Monetary Policy and the State of the Economy — Committee on Financial Services (March 2, 2022)
Summary
Record of the hybrid hearing "Monetary Policy and the State of the Economy" before the Committee on Financial Services, March 2, 2022, Serial No. 117-72, with Jerome H. Powell, Chair Pro Tempore of the Board of Governors of the Federal Reserve System, as the witness. Mr. Powell presented the Federal Reserve's semi-annual Monetary Policy Report and said the implications of Russia's attack on Ukraine for the U.S. economy are highly uncertain. Mr. Powell said economic activity expanded at a robust 5.5 percent pace last year. The record includes the Monetary Policy Report dated February 25, 2022; responses to questions from Representative Kustoff were not received by publication deadline.
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“Monetary Policy and the State of the Economy — Committee on Financial Services (March 2, 2022).”
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[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
MONETARY POLICY AND THE
STATE OF THE ECONOMY
=======================================================================
HYBRID HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
__________
MARCH 2, 2022
__________
Printed for the use of the Committee on Financial Services
Serial No. 117-72
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
U.S. GOVERNMENT PUBLISHING OFFICE
47-131PDF WASHINGTON : 2022
HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California FRANK D. LUCAS, Oklahoma
GREGORY W. MEEKS, New York BILL POSEY, Florida
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri ANN WAGNER, Missouri
ED PERLMUTTER, Colorado ANDY BARR, Kentucky
JIM A. HIMES, Connecticut ROGER WILLIAMS, Texas
BILL FOSTER, Illinois FRENCH HILL, Arkansas
JOYCE BEATTY, Ohio TOM EMMER, Minnesota
JUAN VARGAS, California LEE M. ZELDIN, New York
JOSH GOTTHEIMER, New Jersey BARRY LOUDERMILK, Georgia
VICENTE GONZALEZ, Texas ALEXANDER X. MOONEY, West Virginia
AL LAWSON, Florida WARREN DAVIDSON, Ohio
MICHAEL SAN NICOLAS, Guam TED BUDD, North Carolina
CINDY AXNE, Iowa DAVID KUSTOFF, Tennessee
SEAN CASTEN, Illinois TREY HOLLINGSWORTH, Indiana
AYANNA PRESSLEY, Massachusetts ANTHONY GONZALEZ, Ohio
RITCHIE TORRES, New York JOHN ROSE, Tennessee
STEPHEN F. LYNCH, Massachusetts BRYAN STEIL, Wisconsin
ALMA ADAMS, North Carolina LANCE GOODEN, Texas
RASHIDA TLAIB, Michigan WILLIAM TIMMONS, South Carolina
MADELEINE DEAN, Pennsylvania VAN TAYLOR, Texas
ALEXANDRIA OCASIO-CORTEZ, New York PETE SESSIONS, Texas
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
NIKEMA WILLIAMS, Georgia
JAKE AUCHINCLOSS, Massachusetts
Charla Ouertatani, Staff Director
C O N T E N T S
----------
Page
Hearing held on:
March 2, 2022................................................ 1
Appendix:
March 2, 2022................................................ 55
WITNESSES
Wednesday, March 2, 2022
Powell, Hon. Jerome H., Chair Pro Tempore, Board of Governors of
the Federal Reserve System..................................... 5
APPENDIX
Prepared statements:
Powell, Hon. Jerome H........................................ 56
Additional Material Submitted for the Record
Powell, Hon. Jerome H.:
Monetary Policy Report of the Board of Governors of the
Federal Reserve System, dated February 25, 2022............ 60
Written responses to questions for the record from
Representative Kustoff *(Responses were not received by
publication deadline.) .................................... n/a
Written responses to questions for the record from
Representative Luetkemeyer................................. 133
Written responses to questions for the record from
Representative Velazquez................................... 135
MONETARY POLICY AND THE
STATE OF THE ECONOMY
----------
Wednesday, March 2, 2022
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:02 a.m., in
room 2128, Rayburn House Office Building, Hon. Maxine Waters
[chairwoman of the committee] presiding.
Members present: Representatives Waters, Maloney,
Velazquez, Sherman, Scott, Green, Perlmutter, Himes, Foster,
Beatty, Vargas, Gottheimer, Lawson, San Nicolas, Axne, Casten,
Torres, Lynch, Adams, Tlaib, Dean, Garcia of Illinois, Garcia
of Texas, Williams of Georgia, Auchincloss; McHenry, Lucas,
Posey, Luetkemeyer, Huizenga, Wagner, Barr, Williams of Texas,
Hill, Emmer, Zeldin, Loudermilk, Mooney, Davidson, Budd,
Kustoff, Hollingsworth, Gonzalez of Ohio, Rose, Steil, Timmons,
and Sessions.
Chairwoman Waters. The Financial Services Committee will
come to order.
Without objection, the Chair is authorized to declare a
recess of the committee at any time.
As a reminder to all Members, we will conclude today's
hearing at 1:00 p.m.. Members who were unable to ask questions
at our July hearing with Chair Pro Tempore Powell will be given
priority to ask their questions today, and we will return to
our normal order of recognition once those Members have asked
their questions.
Today's hearing is entitled, ``Monetary Policy and the
State of the Economy.'' I now recognize myself for 4 minutes to
give an opening statement.
I want to start by reiterating that I join with President
Biden and our allies in condemning Russia's shameful,
premeditated, and unprovoked invasion of Ukraine. I stand in
solidarity with the people of Ukraine.
Chair Pro Tempore Powell, since the last time you testified
in July 2021, the United States economy has continued to boom,
and our recovery from the COVID-19 pandemic is strong. Since
the beginning of the Biden Administration in January 2021, our
economy added over 7 million jobs, a record in the first year
of a new presidency. In addition, wages and salaries for
workers grew by 4.5 percent in 2021, the highest level in close
to 40 years.
