<11\fUI')'poljcy""llet<wthetiiKI••••«oiii'Mlll!lary
pol<:y. "")llll< L. \"~leo fl0t21, 'Reodorion and (o'OI;t;on
in C~r"l B.i!nk Commt.mic.ation:s.,"' speech deli\'fft'd .11 the
""'' Sd!ool ol&siness, Un,«>ity ol Calilom~ " Berl<ele)',
BE>d:ek:y. Qlii.,. N~-embet ll~ hl!ps.: \\WYoo.ie<lt'r.a!~t.p
'W'""Ms ~""!han pol<)-ru1es for do<W;,g pol<)· rate
oitheHmdbootdM~l.uvlconom.irs~lsodiscu$~
nt!w~~Kspe«M'-~ItonlOl Z1113.1.1r.tn.
2. fQc adiscus~ion reg-arding princ,ples for d'f conduct
ol ""'"''~'pol<):"" Board d eo-...,..., ol tho f<detal
R""'~ S)•"" {20t31. 'Monewy 11>1<)· F'riiiCiplts and
Practice,"' Boardoi W.'t'fl'l0f5, hr!ps.:t,\mv•.iederilresen.~.goo.
"'""''"vol"'·"''"'"''-pol;,·.priro6plt<-Jnd.pr..:ti<e.h:m.
""'-'·' 'The
P'"Ta)b
"'· (1993l ruk- ttpresetll.ed slick inreiO!Jrce
utitil<llion usitlg an output&ap (thediffeftncebetwt>«~ d~
"""'" leotlol reai!M'domesticprodoct (GOP) and the
leotltloat GOP wo•ltl be~ the <COfiOIII)' w«e operating"'
m.u..itmwn ernp'n,mentl.The rules in i~gUI'f'A ri1'pl'esent siJd;
inresool'{eUIIiliLa'lionus.instheullemp~Wirst.xt,
b«ause tloatg>pbetter<>jl!ur<SthefO.ItC's""~OI)'!O'I
ro promo::emaximumemplq,menl. Howt\'(1(, too\tmeats ln
tW a~efnati\'e me.JSUfes ol resource Vlililalion are hisf!ty
correlated. foe moce inf()C'IYI.1:ion,. ~the n«e bebv iif;fJte A.
135
MONETARY POLICY REPORT: fi8RUARYIOt9 37
A. Mon<t31)' policy rul«
Taylor (1993) rul<
Balaru:td-approach rul<
RfA = r/Jt + R'r + O.S(rr1 -
;rtR) + 2(ufR .. u,)
Taylor (1993) rule. adjusted
Ri' = maximum (r.'' + rr, + (u)-'- u,) + 0.5(PLgap1) . 0)
First-<liftereoo: rule
R{0 = R,_, +O.l(rr,- •") +(u)-'-u,)- (u~,- u,_,)
Non.: R/'~. Jtu. R,"W, R/'.aOO R.'lt repr~llbc' \'3luesof!htnomin:~~1 fl.'dcral fur.ds rate pr~b:d bythtla)lor (1993).
babl'l('('d-approac-h. adju:>~ cd Ta~ior (1993). pric\'-b"<"l. aod first-ditrcr~oo: 11Jies.. r\'SP,."i.:tiwl)'.
R..dcTtOtCS till: ~tool nornirt.;d fcdcr31 fuod~ r.Ht for quarw- 1. ::,is four..quartt!f pri.."\: infbtio~:~ for quartcr '·"' ~ lk
uncmploym."'''l t.m itt quancr 1. aAd ,,v. is 11'\c !.:wl of~~ n..'\ltt3t ml f~tll fund$:tate in1bt lotlg..."t Milhat. Oft a\m~. is
CXP.,."Citd 10b.: oon..®ent ~~oillt SU51ainin,gma.Umwn cmpfO)mtnt and inllation 31 tht FO~tC's 2 pM"C1ll mttr·run objc\ih~.
X1~.ln addition. u}"isd~e r.ttcofunnn)llo)'tJICOI in ttl( klflg._'f run. Z is tt.:C'\Im111Uiw$um OfJIQStdcli3tioBSoftbe r«krol
fulld$r.ue from the pn.~pEion$oftl'le T3.ylof(l993)ru.k v.hcn tlt31 All¢ prMi~'Ssettin~ !h. f~-dcnll ruodsr3tt bclow~c-ro.
PLgapris t~ p.'m'llt dc\iatioo oftht actuallc\d ofpric\'S fr(lm 3 prit:t k\•tl that ri$1e$ 2 p.'ro.'flt per )'<'3;t from iulc\-cl in:);
sp.-cifiN star1ing period.
'Th-Ta)ior (199))rulc a.nd othtr polkyntksart:g-.'tl('r.tlly 'Alilt<"n in !<"riDS ortlkdt\iationorrealoutpu! from its full
capacit}' kwl.lnt~oCQwations. tlx 0\llptll pp Ms b.'I:P r~-pbtWllith the pp k>-1\lo'Mitfl( f3t( of un..-mploymtnt in the
ion~"! run and it>iK'!ual kwl (IJ..<.insa rdationsbipkoo\\n as Ok.un'sb~~.')inonkrto~ntl~Rrolcsin ttnnsoftJ!c
FOMCs stalUIOI)' g;ools.l-listoricaJiy. mowm.'llts in thcou:tput and uncm~mtnl gaps ha~'t ll«n highl~· romla!C'd. Box
aott3pr0\idcsrtfettii!..'¢Sfortlxpolic}'rulcs.
between recent inll.ltion and the FOMC'slonge<·
lower bound may 1heref0<e 1101 ptOI'ide enoogh policy
accomrnodalion. To make up f01 the cumula1i1~ shortf•ll
change in lhe price i~ for peM>al COIIlUmp:ion
in acoomn>odation (Z). the adju<led rule prescribes
eq>enditu<es, 0< Pal, "~ile lhe price-10\~1 rule
onl1• a gradual t<tom oilhe policy <ale to 1he (positive}
includes lhe gap beMeen the le\'el olprices tod.l)' and '"'"''prescribed by the standa•d Tarlor (}993} role afte1
lhe 1"~1 ol prices that 1\'0IJid be oi>sw-ed if inilalion
lhe economy begins to rec01~r. The 1-enion of lhe pricehad been conll.lntat 2 petcent from a specified sr.ning I0\..1rule specified in figure A also recognizes lh.lt the
1
federal funds r.lle cannOt be redU(ed n>ale<ially beb••
l~" iPLg.~p) 1he p<ice-iel-.1 rule !hereby l>l<es
account ol the deviation of inll.ltion from 1he
zero. If infution runs bel01v the 2 percent ol>jec1i1..
long-run objecli\•e in earlitf periods as \\'ell as the
during period< when the p<ice-10\»> rule p<escribel
(Utr. .lpetiod.
sening lhe federal funds rJte well bebv zero, the rule
The adj"'ted Taylor 11993) rule O'<<>gnizes that
will, 0\'e<time, call fo< more accommodation to make
the federal fonds •ale ca nnol be •educed malerial~·
up for the pa~ inll.ltion shortfall.
below zero, and 1ha1 following the prescriptions
As shown in figo1e 8, the differen1 moneta~· policy
oi the ll.lndlrd13)10f 11'993) role after a •ecession
roles oiren differ in rhe;r prescriptions for the federal
du•ing ~~~ich the federal funds •ate has fallen 10 i~
fonds rale.• Ahhoogh almoslall oi the simple policy
(continued"" II(>Xl pdgel
ron ol>jecti1~ {2 percent as meas111ed b)• the annuol
s. c.W.ringlhe pre>enplioos cllhe prke-ia..t ..~
requires selecting .1 Slclcting, )'tilt ior the pric~ Je.."el irom
v.hich torornu!.lte the 2 perc~ annual ti:edinfi.llion.
frgwt 8 uses 1998 ~!he SLlrting. )"ear. ArOI.Uid lh.'!t limt,
tht undertying lrend oi inlbtioo AM longec~erm infbtion
6. These pr<s<ripl""' a•e ca~vll:<d Uling !11 ~ill«!
dau lor inih6on And the Ul'ltf1"4)lo)·ment rate.-.nd (2) SUM')'·
t>p«ta1Klns!libiliud ala ieltlconsi>!oot•ilhPCEp<i<e
rt.al in:ere$lrate .and the- longtc.fJJn \·a!ut oi tht
inilationbeingcloseto2ptrCen:.
unemplo)mMI td:t.
b.l~~imatesoithelonsec«Jn\-alue-oilhcneutr,ll
136
38
PART2: ,\ION!TAAY1'0\«:Y
Monetary Policy Rules (continued!
B. Hislori<al rroml r,oo, m~ prescriptions rro111 >i"'!'k policy rules
...
,
-·
- s
-'
_,
-·
-s
;-1)16
lOlS
!~!ow. Th:tulcs~~\·.....,clin~lkfoi'i:dWrik,W~~'ftlrnll1k. ~if~.:ooi~lbr~"-.,..:ta~.d!qc-ill
lh.:-pMildr:'\l«p.-notlll~~i}'('El~~-Cflefl).~f'NJ(\'1iM&clb'Jt-M'~"'Ibtf.\ionli'IIUQkl6!
ttx-~O.'U11k~cdrctii~~~<I~~'Citfr<n~C11ip~I~Thc~\·.a.\.;\•((11'10lbt.:61$ulro
~t:2ptflltfll. "Thtllt!(ttatt.4Wpnttlc'ldil;lllta\~k<.'tl4lflbt~ifldrt:ockorP('E~i((dllld<'l'ltf!)III99St\~M1f""«ttlll"C'f
)Qf.'fk~C1.~tbroupb'JIS..-Ql.•lllltbcC\~I.'flk~IN.'Oiblcislllt:4U...,~~tt..oup!Ois.Ql,
S(.(n
f.c«tll~'tlbckcl~\\'ollo.'f'l~d.B~Oi9f~l:~rtdmiRC(tti'C&xatd$Ulr~
rules would hal•e called for volues fOJ the fedetal funds
rate lhJ!t were increasing 0\.-et" time in recMt years, the
psescribed values '"'l' widely across rules. In general,
there is no unique criterion ior ial'Ofing one ruk!:
0\~r anothef.