While these are encouraging figures, we have more work
ahead. Families across the nation are facing higher prices
because of inflation created not only by pandemic-related
supply chain problems, but also giant corporations taking
advantage of economic conditions to pass on higher prices to
consumers.
Importantly, housing is a key measure and driver of
inflation. For too long, we have not addressed the shortfall in
our housing supply, and this lack of supply is driving up
prices. In 2021, the national median rent for an apartment
jumped by almost 18 percent, and home prices rose by 17
percent. These are the true drivers of inflation according to
experts, despite repeated efforts on the part of Republicans to
falsely blame pandemic relief and emergency stimulus as the
primary cause.
To address housing supply and other inflation drivers, the
House passed the Build Back Better Act, and the America
COMPETES Act, which make transformational investments,
including $150 billion in equitable and affordable housing, as
well as improvements to our supply chains.
Regarding digital assets, the Federal Reserve recently
released a paper seeking public feedback on a possible U.S.
central bank digital currency, or CBDC, which would provide an
alternative to volatile cryptocurrencies and benefit financial
inclusion and promote national security.
On the other side of that digital coin is a concern that
pariah states like Russia may use foreign CBDCs to relieve the
pressure of our carefully-coordinated multilateral sanctions.
Leadership from the Fed on these issues is more important than
ever.
Lastly, I would note that for the first time, a Chair Pro
Tempore of the Federal Reserve Board is testifying at this
hearing. Senate Republicans have chosen to unilaterally block
your confirmation, Chair Pro Tempore Powell, and the historic
confirmation of diverse and highly-qualified nominees to the
Board of Governors, leaving key leadership positions at the
Federal Reserve vacant when it is tackling an array of economic
issues, including those arising from Russia's invasion of
Ukraine.
This will undermine our recovery from the pandemic and
place our economy and financial stability at risk. At a time of
enormous economic uncertainty, rising prices, and geopolitical
turmoil, the Fed's legitimacy is on the line. Now is not the
moment for obstruction, delay, and gamesmanship. So, Chair Pro
Tempore Powell, I look forward to your testimony this morning.
I now recognize the ranking member of the committee, the
gentleman from North Carolina, Mr. McHenry, for 4 minutes.
Mr. McHenry. Chairman Powell, we appreciate you being here.
And I say to the Chair of the committee that this is the
House. The Senate does nominations. If we wish to have an
opinion, and direct the Senate, we should go run for the
Senate.
We have the Fed Chair here at a time of unprecedented
economic conditions and a war that is happening. I think we
should stay focused on that.
Chair Powell, thank you for your leadership. Thank you for
your steady hand in your approach over this quite tumultuous
first term of yours, and congratulations on your nomination and
the expected confirmation of your second term.
As we all know, the Financial Services Committee
Republicans have offered and requested that the Biden
Administration not approve the $17 billion in International
Monetary Fund special drawing rights for Russia's reserves last
year. My hope is that my Democrat colleagues will withdraw
their support for $60 billion in additional reserves for Moscow
in this year's omnibus that is being negotiated right now.
We stand in a bipartisan way with the people of Ukraine,
and we are grateful for their bravery, and we want to do
everything in our power to assist and support them.
Again, thank you, Chair Powell, for your leadership.
America is facing the worst inflation we have seen in 4
decades because of Democrats' reckless spending here on Capitol
Hill. Instead of a course correction, House Democrats keep
hoping the Senate will take up the $2 trillion in new spending
through Build Back Better, or whatever they are going to call
it. This would only make rising prices worse for families
across the country.
A Wharton budget model estimates that average American
families spent $3,500 more last year to keep up with rising
prices. Nowhere is this more evident than at the supermarket,
where folks are seeing a 22 percent increase in grocery bills,
according to a recent KPMG study. For a family of four, this
could mean choosing between groceries they need, and saving for
their child's education, their retirement, or even a home.
The American people should not have to mortgage their
future because of Democrats' love of more government spending
to give them the illusion of prosperity in the moment. And
despite what we heard from President Biden last night, simply
telling people they are better off does not, in fact, make it
true.
However, I am pleased that the President sided with
Republicans instead of Senator Elizabeth Warren, when he
renominated you to Co-Chair the Federal Reserve. But as you
know, Chair Powell, you have an enormous task ahead of you.
As one of your predecessors famously said, the Fed's job is
to take away the punch bowl just as the party starts to warm
up. But the Democrats have drunk deeply, and they want to move
on to the harder stuff. That is a risk for our economy. We
can't let that happen.
I was pleased to see the Fed reject the notion of personal
accounts by the central bank. As we have seen recently in
Canada, and their unprecedented use of emergency powers to
freeze hundreds of bank accounts, we need to ask not just how
financial authorities can be used, but also how they could
potentially be abused. It is disturbing that some Democrats
refuse to see this danger and may actually view it as an
opportunity to rationalize more government involvement in
Americans' everyday lives.
And that is why I sent a letter to regulators today asking
for clarity on what this disturbing move that we have seen in
Canada could be--if anything to that accord could be done here
in the United States and what we should do to prevent it. And I
look forward to hearing their feedback.
Again, Chair Powell, thank you for being here. These are
unprecedented times that you are serving. Thank you for your
steady hand and your leadership and your willingness to answer
questions using language that most of us can understand.
And with that, I yield back.
Chairwoman Waters. Thank you, Ranking Member McHenry.
I now recognize the gentleman from Connecticut, Mr. Himes,
for 1 minute.
Mr. Himes. Good morning, Chairman Powell.
Mr. Chairman, probably the most effective tool we have
deployed against Putin's outrageous attack on Ukraine is the
sanctions on the Russian central bank and the freezing of
Russian foreign reserves. Our ability to do so stems mostly
from the dollar's preeminent position as the world's reserve
currency.
It is time--in fact, it is past time for all of us to lead
on creating a regulatory environment in which we, rather than
the world's despots, terrorists, and money launderers, benefit
from the emergence of cryptocurrency, including a central bank
digital currency.
Mr. Chairman, one of the headlines on my news feed this
morning reads, ``Russians turn to crypto amid increasing
sanctions,'' as the chairwoman indicated. The subcommittee that
I chair, and the full committee have done and will do hard work
on this topic, but it is time for all of us to act.
Mr. Chairman, I can't shake the image of 17th Century
bankers sitting around London, unable to imagine that their
gold pieces and copper plates could be replaced by these
worthless pieces of paper. Let us not be those guys. Let us
lead and not follow.
Chairwoman Waters. I now recognize the gentleman from
Kentucky, Mr. Barr, for 1 minute.
Mr. Barr. Chairman Powell, thank you for being with us
today.
Inflation has hit a 4-decade high, with the Consumer Price
Index (CPI) surging to 7.5 percent. Core inflation exceeds 5
percent. The Producer Price Index (PPI) is now pushing 10
percent. And recently-published inflation forecasts predict
that the CPI will rise above 8 percent in the coming months.
According to a study from the Wharton School, the average
family spent $3,500 more for the same goods and services in
2021 versus 2020. Tax and spend policies are largely to blame.
Steven Rattner, former Counsel to the Treasury Secretary
under President Obama, put it eloquently in a New York Times
op-ed. He said the $2 trillion American Rescue Plan was, ``the
original sin that contributed materially to today's inflation
levels.''
A potent cocktail of excessive government spending creating
excess demand, combined with a hostile tax and regulatory
environment for private enterprise, which has constrained
supply, have together produced a toxic supply-demand mismatch,
pushing prices up.
Compounding these fiscal policy mistakes, the Fed pursued
for too long an unconventional and overly-accommodative
monetary policy, which has resulted in an inflation crisis that
is hitting our constituents where it hurts. It is the clear
that the Fed is not satisfying its price stability mandate.
I look forward to hearing from you on the path forward to
address the monetary policy side of this equation.
I yield back.
Chairwoman Waters. I want to welcome our distinguished
witness today, the Honorable Jerome Powell, the Chair Pro
Tempore of the Board of Governors of the Federal Reserve
System.
Without objection, your written statement will be made a
part of the record.
Chair Pro Tempore Powell, you are now recognized for an
oral presentation of your testimony.
STATEMENT OF THE HONORABLE JEROME H. POWELL, CHAIR PRO TEMPORE,
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Powell. Thank you.
Chairwoman Waters, Ranking Member McHenry, and members of
the committee, I am pleased to present the Federal Reserve's
semi-annual Monetary Policy Report.
Before I begin, let me briefly address Russia's attack on
Ukraine. The conflict is causing tremendous hardship for the
Ukrainian people. The implications for the U.S. economy are
highly uncertain, and we will be monitoring the situation
closely.
At the Fed, we are strongly committed to achieving the
monetary policy goals that Congress has given us: maximum
employment; and price stability. We pursue these goals based
solely on data and objective analysis, and we are committed to
doing so in a clear and transparent manner so that the American
people and their Representatives in Congress understand our
policy actions and can hold us accountable. I will review the
current economic situation before turning to monetary policy.
Economic activity expanded at a robust 5.5 percent pace
last year, reflecting progress on vaccinations and the
reopening of the economy, fiscal and monetary policy support,
and the healthy financial positions of households and
businesses. The rapid spread of the omicron variant led to some
slowing in economic activity early this year, but with cases
having declined sharply since mid-January, the slowdown seems
to have been brief.
The labor market is extremely tight. Payroll employment
rose by 6.7 million in 2021, and job gains were again robust in
January. The unemployment rate declined substantially over the
past year, and stood at 4 percent in January, reaching the
median of FOMC participants' estimates of its longer run normal
level. The improvements in labor market conditions have been
widespread, including for workers at the lower end of the wage
distribution, as well as for African Americans and Hispanics.
Labor demand is very strong, and while labor force
participation has ticked up, labor supply remains subdued. As a
result, employers are having difficulties filling job openings.
An unprecedented number of workers are quitting to take new
jobs, and wages are rising at their fastest pace in many years.
Inflation increased sharply last year and is now running
well above our longer-run objective of 2 percent. Demand is
strong, and bottlenecks and supply constraints are limiting how
quickly production can respond. These supply disruptions have
been larger and longer-lasting than anticipated, exacerbated by
waves of the virus, and price increases are now spreading to a
broader range of goods and services. We understand that high
inflation imposes significant hardship, especially on those
least able to meet the higher costs of essentials like food,
housing, and transportation. We know that the best thing we can
do to support a strong labor market is to promote a long
expansion, and that is only possible in an environment of price
stability.
The Committee will continue to monitor incoming economic
data and will adjust the stance of monetary policy as
appropriate to manage risks that could impede the attainment of
its goals. The Committee's assessments will take into account a
wide range of information, including labor market conditions,
inflation pressures and inflation expectations, and financial
and international developments. We continue to expect inflation
to decline over the course of the year, as supply constraints
ease and demand moderates because of the waning effects of
fiscal support and the removal of monetary policy
accommodation. But we are attentive to the risks of potential
further upward pressure on inflation expectations and inflation
itself from a number of factors. We will use our policy tools
as appropriate to prevent higher inflation from becoming
entrenched while promoting a sustainable expansion and a strong
labor market.
Our monetary policy has been adapting to the evolving
economic environment, and it will continue to do so. We have
phased out our net asset purchases. With inflation well above 2
percent, and a strong labor market, we expect it will be
appropriate to raise the target range for the Federal funds
rate at our meeting later this month.