Systematic Monetary Policy in Practice
Although ~·~·policy rules,..,. a~ling
fOJ obtaining and communic'.ating current and luture
poliC)• rote prescription>. the u~ulness of these rules
fOJ poliC)...,ker> is limited by a r.nge of p<octical
con>ide<otions. According to simple mone~ry
poliC)• rules, the poliC)' interest rote mUll respond
mechonicall)• to a ""all numbef oi voriahle<. How"'"'·
these \•ari~bles may not reffect important information
available to policymakers 31 the time they make
cled>iono. ffx <X<lmple. ,.,.,. of the inpu~ in:o the
T•yiOJ (1993} rule include financial •nd credit market
conditiortS or indicatOfS oi c:onsumer and business
senti_, lhw: fattQIS ;ue ohen '~ infOJ!llilLive f'll
the future course of the economy. Similarly. ~•'l'
polir;y rules tend to include only the current \OIU<S of
the selected \Otiables in the n~le. But the relationship
bet\,.,.. the current -.IU<S of these voriabl<s and
the outlook for the e<:<>nomy changesm~r time for a
numbef of reasons. for example, the structure of the
economr is ~'01\'ing 0\'ef time and is not known with
certainty at anr given point in time: To cornpliute
7. Thebo'< ~comp!e:Olitsoi Monetai)• PolicyR~" in the
)u~ 20t8 M<Widl)•Poll<y R<portdiscusi<S ""''shin. in the
maners furlhet, n1000tory policy affec~ the Fedetol
Rese~~·s goal \otiable< of inflation and empiO)ment
with long and variabl< lags. ffx these reasons,
good moneta<y policy mUll take into account the
information cont<ined in the real-time forecast oi the
economy. Finally. simple policy rules do not ;1ke into
account that the rislcs to the economic outlook may
be asrmmetric, >UCh "during the period \\ben the
fedetal funds rate was still close to zero. At that time,
the FOMC took into con>icle<!tion that it \\1)Uid "''''
limited scope to respond to an unexpe<1ecl "''kening
in the economy by cuUing the fedetal funds rate, but
that it would h;n.. ample scope to increase the policy
r.l!e in response to an unexpec1ecl strengtheoing in the
e<:onom)'· This i!S} mrnettic risk provided a r~tionale for
increasing the feder.ol funds rate more gradually than
prescribed by some poliC)• rules Ill<>\ n in fogure s.•
(con!inuedi
«00001)'"'""
-Me of the
the iong«-<lJn -.lueofthe
neutr.ll ftal int«tst f.Jte to \'.ill)' O'>(-t time il.tdthus oompro:e
its ~ima1Don. See Boord oi Cn.'tn'IOri d the ftde.rJI Resen."t
lys<em l20t81. ~-;uyPcliq·ll<p«rM'.>shingron:Boordof
Gc.r.tmors, }u1)11 pp. 37-41, hltps: ,'W\\W,I{>clerJ!ftst'f\'f.go'>
'"""""pol") ~b~Ot80113_m¢uliapocl.pdl.
8. focfurtherdi<cussiooregardinglhec:ballen&<sof"'ing
""""'rypoliC)•rvles in pr.K1ke, see BoordoiW.'Efnorsoi
the fed<fallt<>!En• Srst<m120181. "Chll""l" Associa:ed
" 'h Using Rut.. to~ukeMonetaryt'o!iC)•." Boo:d of
Coo.-emors, hn~i'IIV.,\.ft.der.,lre5ef\e.gv> rnoodM\polit"l
.w....,..,.,..
<hoi~·>Ssoci.>ttd-,":h-o."ng-roles-..
pol'ocv.l<m.
137
MONETARY POLICY REPORT: fi8RUARYI019
39
The F0.\1C conduru sy;1ema1ic n10<1e1ary policy in C. Charlge in IO.y~-ar )'kidin n'SpOflSt lo Empto)1ncrll
Sit~ioon·pon
a framework thatrespeccs !he key p<indples oi good
11101le!ary policy11llile prOI'iclingsunicienl ilexibili~·
lo address m.1ny oi the practical concer"' described
e.~rlier. Atlhecoreoithisframework lies 1he FOMC's
ftrm commitmeniiO the Fed<ral Resen~·s stalulory
- 10
mandate oi p<omoting n1aximum emplorment and
•,
price stamli~; a commitmtnl thai Ihe Comminee
... \ I , : t
reaftlrms 01'1 aregular basi"So.' To e:xplain its ~af')'
poliC)' decisions to the public as cl<arl)' as possible,
----~'..,• • ,, I •
!he FOMC communiates aboollhe economic data
•••• t'
•
1ha1 are relt~ont to i~ policr decisions. As part oi this
-s
communi"tion strateg); !he r.deral Resen~ r<gularly
describes the economic and llnancial dala used 10
- 10
I ' •'
infO<m i~ policy decisions in !he Monelary Policy
I
I
.
R<>pott and the FOMC ~ing minule<. These daia
-!CO
-50
0
~
ICO
include, but are nollimiled 10. measures of labO<
~III DOa6tmf?lol.ljc.betiD~I
markel condiuons, innation, household spending
S111l: Thr=~~·.aoJ!h:$:181pkp."n.'4tllrUmF~
and business im'fStmer>r. asset price<, and !he global
))10.~cb¢t"IID IO.~at}i'it!;OtJT(Qjl.l) ~ICS~~ ..•1-b:u•~afkrtht&ialtk«. Tbt~illfftfaMMtoll;»
economic environmenL The FOMC po!tmee!ing
p;if-1$mc"~~lbC'dl~•lkar."'WIIIIOII6nlr->ml~pe:il
$(;a!ements and the meeting minut~ detail how
~3ndrb.·flll."ob.~,"W~f'ol)JCIII,»pirtsDCh;
~~Sa\<r(/~M«rlhc-dlr.:lt~.
lhe dai4 infonm the C0<11mit1et's Ol'etall economic
Soi.JtE ~ofllb..Y~~
outlook. the risks lo this outlook, and, in Mn, !he
Committee's '""'sment abootthe appmpriate stance
ol rnot~e~a~· poliC)'. This appropriate stance depend!
on the FQ.'IC's longe<-run goals, the economic outlook
and !he rish to the outlook. and the dhannels throogh
which monetary policy actions influence economic
participan!S adjust their e>peclalions fO< policy in
activi~· and prioes. The fOMC combines all oi these
lhis manner is shown in f~&ure C. The figure plo:s the
eletnMts in de-termining, the timing and size of
chanse in lhe 10.)t>r y;.ld on Treasury securities in a
adjustmen~ oi !he policy interest rates. The qwrterly
Summary oi Economic Projecti011< pr01·ides additional one-hour \\indOiv oroond the release oi empiO) _,
rep011s on the \'er1ical axis ag.1inst the difier.:-nce in
infonmarion aboot each f0~1C participanrs fO<ecasts
for the econom)' and the longer-run a""'smen~ oi the !he act<Mll'alue oi nonfa~m payroll job gains and the
expect.ltions
oi prh·ate-seclos anai)'S!S immediately
ecO<lom)', under her or his individual viti~> conce<ning
befO<e the release oi the dat.l on the hO<izontal axis-app<optiate poliC)'.
that is, a ptOX)' ior 'su!prises• in nonfarm payroll job
These poliC)• communicatiOII< help the public
gains. When actual nonfann parroll job gains tum oot
und'"'"'nd the FOMC's approach to monetary
to be higher than market participan~ expec1,1he )'ield
poliC)making and lhe principle< that undedie it
on I ().year Treasury sec:urilits tends 10 increase. The
Conseq001tl~'. in response to iAComing information,
rise in the 1O.year yield ref!«~ market participants'
market participan~ ten<! to adjust their expeclatiOII<
e>:peclation tha~ as a result oi stronger-than-expected
r<gar<r.ns lllOO<Ia~· poli>cy in the direction consistent
labor m.1rket dar., the path ol short-term int~ rates
with achie\•ing the m.t'(i mum-emp10)'met'll and !)licewill be higher in the future. eon,~fl<'ly, the 1O.)ta.
stability goals ol the FOMC.N Evidence thai mar~et
y;.ld tend! to decline ahe< negati'• surprises in
nonfarm payroll cl.1ta, retlectin~ !he path oi short-term
interest rates will be somewhat tower in the fuMe.
These adjustmer>~ in !he I 0-)~a< )'ield help sl4bilize
9. S.. !he SUI<'""" on long«·Run Goa~ and '"""'"Y
~icy SltJ~\ which h a\~itable on the Board's \\ebsi!t il
the ecO<lom)' t~ro befO<e the FOMC changes the le.-el
l>ttpsi·"'"''""'''"""•-!P'>·"'"n'"~policy,liWF0\1(_
oi !he fed<ral funds rate in the direction con~~ent wilh
lon:;«RIJ.C.."'¢1.
achie\·ing
i~ goal~ as higher long-te<m interest ales
10. 1\'ewec0f'l001ic iniocrn.uionco~nbtcomposedoi d.!!.!
lend to sl01v the labO< market 11~ile 101-.r rates tend to
StJrprises ot of i.KIM tlutt tn.l')' PQ5(' rish to Mw.e ('(()l'l()tl1ic
O!A:omes but att no1 )'et tetlKted in dle d.na.
~rengthen il.
....
:
·'··'· .'
.. .. ... .
.. I
138
40
PART 2: MONETAAY POliCY
byabou1 $1.2 1rillioo sino: ill peak in 2014."
AI !he January meeling.lhe Commiuec
released an upda1ed Sla!emtnl Regarding
Mone!a')' Policy lmplcmeo!alion and Balance
Shcel Normaliza!ion 10 provide addi!ional
infonna1ioo ~rding i1s plans 10 implemem
mone1ary policy orer Ihe longer run." In !his
slalemenl. !he Commiuec indicated 1ha1 i1
intends torominue to implemem monela')'
policy in a regime in whichan ample supply
of rtStn'tS ensures !hat romrol 0\tr 1he ln'd
of !he federal funds rate and other shorHerm
interest rates is e.~ercised primarily lhrough 1he
seuing of the fedtral Resem:'s adminis1md
rates. and in which ac1ivc managememof
the supply of resm'CS is not required. This
openuing procedure is oflen called a "ftoor
S)~tem." The FOMCjudges 1hal this approach
pr01ides good control of shorHerm 111()r!ey
markel rates ina l'aricty of market conditions
and elf...-tile transmission of those ra1es to
broader financial condi!ions. In addition, the
fOMCstated !hal i1is prepared to adjust
311) of the details for romple1ing balance
sheet normali1"1tion in light of economic and
financial derelopments.
Ahhough rtsen·e balances play a central role
in !he ongoing balance sliM normaliza1ion
prores..\ in !he longer run, 1he size of !he
balance sheet 11 ill also be imponan!ly
determined b) trend gr011 !h in nonresene
liabililies. The box "The Role of Liabili1ics in
lX!ermining !he Size of!he federal Resme's
Balance Shec!" discusses various fae1ors thai
inftu~nce !he size of restrl'e and nonresene
liabili1ies.
;\ lean11hile. in1cres1 income on !he federal
Rtsene's securilies holdings has cominued 10
suppon substamial remi1 lances 10 !he U.S.
17. Sii'K\: tbestnrt of the nonnalitalkm prog.rant
'"""' ....... '"'•dropp<d b) -
iowd)
S600boll...,,
18. S..~ the Stot...,.,nt Rtgatding Monttary Polic)'
lllljlkmtowioa aod 8olloa SliM 1<~
•hid! b:l\ail3blt onthe Boon!'• •<!>sit<" bliP"
'""'"·ftJ..-ral~l'\~.~~.wt~~"'\tnl\'pJ'C'\,:~f..-Ob..Y
IDOll<l>l)::01901?'.~:n·,.
Tn:a5U'). Prelimina')' financial staltrnenl
resul!s indica1e !hal !he Federal Rtsen·e
remiued abou! S65 billion in 2018.
The federal Reserve's implementation of
monetary policy has continued smoothly
As 11~1h !he previous federal funds rale
increases since la1e 2015. the fedml Resme
successfully raised !he effec!il'e federal funds
ra1e in Sep!ember and IXcember by increasing
!he in1eres1 ra1e paid on rtStm balances
and !he interes! ra1e oHered on ovcrnigh1
11:\-mt repurchase agreernenl! (0:-1 RRPs).
Specifically, !he Federal Rtsen-e raised !he
imeres1 r.ue paid on required and e~eess
resene balances 10 2.20 perren! in Septtrnber
and 10 2.40 percent in December. In addition,
!he federal Rtsem increased the ON RRP
offering ra1e 10 2.00 perecn! in Sep!cmber
and lo 2.25perecm in lXcember. The Federal
Resene also appll)led a ' • perren!age poin!
increase in !he discoum rate (the primary
cn:di1 ra1e) in bo!h Sep!ember and Dectmber.
Y"telds on a broad set of money marke1
inslrumenls mo1ed higher. roughly in line
1\ilh !he federal funds ra1e. in response 10 !he
FOMC's policy decisions in Sep!ember and
IXrember. Usage of 1heON RRP facili1y has
remained low, excluding quaner-ends.
Thcdl'ec!ire fedml funds ra1e m01t.'d 10 pari!)
11 i1h 1he imeresl rme paid on resen-e balances
in !he mon1hs before !he December mee1ing.
AI ils lXrember mtcling. !he Commiuee made
a second smalllechnical adjuslmenl by selling
!he imerest on «cess reseno:s ra1e 10 basis
poinls below !he top of !he targel range for
!he federal funds ra1e: I his adjus1men1 was
imended lo fosltr !rading in !he federal funds
market a! rmes well wilhin !he FOMC's
large! range.
The federal Reser1e will conduct a
review of its strategic framework for
monetary policy in 2019
ll'l!h labor market condi1ions close 10
maximum cmploymenl and infta1ion nearthe
Commiuce·s 2percent obj...-ti1e. the FO~IC
139
MONETARYPOLICYRIPORT: fi8RUARYIOt9 41
The Role of liabilities in Determining the Size of the
Federal Reserve's Balance Sheet
The size of the f<de<al Resen~·s balance shee1
increa.ed from $900 billion at the end of 2006 to about
S4.S uillion at the end of 201~ from 6 pe<c:tnt
olyoss domestic product iGDP) to about 2S pe<cent
oi GOP-mainly as a result of the largt-!Cale asltl
purdlase [lSAPJprograms conducted in respon;e to
persi!.tent economic weakness foltow'ing the 1inancial
cri>is. The expansion of 101al a~s th" ~emmed from
the lSAPs was primarily matched b)· highe< resel\~
balances d depository institulions, which pe.1ked in
the fall of 201 ~ at $2.8 trillion, or almost 16 pe<cent
oi GOP, rising from about S10 billion atthe end of
2006. liabilities othet tban reser\'es haw also grown
signif.cantly and plaj..t a role in the expan<ion of
the balall(e sheet The nlOgnitU<ie of these nonresen~
liabilities as well as the'""" affecting theimriabili~·
are 1101 close~· related 10 monel.lry policy decisions.
Since Octobef 2017, the f<de<al Resen-e h.ls ba>o
gradll<llly reducing i~ se<urities hoklings resulting
irom crilis-<ra purchases. Once these holffing< hai'O
unwound to the point al which _,.., balances
haw declined 10 oheir long€1·run Ia~. the si<e of
the balance sheet will be ooermined by faClors
affecting the demand for Fedetal Resen-ellabilities.
This di!Cussion describes the Federal Resen-e's most
signittcant liabilities and 1eviews the iactors lhal
inTluenced their size since lhe financial Cfisi"S. ,\1.any
of ohe Fedetal Resen-e's liabilities arise Iron> ~alulory
responsibilities. such as supplying currency and serving
as the Treasury Oep.1rtment's ftS<alagent Each liabili~·
pr01ides social benefi~ to the econom)• and plays an
import.lnt role as a 1<1ie .>nd liquid asset io< the public,
the banking system, the U.S. ga.~rnmenl, or other
inslitutions.
Figure Aplo~ the alllution of the r..leral Resel'e's
main liabilitie< relati1-eto nominal GOP 01~ the ~
World War II period. Federal Rese~-e ootesou~l.l"'fing
h.l1-e traditionally ba>o the Jar~ Fedetal Resen-e
l~bility and. 01-er the p.~ thr.. decades, h.l1-e ba>o
sl0\11y gr01,·ing as a share ol U.S. nominal GOP. U.S.
currency is an important medium oi exchange and
~ore of value, both domestically and abroad. Despite
1he increasing use of e!e(lroni<: means oi payment.
currency rem<~ins widely used in retail tr~n$aCtions
in the United States. Oen>and for currency tends
to incre.Jse with the size of the e<:onom)' beuu~
households and busi""'ses need OlO<e rurrency 10
use inexc!Mnge for a growing volume of economic
transactions. In addition, with hea~~· us.1ge ol U.S.
currency 01erseas, changes inglobal growth as 11~1
as in financ~l and geopoliti<al ~ability can also
(conrioued oo nw page!
A. liabilities as ashared' nonin;J glll!Sdomcsic prodllCI
Kc:-..:,.,t"b:ab~'li.
Olbr:f1Ubi6li.....
8 Tn:bul') &o.-nl Ao.'-""'l'l
8 C\ttTM..)
-
2S
-lJ)
-
IS
Non: 1m. f~'f 20!S f\.'fQ:iD 10 Q3 iDd arc- fn.:alk fnltNI P.t:m1t &Ml (~ Quutlf Fitutrilt R.t~t iUm~t cbLI £or 1950
ttwocp lll7~( (rom l1lc lfH.!JtA'*" Rqqtt, j'VI1.
SrA.m: Bo.tr.JclOo•o(fOOfioftb!fotdm.IRNntS}'it.aii(!OIS).I()I:IAMdRt{'Ott. ..'IJn. Ta~~R~~ofl)..~tct)IIN)Tubon.\
FCiknl R~~: 8W Oa!it.. and R~t~ l1cms (Table 6.\; 't'e!t·End 19S4-)')Ii ~ M.-clh-Et!J lll1:: T~ (.8: \'w·EA1 1913-19$~1
(W~bn,to((loo.~).fiS).~.i». MI~•'~~.f'~~'f.$01'J'Iub&a~'JiJco..l))l7~cpon#f:~NoiGQ'\~((
ibo: R&.-nl RO(no; Syi~..'m .l:IISl Ffllttcl Rntnr &Ids ~ fl-tnlf ~ Rqutt tlf~l. T~bk; Cccbirlc4 SW..."I'DC'C.;J.ci
C~(W~OQ;:(k.an,!c(Go-,~S<t-:nn..'TJO).p.).hi;I~...."'.M.-ra1'1('tl'tgQ\i~I~:Wl'6l.~·...~·-lt'P)I1·20l~».j>lt
140
42 PART2: ,\ION!TAAY 1'0\«:Y
The Role of Liabilities (cootimJ«!J
mate<i•lll•affe<t the rate of currency gto"1h. Since Ihe
ll.!nks' higher demand for resen-es awe•~ 10 ltil«t in
pan an incttased fOCill on liquidity rill< managen~ll in
h.J\~ moreth.Jn doubled and, as oltheend of 2018.
the context ol regulatory ct.Jnges
stood al about S1.67 Vi Ilion, equil·al..,llo about
lial>ilities 01her thon currency •nd resent'S
include the Treasury General ilc<ount (TGAt, r.-,.,.
8 pe<o..l of U.S. GOP. implying thai acromn!Odoting
demand lor currency alone requires a larger b.llance
repurcho<e agreernen~ cooducted with foreign oftlcial
sheet than before the cri~s.
account hoiclefs, aDd deposits held by designated
Rese•ve balances are cu rrenlly the ~e<ondnnaocial mcul:e: utilities (0fMUs). 8} S!atutt, the
largest liabilil)' in the Feder<! RfSef\~'s balance
feder•l Reset\~ sent'S • special role as fiscal agent
sheel.lotoling $1.66 ~illion atlhe end ol2018, or
or b.lnker lor the lederalgO'>"ern111f1nt. Consequ..tl)\
nearly 8 peteent ol oominal GOP. Thi< l~bility item
the U.S. Tre•sury hold< cash O.l.lnces at the federal
consi<~ of deposits held a1 Federal Reset~~ Bonks by
Reset\'C in the TGA. using lhis accountlo recei\'C
depository iMiilutions, including rommercial banks,
l.lxe< and proceeds ol~e<urities 1<1les and 10 P'l' the
savings banl<s, credit unions, thrift institutioos, and
8"'"'nment's bills, including interest and principal on
moll U.S. branche<and agencies of foreign banks.
maturing ~e<urilies. Beiore 2008, the Treasury tatge(ed
These bal•nces include r~'es held to luloll resen~
a steady, low balance of SS billion in the TGA on
1equirements as well as rese'\'eS hef.d in e>:cessoi
rnost days, and it ured prh·ate accounts atcornmercial
these requirements. Restt~'e bai"ICes allow banks 10
banks 10 manage the \'ari~bility in its cash ~..'S. Since
facili1.11e doily payn,..t flo-,,, both in ordina~· times
2008.theTreasury has used the TGA as the p<imary
and in str~ ~enarios, without borrO\ving funds Of
account for managing cash ~~c.,._ In M.l)•2015, the
selling assets. Resen~ balances have been declining
Treasury announced i~ intention 10 hold in theTGA a
1.-~1 oi cash generally suff~ientto 00\"er one"~ ol
fO< several l'"~· in part as a rewlt olthe ongoing
balance sheet normalization program initiated in
outflows, sOOject to a minimum baf41oce objecthoe of
October 2017, and now stand about S1.2 uillion below roughly SISO billion. Since this policy ch.Jnge, the TGA
their peak in 2014. AI its ~1nuary 2019 meeting. the
balance hos genera!I)' been "~II abO\.. this minimum;
federal Open Marlcet Commin.. decided thai it "ould at the end oll018, it was about $370 billioo, or neorly
continue lo implement monet.1ry polic)' in a regime
2petcenl ol GOP. The current policy helps prote<l
with anample supply of resene, which is oft.., called againstlhe risk that extreme weather Of other technical
or opet"Cllional e\-ents might cause an intt!rf'ruption in
a ·ilOOf srstem" or an ·•bundont resent>Ssrstern."
Going forward, the banking system's"'"'" dem.lnd
a<cess to debt markets and,.,,~ the Treasu~· unable
for reset\~ balances and the Commill,.'s judgment
10 iund U.S. gO'>'Oinme<ll ope<ation<-a scenario that
about the q.,.nti~· that is app1opriatelor the effiCieat
could ha'~ serious conseqveoces for financial swbili~··
•nd eifooive impl.,...talion oi11l011etary policy will
ReL-erse repurchase agreements with foreign oit1ct<~l
delermine the longer·run ""'<~of reser\'e b.llances.
accounB, also known as the ioreign repo pool. also
Ahhough the le-~1 of reset\" balances that bank< will
rose during re<ent yea~. The r.deral Resen~ has
e\'entuallydemand is not ret ~nown wilh cert.dinl)', il
loog oife<ed thi< se<vice as part of a suite of banking
is likely 10 be appre<iably higher thon before the crisis. andcus!O<I! se<vices 10 foreign central b.lnks, foreign
st.Irt of the Global Finaocia I Cli~s. 110\es in circulation
1
g0\'flnmenls1 and inu~marional off.cial inslitul.ioos.