The process of removing policy accommodation in current
circumstances will involve both increases in the target range
of the Federal funds rate and reduction in the size of the
Fed's balance sheet. As the Federal Open Market Committee
(FOMC) noted in January, the Federal funds rate is our primary
means of adjusting the stance of monetary policy. Reducing our
balance sheet will commence after the process of raising
interest rates has begun and will proceed in a predictable
manner, primarily through adjustments to reinvestments.
The near-term effects on the U.S. economy of the invasion
of Ukraine, the ongoing war, the sanctions, and of events yet
to come, remain highly uncertain. Making appropriate monetary
policy in this environment requires a recognition that the
economy evolves in unexpected ways, and we will need to be
nimble in responding to incoming data and the evolving outlook.
Maintaining the trust and confidence of the public is
essential to our work. Last month, we finalized a comprehensive
set of new ethics rules to substantially strengthen the
investment restrictions on senior Federal Reserve officials.
These new rules will guard against even the appearance of any
conflict of interest. They are tough and best-in-class in
government here and around the world.
We understand that our actions affect communities,
families, and businesses across the country. Everything we do
is in service to our public mission. We at the Federal Reserve
will do everything we can to achieve our maximum employment and
price stability goals.
Thank you. I look forward to your questions.
[The prepared statement of Chair Pro Tempore Powell can be
found on page 56 of the appendix.]
Chairwoman Waters. Thank you very much.
I now recognize myself for 5 minutes for questions.
Chair Pro Tempore Powell, as you know, the Fed is required
to conduct monetary policy in a manner that fulfills its dual
mandate to promote maximum employment and stable prices. But as
you have explained, most of the inflation we are experiencing
right now can be traced back to supply chain issues related to
the pandemic, and the Fed cannot directly affect supply-side
conditions.
These supply chain constraints seem likely to only
significantly increase as Russia invades Ukraine and the full
effect of our sanctions take hold. If the Fed's tools are
mostly useful in stimulating or constraining demand, how can we
expect monetary policy to rein in inflation that is largely
driven by supply-side factors?
Mr. Powell. Our policies really cannot, as you point out,
affect supply-side conditions. Our policies affect demand.
What we are facing now is an elevated level of demand in
the face of supply-side constraints, and it is the collision of
those two things that is creating inflation. There is an
important job for us to move away from these very highly
stimulative monetary policy settings to a more normal level of
rates, and perhaps tighter at a time when inflation is highly
elevated, and that is what the Committee plans to do.
Chairwoman Waters. It seems clear that the Fed has limited
tools to address inflation and that Congress has an important
role to play. The Monetary Policy Report notes major shortages
in housing supply as a factor in higher prices. If Congress
were to make investments to alleviate these shortages, do you
think this would be helpful in addressing inflation?
Mr. Powell. Major investments in housing supply? I think
housing prices are high for a number of reasons, actually:
difficulty in getting lots; difficulty in getting materials;
difficulty in finding workers; and very high demand. It has
been extraordinarily high. Those are many of the features, and
also low interest rates have made credit widely available.
Mortgage rates are going up. That will probably begin to
cool off demand. I wouldn't want to comment on congressional
legislation, but I do think there is, no doubt, a role for
Congress.
Chairwoman Waters. I suppose I could conclude, without
having you comment directly on fiscal policy, that you agree
there are ways to manage inflation outside of monetary policy?
It is not only monetary policy where others have a role to
play?
Mr. Powell. I do think that is right, but more in a sort of
medium- or longer-term sense. The Fed does monetary policy, and
inflation is largely a monetary phenomenon. And it is our tools
that can be used to address inflation.
Over time, of course, anything that expands the productive
capacity of the United States over time would, in principle,
make greater potential output and a less constraining economy.
Chairwoman Waters. Fed forecasters expect that inflation
will subside as supply chain disruption issues are resolved.
However, housing and rent prices, as you have said, account for
roughly one-third of the Consumer Price Index, and most
economists do not expect the problem to be resolved as quickly
as supply chain bottlenecks due to both the time it takes to
develop housing and the lack of investment in housing that is
affordable to low- and moderate-income families.
Currently, there is a shortage of nearly 7 million rental
homes that are affordable and available to America's lowest-
income renters and a shortage of more than 5 million homes for
potential home buyers. In my district, there is a shortage of
more than 34,000 rental homes that are affordable and available
to the lowest-income families, while the State of California
has a shortage of more than 962,000 affordable rental homes.
If Congress does not make the investments to increase
supply and access to the affordable homes in this country, how
concerned are you that the Fed will not be able to contain
inflation?
Mr. Powell. You are right that housing inflation is a
significant part of the CPI. We also look more prominently at
personal consumption expenditure (PCE), which is a different
measure, and it is something less than that.
And unlike these temporary supply-side constraints that we
see, housing inflation really is much more of an indicator of
the tightness of the economy rather than supply-side problems.
So, it is something we watch carefully, along with wages,
frankly, and it is a major contributor to inflation. As I
mentioned, higher interest rates do--housing is a very
interest-sensitive sector, and higher interest rates, really
interest rates that move back toward a more normal level should
act to cool off the housing market over time.
Chairwoman Waters. Thank you.
The gentleman from North Carolina, Mr. McHenry, who is the
ranking member of the committee, is now recognized for 5
minutes.
Mr. McHenry. Thank you, Madam Chairwoman.
Chairman Powell, thank you for your leadership in
tumultuous times, and this is certainly interesting times
internationally, challenging times internationally.
Everyone else on the Federal Open Market Committee (FOMC),
it seems, has opined about the March meeting. Everyone, whether
it is a tweet or an interview or anything else. What are your
thoughts going into the March meeting?
Mr. Powell. The March meeting. Okay. Here is how I am
thinking about the March meeting, and I guess I would start, of
course, with the U.S. economy, which is very strong. The labor
market is extremely tight, and inflation is running well above
target.
The way we think about our work is we develop working plans
for making adjustments to monetary policy over the course of
the coming months, and then we are flexible as plans meet the
real world. We are never on autopilot, obviously, and at a time
like this, what we aim to do is to lay out our principles, and
then, with whatever clarity we do have, proceed to implement
them, those policies, carefully and nimbly.
Coming into this meeting, let us say before the Ukraine
invasion, the Committee was set to raise our policy rate, the
first of what was to be a series of raises expected for this
year. Every meeting was live. Decisions would be based on
incoming data and the evolving outlook.
I also expected we would make great progress on our plan to
begin to shrink the balance sheet. So, the question now really
is how the invasion of Ukraine, the ongoing war, and the
response from nations around the world, including sanctions,
may have changed that expectation. And it is too soon to say
for sure, but for now, I would say that we will proceed
carefully along the lines of that plan.
The thing is, the economic effects of these events are
highly uncertain. So far, we have seen energy prices move up
further, and those increases will move through the economy and
push up headline inflation, and also they are going to weigh on
spending. We are seeing effects on other commodities and
perhaps from declining risk sentiment and weaker growth abroad.
The thing is we can't know how large or persistent those
effects will be. That simply depends on events to come. This is
where that leaves me. I do think it will be appropriate to
raise our target range for the Federal funds rate at the March
meeting in a couple of weeks, and I am inclined to propose and
support a 25-basis point rate hike.
We are also going to write down our new summary of economic
projection individual forecasts, which will show each
participant's views of the path forward in the economy and with
rates. I also expect that at this meeting, we will make good
progress toward an agreement on a plan to shrink the balance
sheet. We will not finalize that plan at this meeting. We will
do that when we think the time is right at a coming meeting.
The bottom line is that we will proceed, but we will
proceed carefully as we learn more about the implications of
the Ukraine war for the economy. We use our tools to support
financial stability and macroeconomic stability. We are going
to avoid adding uncertainty to what is already an
extraordinarily challenging and uncertain moment.
That is how I would think about it.
Mr. McHenry. That is very specific. You mentioned 25 basis
points. From all of the analysis about what the Fed will do
over the course of the next year, is 25 basis points the floor,
or the ceiling? Is it the speed limit? Is that the max you
think that the Fed could take on? How do you think of that?
Mr. Powell. Here is how I think about that. We have an
expectation, those of us on the Committee have an expectation
that inflation will peak and begin to come down this year. And
to the extent inflation comes in higher or is more persistently
high than that, then we would be prepared to move more
aggressively by raising the Federal funds rate by more than 25
basis points at a meeting or meetings.
Mr. McHenry. You mentioned the balance sheet, a plan for
the balance sheet, and that is to come. But what I am hearing
clearly from you is that the Fed is very interested in
financial stability, given what is happening, and you are
willing to make quick decisions on a question of liquidity, on
a question of market stability, those important works that you
have focused on as Fed Chair.
And it is actually substantial news for the House to be the
first, rather than the Senate, to break news. So, thank you for
being so forthright about your views on this.
And with that, Madam Chairwoman, I yield back.
Chairwoman Waters. Thank you.
The gentleman from California, Mr. Vargas, is recognized
for 5 minutes.
Mr. Vargas. Thank you very much, Chairwoman Waters, and
Ranking Member McHenry, for holding this hearing.
And Chairman Powell, thank you very much for being here
with us once again.
As we look at the unprovoked criminal Russian invasion of
Ukraine, one of the most notable national security responses
has been the President's recent announcement to cut off much of
the Russian financial sector from SWIFT financial services. Our
EU partners have also joined us and excluded seven Russian
banks from SWIFT.
Chairman Powell, what practical effects would this have on
Russia, its economy, its financial sector, and its people?
Mr. Powell. Thank you.
I should point out that the Fed does not impose sanctions
on other countries that we--in this process of developing
sanctions, we are not a principal. That is really a job for the
Administration, particularly the Treasury Department. We
provide technical background support and things like that, but
I think questions about sanctions and their effects generally
would be more for the Administration and the Treasury
Secretary.
I will just add, though, that the effects of the sanctions
so far appear to have been significant.
Mr. Vargas. Yes. We saw what happened to the ruble. We saw
what happened to the market. The market is still closed. Is
cryptocurrency a way around it for them? Could you talk a
little bit about that?
I know it is a little bit out of your bailiwick. But as you
said, these are interesting moments in time. We haven't had to
face this since really World War II. And even all of the
comments that you made about inflation and watching the market,
so much of it is tied to obviously what the Russians are doing
with respect to their unwarranted and criminal acts there in
Ukraine.
Mr. Powell. I don't have any private information on the
extent to which that is happening, but that is something you
read about and hear about. And I just think it underscores the
need really for congressional action on digital finance,
including cryptocurrencies.
We have this burgeoning industry, which has many, many
parts to it. And there isn't in place the kind of regulatory
framework that needs to be there. It was probably no different
with railroads or telephones or the Internet. Ultimately, what
is needed is a framework and, in particular, ways to prevent
these unbacked cryptocurrencies from serving as a vehicle for
terrorist finance and just general criminal behavior, tax
avoidance and the like.
I guess that is what I would say there. I don't really know
the extent to which it is happening, although you do hear that
and read it in the paper.
Mr. Vargas. It seems like an out for them. Since we did go
down this road, could you comment a little bit about a central
bank digital currency? It seems like that would be something
that would be helpful in situations like this.
Mr. Powell. Yes. We issued a paper. After much thought and
many drafts, we issued a paper, was it late last year? I guess
it was late last year, seeking public comment on the costs and
benefits of a potential central bank digital currency issued by
the Federal Reserve here in the United States, digital dollars.
And we await--I think we gave an extended comment period, and
we very much look forward to reading those comments.
This will be something in which we invest a fair amount of
time and expertise and hiring people and things like that to
try to get it right, but also to understand whether the
benefits actually outweigh the costs, which I think is an
unanswered question, both here and around the world.