1. Set-footnote 13intherMinttxt.
lcoo6nwdJ
141
MONETARY POLICY REPORT: fi8RUARYI019
Accounts a! the r.de<ol R"""~ ptOiide foreign oftic~l
in~iiUlioos wilh a<Cf!ISIO immediate dollar liquidily 10
suppoo opetiltional neEds, to dear and settle securities
in their accounts, itnd to address unexpected dollar
sho<l.lges or exchange rate 1ootili~·· The foreign
repo pool hast'Oim from an ''"'ogele~~l oi around
$JO billion before1he crisis to a
"~rage
of about $250 billion, equivalenlto a liAie more
th.ln 1 pe<cent oi GOP. The rise in foreign r€p0 pool
balances has reflect«l in p.1n cenuol banl:s' preference
10 main1.1in robu~ dollar liGuidi~· buffer~
Finall)', •othefdeposi~· with the Fede<ol Reser.•
Banks ha\'e also risen stea.dil)' 0\'ff recent years, irom
lt'SS than $1 billion before the <ti~s to about $30 billion
at the endoi 2018. Although •othef ~~·include
balances held b)• international and multilateral
orgdnizations, p'!!mmet~t·sponsored enterprises,
and other miscellaneous items. the increase has
large!)' been driwn by the ~ablishmen~ olaccounts
for DFMU~ OFMUs pr"'ide the infraltJUCture for
triln~feaing. dearing. a~)(~ seuling pa)·ments. se<:urilks,
and ~ tran"Sactions among fl~ncial instilution.s.
The Dodd·frank IVall Stmt Relorm and Coosumer
Prot«tion Act ptovide< lhat OFMUHhose financial
""rket utilities design.>t~ as S)>ternicall)' impotl.lnt by
the FinanciaiS!ability Ol'efsight Council-con ""intain
accounts at the Federal Reser.-e and earn intefest on
balances maintained in those accounts.
Putting together all ol these elements-d•11 is,
projecloo Uend gr01,1h f1lf currenq• in circulation,
the Committee's decision tocootintreoptf.lling with
ample reset~es, and the higher le~~ls f1lf the TGA,the
i01eign r'I'O pool, and DFMU balances--<xplains why
the longer-run ~ze of the r.de<al Resm't's balance
sheet will be considerably ~rg« thon beforelhe crisis.
At the end of2018, the Federal Resen~·s h.llance
sheet total«l $4.1 ~illion, Olabout20 percent ol
GOP. Figure Bconsiders the size of the ba~nce sheet
in an inter~tional context. In responre to the Global
«'"'"'
43
Financial Ctilis, central b.1nk balance W.:s increased
in mony jurisdiCtion> Relati\t 10 GDP, the Federal
Resct~e's h.lbnce sheet """'ins ""'lie< than those ol
other reser.-e<uH<ney cenltal banks in major adloancoo
foreign economies that cuttently Ope<ale with abund.Jnt
resen'OS-!Uch as the Europe.1n Cenltal S.nk. the
Sank of ).1pan, and the Bank of Englan<hlltbough this
difference is partly due to the r.de<al R""""' being
much funhe< along in the policy nom"'lization process
after the crisis. In addition, the r.de<al R"""•e's
b.llance sheet relati1't to GOP is only modeslly larg«
than those ol centro I hdnls, SU<h as the Norges Bank
and the Resm• Bank of Ne~v Zealand, thatoim to
operate at a rei.Jtil'ei)' low lewl ofabund.Jnt reserves.
Of cou... differences in central bank balance shee1s
.illso rer'lect diffetences in fioanci~l S)'Slems ac;rtl$~
counlries.
B. Ctntra.l baJ!k balaACe shffis rda1h·e to gross domestic
prodl>.'
....""...........
· ~"""
a r~~~
· ~(fti7118.W
- too
· ~'t(bcl.:o(
""'"""'~
-
00
- ,.
:V,nc; ~I'«2D!Sp«1210k'IQ3.o«pcfore.:-B::ll:o!~•llo:K'
pcnl11110 ~li:Q1 N«~ bit &u. t\rbit ~ tl ~'If'
G<r\«nmm~~FIIld()lobll.
S«."Ut; Hll\"fANI)U..'i.
142
44 PART!: MONETARY POUCY
judges it is an opportune time for the Federal
Reserve to eonduct a re1•iewof its strategic
framework for monetary policy- including
the policy strategy, tool~ and communication
practices The goal of this assessment is
to identify possible ways 10 improve the
Committee'scurrent policy framework in
order to ensure that the Federal Reserve is
best positioned going forward to achie1-e its
statutory mandate of maximum employment
and price stability.
Specific to the communications practices, the
Federal Reserve judges that transparency is
essential to accountability and the eft'ectiveness
of policy. and therefore the Federal Reserve
seeks to explain its policymaking approach
and decisions to the Congress and the public
as clearly as possible. The box ·'Federal
Reserve Transparency: Rationale and New
lnitiati1-es'' discusses the steps and new
initiatives the Federal Reserve has taken to
improve transparency.
143
MONETARY POLICY REPORT: fi8RUARYI019
45
Federal Reserve Transparency: Rationale and New Initiatives
Chaim1an began holding a p<ess conference aner
ea(h FOMC meeting, doublin& the freqwncy of the
impw.-e llansparency, which fMOvides three importanr
press conierences lh.lt were fntnxfuced in 2011 .
benefi~ First.transparenq• helps ensure that centrJI
These press conferences are held 30 minutes aner
banks are held accoon~ableto 1he public and its
the release olthe ~meeting staterner>tand p<ovide
elect.O repcesentatii'<S.Accountability is essential to
ad<li~onal information aboulthe economic outlool:,
democratic legitim.1cy and is pMicularly important
the Commi«ee's policy deci~on, and policy tool<
Press confereoces also aUow tht (bairm;~n to answer
for central banks thai""'"' been grant.O exlensive
operational independence, as is the me for 1he
questions on mont~al)' policy and o;her i~ in a
Fette..! Resen•. Second_ ~ansp.~rency enh.Jnces
timelr fashion.
In Nol'ember 2018, the FOO..al Resen~ announ«<i
the
of monet.J<y policy. If the public
under<t.Jnds 1hecentral b.lnk's vie11~ on the economy
that it would conducla broad review oi its moneta<y
and monet.l<y policy, then households and busi,.....
policy framework-->pecifiully. oi the policr w"egy.
will take those views int() account in ma~ing their
lools. and communication praetices that the FOMC
spending and im..,~t plans. Third, tra0sp.1rency
US<:S in the pursuit oi i~ dual·mandale goals ol
supports a cen~al bank's eiiortlto pronlOie 1heSJfel)•
maximum employn>entand price stability. The FOO..al
and soondr~eSS oi finan<:ial in~itulion) and the o~'ef<tll
Resen..,'s existing policy framework ~the result oi
financial system, including b)· helping financial
decades ollearning and refinements and has allowed
institutroos know what is expected of them. Thus. for
the FOMC to pursue eiiectivtl)' its dual·m>ndale
e><h of these reaSOIIs. tl>e FoderaI Resen"eseeks to
goals. Cenv•l bonks in a number ol o1her adl'anc.O
explain i~ policymaking approach and decisions to 1he economies ha1~ ako found it useful, at times, to
Congress and the public as ci<arl)• as possible.
conduct reviN> of their moneta<y polic)' iranleii'OiksTo foster tr30sp.l«'fl<)' and accoontabilit)', the
Socha re~·i"'" seems pMicularly approp~iate 11flen the
feder~l Reser\'e uses A '''ide ''~riety oi communications, economy appears to ha1• changed in wars that matter
including ,...iannualtellimonr b)• lhe Chairman
for the conduct oi n>onelal)' policy. for exampl<t the
in conjunction with this report, the Monewy
naJir<~lle~•l oi the policy inrerest rare appears to ha1..,
Policy Report. In addition, the FOOeral Open Market
fallen in 1he Unit.O Slates and abrood, increasing the
Committee IFOMCl has released a st.Jtement after e~·ery risk thai a central bank's policy rate will be con<trained
regularly sdl«iuled meeting for almo.t20 l•ar<, and
b)' its eiiecrive lowe< bound in fu1ure ecooornic
det.liled minutes oi FOMC meetings hal~ be<n released downturns.The review will consider \\"a)'S to ensure
thatlhe Fodera I Resen'e's moneta<y policy strategr,
sioce 1993' In 2007, tl>e Fodera IResen~ expand«i
the economic projectioB<that hal• accompanied the
tools, and communications going forward ptOI'ide the
best means 10 J(hie"\~ and mairnain lhe dual-mandate
Monetary Po/ic)' Report since 1979 into the Summa<y
oi Economic Pmjections, ~\~ich fQ,\:\C par1icip.1nts
objeail....
submit e~ery quaaer. And in 2012,the FOMC first
The revif:ll•will ior:lude outreach toand consultation
rel<ased i~ Stat"'""'I on Longe!·Run Goals and
with a broad Mnge of sr.U:eholders in !he U.S. economy
th<ough a series oi 'Fed LiSiens• f:l'l'llts. The Reserve
Moneta~· Policy S~tegy, 11hich it reaiti""' annwll)'·'
The r.deral Resm'Oconlinuesto make
Sanl:s will hold forums "ound the countrv, in a 101m
impro\'·ernenu 10 its coo1municC!Iions.. In January, the
hall forma~ allowing the Federal Resen.., rogarber
l""f'ec1i1'<> from the public, including repcesentaiii'OS
oi busin<SS and ind~<y.labor leaders, community and
1. In Oe®lber 2QO.I, <he FO.\\C de<;ded to~><gin
economic del'elopmont officials, ocadernics, nonp<ofit
publislling rheminut<'S m... we<baltor ""'l'mot<ing.
~ing thepubfication smedu~toptO'.ide tbe~ic\\lt.h
Otganiz.alioos, community bankerts, focal ~-ettunent
morerimely infOI'll'lation.
oifiCials, aod representati\'es of conyessiooal oftH:es in
1. The~~"""""''~""'"'ho~bogiooiogollnisrepon Resen~ Bank Oistric~.' In addition. the federal Resen..,
on p. ii.TherO.\tC ~lsopubliW:'str<~~ofitsmeetings
(con~nued oo II<:Xl page!
.litet a fl\'t-)Wr &a,g. For atf:\~' ol the rNin comn..mic<~liotl
<ools US<C!IJr lhe Federal R<Sfl\eandccber ctnllalb.!nl:s.,..
0."« 1he pa~ 21 )'tors, the Federal Resm~
and otMI m.Jjot cen~JI b.lnks n.ll~ t.1ken !I~ to
"'ec1""'"""
~c~oru-·~-•rr~'<>~icySir•teg;esoi~~i«C"'"al
S..ks: .~;en is Milable on ~ webpoge 'Monetary ll>licy
Princip&s.aOO Pt.Ktice"' on the BooKI's lll>bsite.lt kr~~'.\\wN.
i<der•l•htne.gc>~,...,...I)!>Oirul"""""'t'f'OI<I·pr"'<~·
•n<i1"0<1i<e.htm.
). •fed lil<ens' ""'"~ w;tl be hel<l a1 <ile fed«aI R"'nt
Bani oi D.lll.!s 1)\is ftbruary and ao rile Federal Rfsmt Bani
ofMinnt.apoHs thisAprii.Othef ·r.ro listens.. e\en:s ~\ill be
antiOUnctd in coming v.uk$.
144
46 PART2: ,\ION!TAAY 1'0\«:Y
Federal Reserve Transparency lcommU<'d!
Syslem will spon10r a research conf«ence !his June a1
!he Fode<al Resen~ Ban~ of Chicago. wilh academic
speak«S and non...cademic paneli~s from oulsidt the
Fode<;l Resen·e Syslem.