Nonetheless, it is our obligation to move vigorously to
understand the answers to that question so that we can deploy a
central bank digital currency if it is appropriate.
So would it, in principle? It depends on why people are
using unbacked digital currencies. If they are using them to
evade visibility and evade the law, then for us just to have a
law-abiding CBDC won't change that. They will still be able to
use those currencies for that matter.
The existing digital currencies that, again, are not backed
are really vehicles for speculation. They are not used in
payments. They are not a store of value. They are a
speculation, like gold. That is what they are used for.
Whereas, potentially, a U.S. CBDC would have a wider view.
I do want to stress that we have not decided to do it, but
we do understand our obligation is to really get to the bottom
of it and to understand both the technical and the policy
issues that need to be answered.
Mr. Vargas. Thank you, and I know my time is about up. I
would just say, from your lips to God's ears. I hope that
inflation does peak this year and does come down because people
are hurting.
And thank you very much again for your steady stewardship.
We appreciate it.
Mr. Powell. Thank you.
Chairwoman Waters. Thank you very much.
The gentlewoman from Missouri, Mrs. Wagner, is now
recognized for 5 minutes.
Mrs. Wagner. Thank you, Madam Chairwoman.
Welcome, Chair Powell. It is good to see you in the chair.
We appreciate your time and service.
Chair Powell, since the last FOMC meeting in January, the
global economy has become markedly more complex. Russia's
unprovoked and unwarranted invasion of Ukraine has led to a
very steep increase in the price of energy. As of this morning,
when I checked, a barrel of crude oil was priced at $112 per
barrel, and this steep increase in the price of energy risks
pushing U.S. inflation potentially even higher.
You have touched on this a little bit, but how does the war
in Ukraine affect your thinking as you prepare for the next
FOMC meeting?
Mr. Powell. I think the first thing again to say is that
the ultimate economic effects of the war and all of the
sanctions and events yet to come are just very highly
uncertain, and we need to understand that. And as I mentioned,
I think it is appropriate for us to move ahead. Inflation is
too high. The Committee is committed to using our tools to
bring it back down to levels of price stability, which is to
say 2 percent inflation.
But I would also say that given the current situation, we
need to move carefully, and we will. And we will be nimble. We
will be looking at the situation as it evolves. And again, we
will use our tools to add to financial stability, not to create
uncertainty.
Mrs. Wagner. So, at this point in time, you don't think
that it significantly alters your expectations for the rate
increases that you have discussed this year?
Mr. Powell. I don't think that is knowable yet. What we do,
what we like to do is to run alternative scenarios, and we have
done some of that, as you would expect. And it is easy to find
cases where it would affect it. But we don't know that yet. We
honestly don't, and we will see.
Mrs. Wagner. Thank you. Chair Powell, could you explain the
role of the Federal Reserve in implementing U.S. sanctions on
Russia, how you are working with the Office of Foreign Assets
Control (OFAC), how this actually is implemented?
Mr. Powell. Right. Sanctions are really designed by the
Administration. They are a part of what the elected government
does. We provide technical support.
We implement those sanctions, or we make sure that the
banks that we supervise and regulate, obey them. That is one
thing that we do.
We also consult. We have knowledge about financial markets
and financial institutions. So, we are providing technical
support, but we are not the decision-makers on those things.
And honestly, these are decisions that are made at the level of
the elected government, not at the level of the Fed.
Mrs. Wagner. I know things are happening quickly and are
real-time here, but what actions has the Fed taken to date
since the invasion of Ukraine?
Mr. Powell. I would say, first of all, since late last
year, we have been on very high alert for cyber attacks. We
haven't really seen any notable incidents about that yet. We
are making sure that the banks we regulate and supervise are
also on high alert. We communicate with the Reserve Banks,
where there is a lot of expertise in these areas, and with
other parts of the government. So, that is one thing that we
have done.
As I mentioned, we are in very close contact with the
Treasury Department, as you would expect, between every central
bank and every finance ministry around the world. But again, we
are not the ones who design the sanctions.
Mrs. Wagner. Okay. Cybersecurity is, certainly for this
committee, and especially at the Fed, a top priority. I'm glad
that you are watching it closely.
Chair Powell, does our U.S. financial system have the
necessary capital and liquidity to handle any economic fallout
from this war? What kind of data will we be seeing?
Mr. Powell. The evidence to me strongly suggests that the
answer to that is yes. We just went through a rather enormous
shock with the pandemic and the near closure of the global
economy, and U.S. banks' capital levels are at multi-decade
highs, as are liquidity levels. It is hard for me to look at
that and say that a lack of capital is a threat at this point.
There are certainly issues. Again, cyber for private
financial institutions is a huge issue and one that they spend
a great deal of time on, as do we.
Mrs. Wagner. In 2015, the Obama Administration blocked the
development of the Keystone XL pipeline, a decision reversed by
the Trump Administration. Then, President Biden canceled the
permits, again depriving the U.S. of over 800,000 barrels of
oil a day. Wouldn't expanding the supply of oil by 800,000
barrels a day reduce energy inflation and lower prices at the
gas pump?
Mr. Powell. We are not responsible for energy policy. That
is a matter for Congress and the Administration. Of course, the
laws of supply and demand do work.
Mrs. Wagner. The laws of supply and demand do work.
I yield back.
Chairwoman Waters. The gentleman from Guam, Mr. San
Nicolas, is now recognized for 5 minutes.
Mr. San Nicolas. Thank you so much, Madam Chairwoman.
Good morning, Chair Powell.
And I would like to first recognize one of my senators all
the way from Guam, Senator James Moylan. Thank you so much for
making time to join us here today, Senator.
[applause]
Mr. Chairman, over the course of the uptick of inflation in
the last year, you testified before the committee on multiple
occasions that the Fed believed that the inflation the country
was experiencing was transitory. And since that time,
especially today, there is a seeming change in that tenor.