Beginningi\IOUnd !he middleoi2019, as part oi
!heir reviewol how to be>~ purwe !he Fed's ~a!Uiory
mandate, Fode<al Resen" policym.l~«S will discu;,
ctlevan1 ercooomic research as well <~s the ~"tS
offetoo during 1he OUireach """K AI !he end of !he
proce<~. poli<ymak«S '~ll•ssess 1he informa!ion and
pe<Sp«ti'"' ga1heroo and will report !heir findings and
conclusions 10 !he public.
This review complements otMr recent chc1nges
10 !he Fode<al Re!ro'e's communicalion prdClicts.
In N01,..,be< 2018, !he Board inauguroled ~'"
report!, !he Su{JI!fv~ion and 1/Rgul.!tion IIA!potl and
!he FiniiJICiaiS!dbility 1/.epo<t.' These report> pr~dt
information abou11he Boord's relflO"'ibili~\ shared
wilh Olher gos...,men1 ag<tlCies, lo fos1er !hes.fe1y
and soundness olthe U.S. banking sys~em and 10
promote finaocial ~bilily. Transpareocy is key 10 1hese
effof!>, as i!enll<lnces 1Jtlblic ronfodeoce, all01'' for !he
consideralion oi outside idea5, and males il e.Hitr i01
regulaled entilies to k001v wh•l i< expected ol1hem
and how bes110 comply.
4. The~'"""'lldR<gui>IIOI1R<jx>!Ondlhe
fitlJoci.JJSIJbi,r,l)' Repotr.areA-Aibble on the Board's
1\'tbsi!:tal, respecth'tfy, b·~AIWYo'.ft.der.attest'nf.'.go'o''
publ<ai-~OIS<rq.<rrobor-wp!f\•,.,._.~~·.,.,_
"!J0111'f'l'"'•·""" .oo hllp<:J''"''·.i.oo-.t""""~-sos
pobi<""""QOI S<rq.«"ber-loi\Oil<i~-!Ubr"~'"!JJOI·
P"'P""-htm.
The Supetv~ion and RegulaU<Jn IIA!pott pro<•ide<
an overview of banking conditionsand the currenl
areas oi focus ol the FOOeral Resen-e'< regulaiory
policy frame~'orl;. iocluding pending rules, and key
1hemes, !rends, and priorihes regarding supervi!OfY
progranrs. The report di~ingui<hes beo,·een large
finaocial inS!ilulions and regional and comn>unily
banking organizalions becau<e superviiOr)' approach«
and priotilies for !hese instilulions frequently differ.
The report ~de< information to !he public in
conjunction with semiannual testimony bei01e the
Congre;, by !he Vice Chairman fot Supervi<ion.
The r.nanci.l!Subiliry Rripotl summarizes the
Boa1d's monitoring ol vulnerabilities in the flnan<ial
<y<lem. The Boord monilors fourbroad calegories oi
vulneabililies, iocluding ele~•aled \•aluahon pressures
(" <ignaled by asl<l price> thai are high relalh-e to
ecoOOtnic fundamentals 01 historical nom'IS), e.xcessi\'e
borr01ring by businesses and hou<ehold<, exces<i•-e
le\"e(age within the iinai'ICial SOOOI, and iunding
risks (risks associated with a withdrawal oi funds
frorn a partkul.ar linandal in>titulion 01 seaor. for
example as pa~ of a •financial panicj. Assessmen~
ollhese '" lne<lbili!ies informFOOeral Resen'O ..:lion<
10 promote !he resilience oi !he financial sys~em,
including through i~ <u~sion and regula!ion of
finandal institutions..
Through all ol!hese eifO!I> 10 impr01-e ill
communicalions, !he Fode<al Resen" .,.ks to enhance
lransparency and acroun!.lbilily regJrding how il
I"'"""' i!S ~a!Uiory responsibilities.
145
47
PART 3
SUMMARY OF ECONOMIC PROJEOIONS
The following materia[ appeared as an addendum to the minutes of the December 18-19, 2018,
meeting of the Federal Open Market Committee.
In conjunction with the Federal Open
Market Commiuee (FOMC) meeting held on
lftcember 18- 19, 201&. meeting participants
submiued their projections of the most likely
outcomes for real gross domestic product
(GDP) gr0111h, the unemployment rate, and
inflation for each year from 2018to 2021
and over the longer run.~ Each panicipan!'s
projections were based on informalion
available at the time of the meeting. together
with his or her assessment of appropriate
monetary policy- including a path lor the
federal funds rate and its longer-run valueand assumptions about other factors likely
to afl'ect economic outcomes. The longerrun projections represent each participant's
assessment of the l'<liue 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 panicipant
deems most likely to foster outcomes for
economic activity and inflation that best
satisfy his or her indilidual interpretation of
the statutory mandate to promote maximum
employment and price stability.
All participants who submiued longer-run
projections expected that. under appropriate
monetary policy, growth in real GDP in 2019
would run somewhat abore !heir individual
estimate of its longer·run rate. Most
19. fi,·,mcmbersofthe BoardofGowmors.one
more than in Septl'111be:r 2018. wtre in office a11he 1irne
of tit< De--ember 2QtS m"'ting and submitted "-onomk
pmje<1ion<
20. On< panicipont did 11ot submit long<r·run
proje<1ions for ml GOP growth. tilt unemptoymtnt ratt.
or the federal funds rnt~
participants continued to expect real GDP
gro111h to slow throughout the projection
horizon, with a majority of participants
projecting growth in 2021 to be a lillie below
their estimate of its longer-run rate. Almost
all participants who submitted longer-run
projections continued to expect that the
unemployment rate would run below their
estimate of its longer-run lel'el through
2021. Most participants projected that
inflation. as measured by the four-quarter
percentage change in the price inde.x for
personal consumption expenditures (PCE).
would increase slightly orer the next two
years. and nearly all panicipants expected
that it would be at or slightly abore the
Commiuee's 2 percent objecti1-e in 2020
and 2021. Compared 11ith the Summary of
Economic Projections (SEP) from September.
many participants marked down slightly their
projections tor real GDP growth and inflation
in 2019. Table I and figure I pr01ide summary
statistics for the projection~
As shown in figure 2, participants generally
continued to expect thattheerolution of
the economy, relative to their objectires of
ma.,imumemployment and 2 percent inflation,
would likelywarrant some further gradual
increases in the federal funds rate. Compared
with the September submissions. the median
projections for the federal funds rate for ihe
end of 2019 through 2021 and over the longer
run were a little lower. Most participants
expected that the federal funds rate at the end
of 2020 and 2021 would be modestly higher
than their estimate of its le1•et Ol'er the longer
run; however. many marked down the e.xtent
to which it would exceed their estimate of the
longer-run le1~l relatire to their September
projection~
146
48 PARTJ:
SUM\~RY Of ECONO~IIC PROitCTIO:<S
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........
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lbcr~al(}pco\hA<1C"(G.II~t.-,:OCIS.~:!S:6.a!C)wpan~dlll.OC'*ll~.,..~-~llK"-.~,~tar:a1G1>P,tK~--''~·ot
tb:k«ftJ(Iil)dlliiCI~~o.-tiO!a•iiiiJbc~!>~;"')Jl~ifl$..:4tfii:!'W~d~!i«~JU(bf'CO)M"*•U«·,..."''iofl•illlfk~~~$.-Jt.
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I,
f«u<ir r.~till~J!JtbtiiM"pllj(lo_. • ....._,ilt~,ufaruop.!fr..-......N~~\\ltd&bt~c(~la*itf'ft.l!lt_.t'l.)t\lbc
.t.•«'ftc!I~C..·o~rt~"llt::Ii.
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; l!J.:t~fotl.lUWlc..tpvt•)WICo:W:-uJifllllqt.~IU'fl'""~(rN~IO·~.f.x~t•I~ I&Wt~ll.
:
t~~'Wctif.x«tt(Pcr.id.lli.'OI.ff~(olkatd
On balance, participants continued to view
the uncertainty around their proje<:lions as
broadlysimilar to the a,·erage of the past
20 years. While most participants viewed the
risks to the outlook as balanced, a couple
more participants than in September saw
risks to real GDP gro111h as weighted to the
downside, and one less participant vie,wd the
risks to inHat ion as weighted to the upside.
The Outlook for Economic Activity
The median of participants' proje<:tions for the
growth rate of real GDPfor 2019, conditional
on their individual assessment of appropriate
monetary policy, was 2.3 percent, slower than
the 3.0 percent paceexpocted for 2018. Most
participaollscontinued to expect GDP growth
to slow throughout the projection horizon.
with the median projection at2.0 percent in
2020 and at 1.8 percent in 2021. a touch lower
than the median estimate of its longer-run rate
of 1.9 percent. Relative to the September SEP,
the medians of the projections forreal GDP
growth for 2018 and 2019 were slightly lower,
while the median for the lonQer-run rate of
growth was a bit higher. Sev~ral participants
mentioned tighter financial conditions or a
softer global economic outlook as factors
behind the downward re1·isions to their nearterm gro111hestimate&
The median of projoctions lor the
unemployment rate in 1hc lourth quarter of
2019 was 3.5 percent. unchanged from the
September SEP and almost I percentage point
below the median assessment of its longer·
run normal level. With participants generally
continuing to expect the unemployment rate
to bottom out in 2019 or 2020, the median
projections for 2020 and 2021 edged back up
to 3.6 percent and 3.8 percent. respecti\'ely.
Nevertheless. most participants continued to
project that the unemployment rate in 2021
would still be well below their estimates of its
longer-run level. The median estimate of the
longer-run normal rate of unempiO)~nent was
slightly lower than in September.
147
MONETARY POLICY REPORT: fi8RUARY 1019
Figure I. Medians. muraiiC"ndertcies. and rangesorecooornk pro~'1ions. 2018-21 and owr the longtr run
""""'
CMogeinn.-alGDP
- M~({~'~
IJ CcaLJ~!Cndco.i'dPf'O'P,1i;xzj
-
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Non~ l):finitionsof,'Sriabksandotbtrt~pbnatioosar( it~ttK-nottslo tabk
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49
148
50
PARTJ: SUM\~RYOf ECONO~IIC PROitCTIO:<S
Figure 2. FOMC particip3 nls' assessments ofappropriate mone1ary policy: Midpoiru of target range or 13rg<"l
~rd fori he federal fund; nne
"""'';_o
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Nott Each$batkd ~i.rdc iDdi<'-.Uti t)l.:,oaluc(rou.ndcd to the' l'lt.l~ liS ~f\'tl'ltag.:point)ofn indi\idual p.:mK:ipanfs
judgmco.t ofd~e midroitu ofthe .appropri:ne tart<{ f'3~ ror the- (C\kral fllnds r.l:{( 01 ~ :lJl'PfopriltC' tar,get k\d fot' the fcdcr.tl
fantJ$ nuc at the end oft~ ~"ifk'd ~r )tar« 0\tr 1~ lon~f run. Oot participant did nQ4 $ubmit loll~r-rum pcoj..X"Iio~s
fortbtfOOcr.dfundsrat('.
Figures 3.Aand 3.Bshow the distributions of
panicipants' projections for real GDP growth
and the unempiOJ1nent rate from 2018 to 2021
and in the longer run. The distriblllionsof
individual projections for real GDPgrowth for
2019 and 2020 shifte\1 down rdative to those
in the September SEP. while the distributions
for 2021 and for the longer-run rate of GDP
growth were little changed. The distribution of
individual projections for the unemployment
rate in 2019 was a touch nnore dispersed
relative to the distriblllion of the September
projections: the distribution mored slightly
higher for 2020. while the distribution for the
longer-run normal rate shifte\1 toward the
lower end of i1s range.
The Outlook For Inflation
The median of projec1ions for IOta! PCE price
infla1ion was 1.9 percent in 2019, a bit lower
1han in the Seplember SEP. while I he medians
for 2020 and 2021 were 2.I percent, Ihe same
as in 1he previous projection~ The medians of
projeclions for core PCE price inflation over
the 2019-21period were 2.0 percenl, a louch
lmrer I han in Sep1ember. Some participants
pointed 10 softer incoming data or recenl
declines in oil prices as reasons for sha,•ing
their projections for inflation.
Figures 3.Cand 3.D pro,~de information on
thedistributions of panicipanls· views about
149
MONE!ARYPOLICYRIPORT: fi8RUAAYI019 51
the outlook for inflation. On the whole. the
distributions of projections for total PCE price
inflation and core PCE price inflation beyond
this )\'<lr either shifted slightly to the left or
were unc.hanged relative to the September
SEP. Most participants revised do11~1 slightly
their projections of total PCE price inflation
lor 2019. All participantmpected that total
PCE price inflation would be in a range from
2.0 to 2.3 percent in 2()20 and 2021. Most
participants projected that core PCE inflation
would run at2.0 to 2.1 percent throughout the
projection hori.zon.
Appropriate Morretary Policy
Figure J.E shows distributions of participants·
judgments regarding the appropriate targetor midpoint of the target range- for the
federal funds rate at the end of each year
from 2018to 2021 and 01·er the longer run.
The distributions for 2019 through 2021 11~re
less dispersed and shifted slightly toward
lower values. Compare{! with the projections
prepared for the September SEP, the median
federal funds rate was 25 basis points lower
over the 2019-21 perio;!. For the end of 2019,
the median of federal funds rate projections
was 2.88 percent, consistem with two 25 basis
point rate increases over the course of 2019.
Thereafter. the medians of the projections were
3.13 percent at the end of 2020 and 2021. Most
participamsexpected that the federal funds
rate at the end of 2020 and 2021 would be
modestly higher than their estimate of its le1-el
over the longer run; however, many marked
down the extent to which it would exceed their
estimate of the longer-run level relative to their
September proj~tions. The median of the
longer-run projections of the federal funds rate
was 2.7) percent, 2) basis points lower than in
September.
In discussing their projection~ many
partic.ipants continued to express the view
that any further increases in the federal funds
rate over the next few years would likely be
gradual. That anticipated pace reflected a
few factors. such as a short-term neutral
real interest rate that is currently low and
an inflation rate that has been rising only
gradually to the Committee's 2 percent
objecti1-e. Some participants cited a weaker
near-term trajectory for economic growth or
a muted response of inflation to tight labor
market conditions as factors contributing 10
the downward revisions in their assessments of
the appropriate path for the policy rate.
Uncertainty and Risks
In assessing the appropriate path of the federal
funds rate, 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 l'arious private and g01'emment
forecasts over the past20 years- for real GOP
growth, the unemplo)~ent rate, and total PCE
price inflation. Those measures are represented
graphically in the ''fan charts" shown in
the top panels of figures 4.A, 4.B, and 4.C.
The fancharts 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 a11ending these
projections is similar to the typical magnitude
Table 1. Awrag< historical pro;.-.:tionerror rangos
1\:r"-nllfC r'(lin;~
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ro.kriJfi!Jiikrll<•\lt~dlf"F!I~t,' tll(t\\'f.t,tt'I<M<of~'Wf(U*'S
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150
52 PARTJ:
SUM\~RYOf ECONO~IIC PROitCTIO:<S
n
Figure 3.t\. Distribution ofpanicipants' proje..""tions for the change in f\'al GOP. 2018-21 and O\'"er the lo!lg('r run
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lS
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151
MONETARY POLICY REPORT: fi8RUARYIOI9
Figure lB. Distribution ofpantcipants· projtt1i1Jns for 1he unemployment rnte~ 2018-21 and O\X"r 1he longer run
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53
152
54 PARTJ:
SUM\~RY Of ECONO~IIC PROitCTIO:<S
Figure 3.C. Distribution crpanidpants' projections fQr PCE infta1ion. 1018-21 and owr 1he longer run
-IS
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153
MONETARY POLICY REPORT: fi8RUARYI019
Figure 3. D. Oistribution of pankipants" proje..'1ions forron: PCE inflation. 2018-21
ro1s
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154
56
PARTJ: SUM\~RY Of ECONO~IIC PROitCTIO:<S
Figure 3.E. Distribution of panicipants' jLtdgments of the midpoint of the appropriate target range for the
federal funds rate or the appropriate targetlewl for the federal funds nue. 2018-21 and O\'er dtt longtr run
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162
1.87
4.12
P~-n.'l.'lltr.lfl~
4.1)
4.H
• .38
4.6)
.Utl
4..87
4.SS
5.12
155
MO\ETARYPOliCYREI'ORT: F£8RUAAYl0l9
of past forecaSt errors and the risks around the
proj<etions are broadly balanced. then future
outcomes of these rariables 11·ould hare about
a 70 percent probability of being within these
confidence intervals. For all three variables.
this measure of uncenainty is substantial and
generally increases as tl!e forecast horizon
lengthens.
Panicipants' assessments of the le.cl of
uncenainty surrounding their indi•idual
economic projections are shown in the
bottom-left panels of figures 4.A, 4.B. and 4.C.
Participants generally continued to view
the degree of uncenainty attached to their
economic projections for real GDP gro111h and
inHat ion as broadly similar to the a•erage of
the past20 )ears." Acouple more panicipants
than in September viewed the uncenaint)
around the unemployment rate as higher
than a•eroge.
Because the fan chans are constructed to be
symmetric around the median projection~
they do not reHect any asymmetries in the
balance of risks that panicipants may see
in their economic projections. Panicipants'
assessments of the balance of risks to their
economic projections are shown in the
bottom-right panels of figures 4.A. 4.8.
and 4.C. Most panicipants generally judged
the risks to the outlook for real GDPgro111h,
the unemplO)"'tent rate. headline inOation.
and core inHation as broadly balanced in
othen10rds. as broadly consistent 11ith a
S)mmetric fan chan. Two more panicipants
than in September saw the risks to rtal GDP
gfOIIth as weighted to the d011nside. and
one Jessjudged the risks as 11cighted to the
upside. The balance of risks to the projection
for the unemployment rate was unchanged.
21. A11hcrnd of tbi>summal). the bo< "l'orttast
UI'IC'trtaint)- di!C\ISSCS the sourm and intttpttatton
o( "D<'tiUIDI) surrounding tb< t\vnomi< for«<OU and
"plms tit< approodlll!<d to aSl<i\ til< -.uint) aod
nsksatttod"""" ponirip;lDI>' p<Oj<.'liom.
57
"ith three panicipants judging the risks to
the unemplO)ment rate as weighted to the
downside and t110 participants viewing the
risks as weighted to the upside. ln addition.
the balance of risks to the in Ration projections
shifted down slightly relati•·e to September, as
one less panicipant judged the risks to both
total and core inflation as weighted to the
upside and one more panicipant 1iel1ed the
risks as 11cighted to the downside.
In discussing the uncenainty and risks
surrounding their economic projection~
participants mentioned trade tensions as
well as financial and foreign economic
developments as sources of uncenainty or
d011nside risk to the gro111h outlook. For
the inHation outlook. the elfects of trade
restrictions litre cited as upside risks and
10\\tr energ) prices and the stronger dollar as
downside riskt Those "ho commented on U.S.
fiscal policy 1'ie11ed it as an additional source
of unccnainty and noted that it might pn.'SCill
two-sided risks to the outlook. as its eH'octs
could be waning faster than expected or turn
out to be more stimulatile than anticipated.
Participants' assessments of the appropriate
future path of the federal funds rate 11tre also
subject to considerable unccnainty. Because
the Committee adju>tS the federal funds
rote.in response to actual and prospectire
developments over time in real GDP growth,
the unempl0)1ncnt rate. and inHmion,
uncenainty surrounding the projected path
for the federal funds rote imponantly reftects
the uncenainties about the paths for those ktj
economic \'ariables aloog "ith 01her factors.
Figure 5 prorides a grophkal representation
of this uncertainty. plotting the median
SEP projection for the federol funds rate
surrounded by confidence intervals derived
from the n.>sults presented in table 2. As with
the macroeconomic 1ariables. the forecast
uncertainty surrounding the appropriate path
of the federal funds rate is substantial and
increases for longer horilont
156
58
PARTJ: SUM\~RYOf ECONO~IIC PROitCTIO:<S
Figure 4.A. Unrenainlyarn! risks in projectionsofGDP g.ro'"1h
Median projec1ion and confide~ int(l'\'l!l ~on historical for~XaS' errors
Cb3n~ in rc.3l GOP
- M~<rl~~
- I
i\l ,.OOfiM'ft."'t ilun21
-4
-J
-2
-I
- 0
llll4
lllll
lll16
lllll
llliS
2()19
llllll
2021
FOMC participants' a~"QQ''(:nts of uoctnainty and risks around 11ttir economic proj«:ti{)ns
n,
:
n
~ctnkfofrwti,~nts
Risk> lo GOP~''"''"
ltllto.'l.'ftainty :11bou1 GDP~r.;w.1h
0 ().'Ctfllb«l'f\..,.'\.'fiotb.
: -- ~~,ion$
- IS
-16
l
=:~
1
I
1
I
~1J 2
- S
- 6
- '
~mibr
-IS
-16
...
-14
I
I
I
8roadl1
0 I).,'Cftlb:t,..'*''tion)
= ·· 5<!<<10bcr~
=
-
I
I
I
I
I
I
-10
=:
-'
r..r:-;:1 ~-...=-:-::-:; I J 2
H~
Non: 1lK:- bll:k' 3nd rOO lines: in tk top p.lnd $ht»\·l<'\uaJ \~IA'$3nd m.."dUn projl\'tcd \'11~ rC\fl('C1iH·Iy. oftht ~A.'\'TII
dungtin fl'algroocfomeslk"prodoo (GOJl')fromW fou.nhquanerol1bt pt\"\'iotJS }'tar toW fourtl! quanerol1bt ytu
iodi.:-3tt'd. Thcwnf~ inttn'3.1 :u\l\100 the mcdi3n rroj.~t«< ,.,.lues is as:;l.UIK'd to ~s;.lflmclrl:3nd i) ba~ on roo1 m:-.111
$Qll3r00trrors of\1rious pri\'::11(' 1nd gc>\tmmcnt fM\.'3Sam1dc O\'tr the prt'o·ioUf 20 ~"t.ars: more infornution about t~
da11 is3\'3ibbk in tlbJe l ~UstCUITttUC'OI'IIJitioru.ma.~ diff'~from those IDlt !)rt'\'3ikd.on;a\'ttagt.O\'ttl~ pmious
2'0)~r~ 1t.t~idth artd$hap:ofch-:~·onfldc~intc"'JI~im3ttdoal"'~ofthc l't~or);'3l ro~tm>r$rna)·not r.:&\"'1
F0~1Crun~"ip.1.nt$'currmt a~~ncsof1hl: utK'tnainl)':a00risl:s3round thcirproj..'l."tioM.: l~turrtRt3~nts3rt
wmmariud in thl: lo~~o~r p;u~Cls.. GtMr.l!l)· sp;."3ti~~g. panicil'lnts\\bo~ 1~ unctt12int} aboutltlcir pr"'j«tioos3s ..broad!}·
~milu" to ll'h: 3\\"r:l~ k\clsoflbc pa_.q 20 )\"Jrs \\OUJd \'icwd'lt' llil.ltl't ofthc('Oilrx.lmct ini.Ct\'11 sbo\\11 in t~ ~i)toriQI fan
dun as la~l)· consbt~1 ~-ith tfk-ir 3..~"'11K'flhoilht unetrUJincy 3'boot Lhcir pro]:-dioos.. l.iknis.:. pmici{\'lnt), \\flo judge
t~risl:sto tbcir proj.'l.'tions as "btoodl)' ba.lai')C('().. \\OuJd \icw ll)croail&:ar< intm'31 :uound 11Kir proj-:~.'tions 3S3PPfO\imatc~·
~)mm.."tric. Fordtflnilioas or Ur'll:~nainty and ~ks ir:r (\"'C''Ittlic projo.'\1ions. ~ chr;.· bo~ '"fom."3SS Ufk.X'rtail'!l)'...