Could you elaborate more on that?
Mr. Powell. Sure. I would be glad to.
I think very widely among macroeconomists and other central
banks around the world, we looked at it as akin to an energy
shock and a supply-side shock. And the textbook on monetary
policy would have you look through that because a supply shock
comes and goes, and by the time monetary policy is having its
effect, which happens with long and variable lags, we think the
supply shock is already gone.
We looked at it that way. I think we expected to get
relief, particularly going into last fall, I would say. We
expected when schools reopened, vaccinations were raised, and
kids were back in school, we expected the supply of labor to
come in, that kind of thing. And it didn't happen.
But it didn't happen because the supply-side constraints
didn't ease. And it is not like, as a practical matter, what
was wrong was not the theory, it was just in reality, the
supply-side constraints have been much, much more durable and
persistent than we had expected.
We knew that we could be wrong, and I always thought we
could pivot pretty quickly and catch up, and we started to
pivot in the middle of last year and then pivoted hard at the
end of the year.
But in the meantime, the economy was really healing
incredibly quickly over the second half of last year. Record
job growth and record declines in unemployment, and record
tightening in the labor market. We know that what our job is
now, which is to move away from these highly-accommodative
settings to more appropriate settings given the very hot nature
of the labor market and the level of inflation.
Mr. San Nicolas. There is chatter, Mr. Chairman, public
chatter that the intensity of inflation that we are dealing
with today is a reflection of the Fed not taking policy action
soon enough, and not taking enough policy action. And there is
public chatter that that causes the Fed's credibility to come
into question as to whether or not it is acting responsibly and
appropriately with the datasets that are coming in.
And I bring this up, Mr. Chairman, because we have a duty
to the American people to be able to raise these questions, as
pointed as they are, and to give individuals such as yourself
an opportunity to really speak to the credibility question that
is out there in the community. So, if you could elaborate
further on that?
Mr. Powell. Sure. It is for others to judge many of the
things you mentioned, and we understand that. But starting in
December, at our December meeting, we began talking about
significantly more rate increases. The market took us very much
at our word.
And as this year has gone on, market participants do appear
to be reacting what I would call appropriately to our
assessment, our ongoing assessment and reassessment of what is
appropriate. And I will just assure you and everyone that we
are committed to achieving price stability. We will use our
tools to achieve price stability.
Really, that is an essential bedrock element of everything
else we want to achieve in the economy, including a strong
labor market.
Mr. San Nicolas. When we faced the financial crisis in
2008, a lot of lessons were learned about the need for the Fed
to be more responsive to the liquidity traps that could take us
by surprise. Given the circumstances we are dealing with today,
and the frustrations that the American people are facing, can
you share with us any lessons that the Fed has learned with
respect to its responsiveness to the inflation that we have
been dealing with over the past 12 to 18 months, and the
intense inflation that we are dealing with today?
Mr. Powell. The inflation that we are experiencing is
nothing like anything we have experienced in decades. It is
higher, of course, much higher than anything we have seen since
I was much younger. But not only that, it is different. It is
coming from the goods sector. The goods sector has been a
source of disinflation for a quarter of a century because so
many goods, so many manufactured goods have been manufactured--
Mr. San Nicolas. But just specifically, Mr. Chairman--
reclaiming my time--what specific lessons has the Fed learned
from the outcome that we are dealing with today?
Mr. Powell. We are still living through it. So, the main
focus we have is not on doing a retrospective. It is on
conducting policy appropriately to return us to price stability
while also sustaining the expansion.
Chairwoman Waters. The gentleman's time has expired. The
gentleman from Georgia, Mr. Loudermilk, is now recognized for 5
minutes.
Mr. Loudermilk. Thank you, Madam Chairwoman.
And Chairman Powell, thank you for being here, and
congratulations on your nomination to continue your job for a
second term. I think it is well-deserved.
Before I get to my questions, I want to hold up something
here. This is a Ukrainian dollar. It is a hryvnia. I kept some
of these when I was in Ukraine several years ago doing some
ministry work, and I think it is interesting to think that what
happens in the next few days may determine whether this is
another defunct piece of currency and the nation returns to a
ruble, or will this maintain some of its value?
But as you look at it, you can see it is a fraction,
physically a fraction of the size of the U.S. dollar. It takes
about 30 of these hryvnias to match a U.S. dollar, but when you
look at values, our dollar has decreased in value, as you have
mentioned, due to inflation.
Now a year ago when you testified before this committee, I
asked what your outlook was for the economy, and you said you
expected economic growth to be strong for the rest of 2021. But
at that time, I warned that the $2 trillion stimulus bill that
was making its way through Congress at that time was
unnecessary and far too big, given that the economy was already
recovering. And lo and behold, these predictions came true.
In your opening statement, you mentioned that you didn't
expect inflation to continue at the rate it is right now. But I
also recall that throughout 2021, we heard that inflation was
slight. It was going to be temporary. But I also understand
that prediction probably didn't include the actions and the
roles that Congress had, as you had said.
According to a report from the Federal Reserve Bank of San
Francisco, because the American Rescue Plan was so extremely
large and was passed when the economy was already recovering,
this was a significant contributing factor to inflation. Do you
agree with that report, that our reckless spending is a
contributing factor to our inflation?
Mr. Powell. Really, I wouldn't like to comment on any
particular law, but I will say this. All of the things that we
did after the pandemic were--we turned our dials as hard as we
could. So did you, with the CARES Act. And the economy did
benefit from that. We have the strongest economy in the world
now.
But part of that, no doubt part of what we did and what
Congress did, without naming any particular laws, is also part
of the reason why inflation is high now.
Mr. Loudermilk. Right. There are multiple contributing
factors to that, and the reckless spending, which devalues our
dollar, is one of those. And what we heard last night was that
there is not going to be a change in the direction this
Congress is going or the White House. It sounds like we are
just going to repeat the same mistakes we made in 2021.