157
MONETARY POLICY REPORT: fi8RUARYI019
Figure 4.6. Unttrtainlyand risks in proj«tionsofthe unemployment r.ue
Median projection and con"d~nct interval based on bi.s.torical ron.'Ca)t errors
UIX'fllp!~ll"'"tltrat~
- - MOOWI('(~~
I
- 10
~oonfd."fl('(~trnl
-9
-s
-7
-~
-s
-)
-l
-I
2014
2013
2015
2UI6
2011
FO~IC p:uticipanls· assessments of unctrtainty and
2018
2019
2021
risks around their economic projt.>cti<ms
Nuttlt\'tolN~)
·n: : - n _.,
lloo.'f1ainty about the u!K'mpiO)~ct mt~
0
~'l.'ttllt\Yf'C\'P,"tiott$
Rbl:s tot)).: '-!Jl('mploymcn\Qtl.'
-IS
-16
: • • Scpcd<t ~'1ioos
0
: ••
D.'l.\"':llb.'ffll'(lj:..~
-IS
-16
Sct't~"~'fli'<;,~IOIM
-I'
-I'
---
I
I
I
- S
-
I
I
I
-10
- S
- 6
=
:
I
=!
1 0·1
I
- 4
tl
I
BroadI)'
~mibr
rr=JT::=l ~ J 1
W~to
Non: The bli.K' :aDd «d lirxs in tbt top l\'lllC'l s.bo~· 31.1W) \-atucsand tnt..'dia.n rroj.'\.'kd \'alues. re5pe\.1h"dy. oftbta\c:ra.y
ci\il:i3n U!\.'mpfo)m;nt ra,~ in the fourth QP.13ncr of1~ )\'.U in<la.."3tcd. The confilk'flC\' int~-n-al ;~round the m«<i.Jn pr\l',i«tcd
\'<1fue3: is. assumed 10 be S)'TI'I~uic aDd isbased on fOOl nwl'l sqLLlr\'tl «ro~of'~Mus pri\'3!C: and go1tmmcnt (Of('I."3StS ITltl&
0\'tt lk Jlfl."'ious 2i.l )"tarS; mo~ inrOfTil.1tion aboutthcsttbt.J i:s.a,'3ibbk in ublc 2. &,.,~usc current C'Oflilitiorrs may di!fcr
ft<Jm those t!ut pre\"li\td. 003\CrJ.sc. O\tr 1bc pm'iou$ 20 )~IS.. tbr \\idth 3nd $b3~ ofthe 0011fed...~ in1er.1l ~~uxl on
theN.sisoft~historirJI(orC\"aS4ffl'\ltsmayootl'tlk\.'1FO~! C~rticipatnfturrtnt~ISol'lhtW'Il'('rtaint)'arwirisb
:.round tbrirproj.'\""t~•OOcCl.lfrcnt :l.~IS3rc wmlll3riudin tbc~\'f p:lOCk.. G~ra0) sp.';ll;ing. p;.rticiprul!S\\ho
jOO~ the urk."tttairu~· abo-ut 1bcir ptoj.\.'tiol\$ :ss Mbroadl)' similar-to t11t ;)\'tt.1~ l"\'tkoft~ p.'bl ZO ynrs W(IUid ,w t~
uidth ohbe roolioknc< io1mol sllo\ln io 111< bi~oritll fan cllln "'br~lr rooiillt111 •ilh 11i<ir 3=m<111<ofll< ooo:ruiDiy
3bouttB..;r proj.;~tions. Likcwi~. !X)rticipants whojud~ th: risks to their proj.·'l:tioo~as Mbroodty b3\anoo.l- -.ou3d ''lew the
CMf»dcore inltn'31 :lrou.nd th..;r (II'Oj.\.'tionsasappro.\im:stc\)'S)TI'UYICirie. FM do.:finitioru. of un.xnaint)' 3nd ri~s in C\'OOO!mic
pr~1ions. S« the bo'l: Mfot«"aSI Uncm;~ioty.""
59
158
60 PARTJ:
SUM\~RY Of ECONO~IIC PROitCTIO:<S
Figure 4.C. Uncenainty and risks in proj«tions of PCE inflalion
Ml"dlan proja.":tion and cor~fidcnce interval based on histori('al forecast ~trrors:
PCEinlbtioo
- ~1.-..Jian oi~Ucb
'Xr.t~-cillt('f\1.1
-J
-
2
-
I
- 0
lOIS
2013
2016
2011
2018
2019
2020
lOll
FOMC p3nicipan1s.' as:stsSmtnts of un<trtainty and risks around their e\"()nomic projections
~~'f<iP~-ni~
Ul')."\.'f'llint~ about PC£ inlbLlon
Oll\.'tfllllct~"'JQG$
- n _,
- n _,
Risis 10 PCE inflatjoo
-18
-16
: •• $efltMitxt)'fQ)....,;..~
-14
-12
-10
-s
- 6
- 4
Ql)..'\'tii'Jb:t~"''iolt$
I ---
I
I
~
l);"aW~krfiC'O:ia:1iocK
-18
-16
- . $cpttmbcrprc;:,."ti."GS
-I•
-ll
-10
-s
- 6
-'l
Brood~
-10
- 8
- 6
I
---- .-;
Btoadlv
Nblli.'\-d
Rislstorort PCE inllalioa
UDCC"n.3intyabout cott liCE infLuion
'(j_mila:t
-ll
r==JI I]-
dO'o\11~
0
I
I
~~
W~¢tuN 10
:
-IS
-16
· · S.~"o;."~~
0
1"'-'\'lllb:Tpr~11oes
-IS
-16
•• $cptont\'Tpr'*'-1i.'GS
I ---
=
I
I
I
I
-ll
I
-10
- 8
- 6
I
- 4
~ -r=--=--=i ;, l
Hi!l<r
Non: The l.i~.~~:3nd n:d lillt...~ in tr.:lopr-'IXI.shouo· ai.1wl ,·;tlucsand mcdi3n rco;xttd ' 31\K'$.. n.'$JX"CCihiy. ofthocp:ro:nt
l"b!ngc in 1br pritt it'M.l'1: for p.:rson3l ronsump2ioat.\p.-ndi1un:s (P('E)from tbc founb qt11rtcr of1~ pmiollS }'\".1t to 1br
fourlhquartcu(lhc )Wf icdkat«<. Th:oonfll.lc1wx intcr.'ll~Dd tk median rro~i.td \"JIUC'$ i-sassl.lfDIN to tx)ymmccrk
:.\nd is ba-ed on rOOtiiiC'in squ-ared crross of \-ariQ!J$ pri\'3tt Jed ~~'tmfl.l('flt forttJSIS m.ld-:0\\'f the rrc,iou5 20)\";,\fX more
W'ofl'l'l.'ltion :~boot tho..'ii!'dll:l i.s :ll'lilabk in tabk 2. Be\"3tN: rum•nt oonditioM may difft.r from thost tll:u pm':llil..-d. oa
a,·crar:.O'Itr th;:-prt."\ioUS 20;.~~ ~"idlban<l shap:-oftho:confldcl),~intcn~l es~imltfd oa tlwbo.sisoftbc: h~~
rort'C3~ cn'OJ"nuy 001 rrtl«:t FO~fC p;utio."ip;lllb' currtnt ~~tsoftb.:- W'ICtrtJitlt)·Jnd ri.~s:~routld tbrir pt'Qj.\.1.~
tbrse currtnl a_~"Stlltnts art .so\Jmrnari.ud in tlK ltw.;;r JXlliCb. Grnerally sp:al;iJlg. p.3rtidpwltS v.hojudp:- tbc uncertaint)' :sbotlt
tb<"irJifoj."\.1ions~ ~brood~· :-irnilar~ to th.:;ntr.!~~·fuoft~p3.$l20)l".li'Sv.oukl 'ic11 th.:v.idthoft~('C)fi!W.'fl!Xinl\"n'31
$hO'o\YI in tht hi~oti--al fao th3irt 3$ laf!l'l)' l-oo;.isl~l 1o1itb thcir ~~'titS of'I~ lltM.'trtail'll)' 3bot.Jt th..'ir proP,"1icol'li
Lil;c1o1~. ~rtkiJ'Kl.fiiS v.hojud~ tbc risk5 to tbcir pro~"tions 35 ~bfoodty balati'.:af 1roukl , ._"" tbccontidrna: intc:n-al
3rwnd tMr proj«tioM as JPPJO~m3!dy S)TntrM:tric. For d:fioitioosofW'll.\'rtainty a!XI risl:.sin ccononUc projc('!ions. $C<' th..!
bo'( ~Fota.-;a~ Urx:trulnt)'-~
159
MONETARYPOLICYRIPORT: fi8RUARYI019
Figure 5. Unetnainty in projections ofth.e federal funds r.l!e
Median projection and oonftdeoce int(r\'al b:k~ on his1orical foret"3Sl errors:
""'''"
Fcdcl11fuod3;rn1~
- ,\tifJr.iDIMU.rt-'1~
-
-6
-~ICI.Smolrro:fC\1iom
111:~"-"Cdidmo."Ymtm-ai'
-5
_,
-J
-l
-1
-o
2QJJ
lflll
1016
1017
lOIS
1019
lfllfl
lOll
Noi£ Th.:bluc:ll'ld n.'d li~arc b.ts4'\l onxtU3.1 \"3ll)t."$.1nd mcdiJn pro~'1cd ''ll!A~ l\."$p.'<1il"tl)'. oftl'lcComminiX's
taJi<1 for the fcd.."RI furd~ rate a11bc: (11<1 of liM: ynr in<lica1cd. The anual 1"JJ~KS arc-1hc midpoinl oflhc tare~ r:any: tb:
n'k\li3n proj.'l."ted \'llurstmbG.~or~ cithtrab.:midpoinl oftb!-13.r$('1 1'3.tl~Of the ta~"tlcltl.lhc®r:..i.'M: intl!'n":!l
ll'OUod the median proj.'\.1«1 \'3IUCS i:s Nscd on root me:111 squll'Cd errors of ~~us pri\:Jte aDd yrwmm.:-nt forf'('J.Sts n~
Oltrlhc pm·iou:slO )~f'S. Tht('()Gi»,"'X(intm;~li~nots&ri.1~·c:on~rnl 'lltith IJlc projmion.s for tkfedmlft~ods ra1c-.
prirrorilrl\."'(':)11$( tbc$c-pc0j."t'tions311:'not fOM."'3.,t$ofthclikcl~ outCQn'IC$for 1hc f('ojcQI fund~r.l!r. but ~1hcrprojc<1ion(
ofp:~niclpa~~b'indhiduala..~ntsofappropriatcmoi'ICW}'poiK.')·.St~l.hi>r:oricalfom.-ast.Morsp:-O\itkabr~sell5('
oftfl.:u/X\'ftaint~ arOllnd t.hdutllrt path oltbc fOOe-ral fundsr.ttc"'~~ b)·the u~nainl)' 3boul tlx ma\'l'O('I.voomk
\'3ri3~.1$\\'dl:uadditi«l:aJ:tdjLmi'IX'nt$10tJu)nct31)' ~'thltrna)·~aflfiWPri3.tctoolT~It~dT~'tsof~l:$to
ttxt\'OOOm)'.
ThcwnfM.knlx int(n1) i$ :muiTII."d to be S)1Timct~m~pl \\'hen it istf\l~wdat t~--ro the bollom oflt'..: bA~ ~~1
r.tng.c for the ftd..v.tl fund$ r:ucth.at hasb.'tn:ldop.:.cdint~p3St by th<-Commin~. Thistrut~t<~li«< ~'OIIkll\01 be inttn<kd to
indil.:ale tb.:-lil:dihood oilbe I.I5C' ol~ti\'t iatmst rnlrs lo pro\ick adJitioaal monetary polic}· :N.wmnM>datioo ifdoing so
WO\Sj\ldgl,'d ;tppr()pri.~lc. In~il $itU3l~ th.: ((lllUl)jlt~~l'Ould 3ko crnplo>•Oihcr tool(. ini.it.ldingfOA'3rd gllidaoo: 3[')1j
b~~·SI..'ak~l pu~lwt5.tOpro\ilk:Jdditiorulan'OIM'!(Ida!ioa.lk\.'"3USC'C'Umtll ronclitiot!smaydifl'« from tbostdUI
rm~IOO. on3\~, 0\·crlhc pmiot.JslO)'t3~ thcwidthaodslupcofthc('Ofltic.t,.'fl«intmillcstimatcdon tbc k'lisofthc
bi'lorit-J.I fofl."C;t)) crrOJ' Dl3.Y ~ nila.'t FO~tC pl:dirip.1111>" amtttl3..~'tll\,l$of1~ utKXrt3inty 01nd ri~saroond tll.,;r
projc\"tions,
• Thecoo~inlm'3lisdC'riwdfromfon.uStsofthcawr.t,p:hclolshor1·termintc~ratt5iJitbefoonb~o~U3rt(ro(
lbcyc.uiildt.."3t00: mortinfomution :t.botltt~cht3 i$;h':lib~int3bk 2. TbtWikd lrt3 cDC'MI~l'\S than3
10pc«"«'trofltid.Mctir.tM>alifttxronfltkoo:-intm-;~lhas~atruM3tNatzcro.
61
160
62 PARTJ:
SUM\~RY Of ECONO~IIC PROitCTIO:<S
Forecast Uncertainty
The ecOOQmic p<Qjections provided by the members
ol the Board oi Go\~nor. and the presidenb of
the f<dernl Resen~ Banl;s inform discussionsoi
moneta')' policy among policymaktrs and can aid
public ur>dtrstanding olthe bas~ for policy actions.
Consi<lerab!e uncertainty attenck these projections.
hoWt\'ff. The economic and ~.nistic.al models and
relationship< Ul4'd to htlp produce economic foroca<ts
are noces~arily imperfe<t des<ripuons of the real ""'ld,
and the future paih of the economy can be aiie<ted
b)• myriad unforeseen de\-elopmen~ and ewn~. Thu>,
in letting the Stance olmonetary policy, participan~
con>ider not only \\hot appea15 to be the most likely
ecooornic outcome as embodied in their pt~«tions,
but also the range oi alte<nati\~ pos~bilities, the
likelihood of their occurring. and the po:ential rosts to
the economy should they occur.
T<tble 2summilri'!es the a\'ffclge hi~oric~l Clccuracy
ol a "nge of foroca~s. including those repocted in
paSI.IIoae!ar)•Policy Repo<IS and those prepared
by the federal R"""'" Board's staff in advance oi
meetins< of the Federal Open Market Committee
lfOMQ. The projection """ ranges shown in the
table illUStrate the considerJb!e uncertainly associated
with economic foreca%. For eX<Jmple, suppose a
participant projectS !hat real gross domestic ]l<Oduct
IGOPJand tottl consume< !"ices will rise sle.lcfily at
annual rates ol, relpe<li1-ely, J percent and 2 percent.
II the uncertainty attending those projections is similar
to that e>.perienced in the j)<lsl and the risl;s around
the p<Qjections are broadlr balanced, the numbers
repocted in table 2\\Ould imply a pro»Jbility of about
70 percent !hat actual GOP\\wld expaod 1\ithin a
rang< of 2.2 tO 3.8 percent in the CUrter!! yea\ 1.4 tO
4.6 percent in the seconc year, and 0.9 to $.1 percent
in the ihird and fourth l~"- The corresponding
70 percent coniidence inter~~ls ior Ol'efall inilation
would be 1.8 to 2.2 percent in the current)'"" aod
1.0 to 3.0 percent in the second, third, aod fourth ~~ars.
Figures 4.A through 4.( illustrate these confidence
bounc~ in •fan ch>rts" !hat are symmetric and cen:ered
on the ~ians of FOMC participant( proje<tions for
GOP g<0\11h, the unem~loyment rate. aod inflation.
HOWe\'ef, in some in~aoces. the risks ~cound lhe
projections may not be srmmetric. In particular, the
unent~IO)'ftl<flt rate cannot be negati1-e; furthermore,
the risl;s around a particular proje<tion might be tilted
to eiih« the up<ide e>r the downsi<le. in 1\ltich case
the corresponding ian chart 1\00id be asymmetrkally
posilioned arouod the ~ian projection.
Because current condilions may differ from those
that pr01~iled, on
0\., h<s!ory, participan~
p<O\;<fe judgments as to "1lether the uncertain~·
attached 10 their projections of e.l<h economic variable
is gre>ter !han. smalle< than. ori><Oadly similar to
~'Picall01-.ls of forecall uncertain~· seen in the pa~
20)~ars,as presented in table 2 and rellected in
the widlhs ol the confidence inter\OIS """'" in the
top panels of figures 4.A through 4.C. Participan~·
currenl a~ oi the unceruinry Sllnotmding
their proje<tions are summari>ed in the bonom-leit
(contrnwd!
"'"' g<l.
161
MONETARY POLICY REPORT: fi8RUARYIOt9
panels oftho<e figures. P.lrticiparus also p<Ovide
judgmems as to whether the risks to their projections
are weighted to the upside, are weighted to the
downside. "' ille broodl)' b.llanced. TIIJt is, 11Me
the S)'mmettic historic~I fan charts sho<.\n in the top
panels of f&gures 4.Athrough 4.Cimply thJt the risks to
participan~· projections are balanced, participan~ ma)'
judge that there is a greater risk thJt a gh-en variable
11ill be above rather than below their projections. These
judgmen~ are summari>ed in the ,.,_,..,.right panels of
figures 4.A through 4.C.
As with feal activity and inflation~ the oudook
for the future path of the federal funds rate is subject
to considerable unceminty. This uocert.aint)• .arises
f)limarily ber:ause tach participants assessment of
the appropriate stance ol rnone1ary policy depends
impo11antly on the <!\dution of real activi~· and
inftation 0\~ time. If economic conditioos e\'01\'t'
in an unexpected manner, then a~ts of the
appropriate se«ing of the federal funds rate 11oold
change irom that point fM10rd. The final line in
t.lble 1 shol1; the error "nges fO< forecasts of short·
term inle<est rates. They suggest that the hi~O<i<:al
conMence intervals as!Oeiated with projections of
the federal funds rate are quite wide. IIshould be
noted, however, that these confrdenc:e inler\oals are OOl
stJictl)' oon~~ent "ith the projections lor the federal
funds rate, as these projections are not fO<eca~s of
the most like!)' quarterlyoutcomes brrt rather are
p<ojections of participan~· individualas,...rnen~ of
apprq>riate rllOf>etlry policy and are on an encJ.of.
)"-'r basis. However, the foreca~ e<ror< should p<ovide
a seo<e ol the uncertainty around the fu1ure path of
the feder•l funds rate gene<ated b)• the uncertainty
about the macroeconomic vJriabtes as \\~I as
additional ddjustmeo~ tornone1•~· policy thai would
be appropriate to offset the eli~ oi shocks to the
economy.
If at SO<ne point in the fu1ure the oonfr<lence inte<Val
around the federal funds "te were to extend below
zero, it would be truncated dt Ze<O fO< purposes of
the f.1n chart shown in figure 5; zero is the bottom of
the lowest target range fO< the federal funds rare that
has been adopted by the Commiltee in the pa~. This
approoch to the constJUction of the federal funds ldtt
ian chart would be merely acon,'E'ntion; it would
1101 hM any implicotions fO< possible future policy
decisions reg~1rding the use of negath·e inteteSt rcl!es to
provide additional n1011e~ry policy acconlrnodation
if doing so were .appropriate. In AAh situation}, the
Cornmi«ee could also empiO)' <>~her tools, including
fonvdrd guidance and asset purchases, to provide
additional a«ommodation.
While figures 4.Athrough 4.Cprovide infom!.ltion
on the uncertainty around the econon1ic projections,
frgure I provides information on the range of vi0111
.cross FOMC participants. Acomparison of figure t
with frgures4.A through 4.( shol'' that the di<perSion
of the projections across partkipants is much smalle<
than the a\ffage i01ecast erro~ 01-er the past 20 )~'"·
63
162
65
ABBREVIATIONS
AFE
advanced foreign economy
BOE
Bank of England
C&I
commen:ial and industrial
CRE
commen:ial real estate
DFMU
designated financial market utility
EBJTDA
earnings before interest. taxes, depreciation. and amortization
ECB
European Central Bank
EME
emerging market economy
EPOP
empiO)'ment-to-population
EU
European Union
FOMC
Federal Open Market Comminec: also. the Comminee
GDP
gross domestic product
JOLTS
Job Openings and Labor Turnover Survey
LFPR
labor force panicip;ltion rate
LSAP
large-scale asset purchase
MBS
mongage-backed securities
Michigan survey
University of Michigan Surveys of Consumers
ONRRP
overnight reverse repurd1ase agreement
PCE
personal consumption expenditures
SEP
Summary of Economic Projections
SLOOS
Senior Loan Officer Opinion Survey on Bank Lending Practices
SSDl
Social Security Disability Insurance
TCJA
Tax C1us and Jobs Act
TGA
Treasury General Account
TIPS
Treasury lnHation-Prota:ted Securities
VlX
implied volatility for the S&P 500 index
163
@FedFRASER