I know that you have the tools for adjusting the interest
rate. You mentioned increasing 25 basis points, and you
mentioned that it may be necessary to go higher. I understand
that. Do you still think that inflation will be temporary, and
I believe that you said it would be short-lived going forward
because of resolving our supply chain issues?
But since there are other contributing factors to that, are
you anticipating that Congress or the Administration will undo
some of the failed policies, such as the spending policies and
the suppressing of America's energy supply, which has been a
significant contributing factor?
Let me rephrase that. If Congress and the White House do
not change the policies of 2021 and continue down that same
path, do you still believe that inflation will stabilize, that
price stabilization will come this year?
Mr. Powell. First, we have had this expectation, as you all
know, for more than a year, and it hasn't actually come true.
So, we are humble about the fact that we can't really call with
any confidence the turn. But it does seem that this year will
be withdrawing policy accommodation. Actually, a lot of the
fiscal policy spending has happened now, and so the impetus to
growth will be declining and, in fact, negative from fiscal
policy as it stands now.
And just the natural improvement of supply chains and labor
supply and things like that, those are the things we are
looking to for relief on inflation, that we are hoping for, but
it's very difficult to say when they will happen. And our job
is to achieve price stability one way or the other.
Mr. Loudermilk. Okay. I see I am running out of time. I
have several other questions, but I will submit those for the
record, and I yield back, Madam Chairwoman.
Chairwoman Waters. Thank you.
The gentleman from Illinois, Mr. Garcia, is now recognized
for 5 minutes.
Mr. Garcia of Illinois. Thank you, Chairwoman Waters, and
Ranking Member McHenry, for this hearing, and thank you to
Chair Pro Tempore Powell for joining us.
It has been a challenging year. Rising prices at the gas
pump and supermarket cause real distress to working-class
families like my neighbors in Chicagoland, and the improvement
in employment and wages is real, but not nearly enough.
My constituents saw a decade of stagnation after the last
recession. Working-class Latinos and immigrants like my
neighbors are always hard hit. We simply can't afford that
again.
Chair Powell, you have said that inflation has been driven
by bottlenecks in the supply chain, and last night, President
Biden highlighted their role in corporate concentration and
price increases. I will note that CEOs from Kimberly-Clark to
Tyson Foods had bragged to investors about their power to raise
prices without facing competition. And last night, President
Biden said, ``Lower your costs, not your wages.'' And my
constituents were glad to hear that.
Mr. Chairman, can you explain how raising interest rates
will lower prices for diapers or chicken? Last time, it was
because my neighbors lost their jobs and couldn't buy diapers
or chicken. Is that the idea?
Mr. Powell. The idea is that right now, the Federal funds
rate is still set close to zero, and that is a very stimulative
level. I think it is 8 basis points today. That is not an
appropriate level, we think, going forward. We think it is
appropriate that we engage in a series of rate increases over
the course of this year and also let our balance sheet shrink.
And what will happen then over time is that demand will
moderate as interest rates get into the economy over time, and
these annual price increases in everything where prices are
going up will moderate as well. That is how it has always
worked with interest rates.
We don't do competition policy. So, I can't really comment
on that part of it, but I will say that is how we think about
inflation and that is how we use our tools to get inflation
under control.
Mr. Garcia of Illinois. Changing gears, we discussed
corporate concentration, and last July, the President issued an
Executive Order on competition that encouraged the Fed and
other regulators to increase their scrutiny of bank mergers. It
has been a long time since regulators blocked a bank merger,
even an acquisition by a global systemically important bank
(GSIB) in 2020.
Chairman Powell, do you think it is appropriate to issue a
moratorium on pending mergers while the Fed updates its
framework for their review?
Mr. Powell. I think we have a statute that Congress has
passed that gives us the rules for evaluating potential
acquisitions and mergers by banks. I think we have a widely-
developed framework for that work, and we are continuing to
implement that.
Any changes that would come would either come through
legislation or through new personnel at the Fed, neither of
which we have right now.
Mr. Garcia of Illinois. As we learned from Wells Fargo,
frontline bank workers are an important resource for
regulators. They see firsthand how banks implement or ignore
internal controls, and they can identify problems as they
develop. Incorporating frontline workers' voices in our banking
regulatory system would improve the information we have and
diversify the voices that get heard.
Chairman Powell, would the Fed commit to adding bank
workers to your various advisory councils? Why or why not?
Mr. Powell. That's a very interesting question. We do have
quite a diverse group of people on our various advisory
councils, including people who are representatives of workers.
I don't know that we have outside councils who advise us on
bank supervision, per se. But we do always seek out in all of
our--in our Reserve Bank boards and also the advisory councils
that we do have representation from labor and also from people
who live and work and represent the interests of low- and
moderate-income communities.
Mr. Garcia of Illinois. Thank you. I would appreciate it if
you would consider that.
And Madam Chairwoman, I yield back.
Chairwoman Waters. Thank you.
The gentleman from Tennessee, Mr. Kustoff, is now
recognized for 5 minutes.
Mr. Kustoff. Thank you, Madam Chairwoman.
And thank you, Chair Powell, for attending this morning.
A lot of times, we look for historical references when we
try to reference a current event. A number of people, a number
of pundits, when they look at inflation today, reference it
back historically to the late 1970s and the early 1980s. From
your perspective, is that the proper historical reference to
what we are experiencing today as it relates to inflation?
Mr. Powell. That is the proper historical reference for
what we are trying not to replicate. Obviously, all of us have
looked carefully at the history of post-World War II inflation
and business cycles and all that kind of thing. One of the
things that is different now is that central banks, including
the Fed, very squarely take responsibility for inflation. That
was actually not the case in the 1970s.
There was a school of thought that really there were
certain things that an independent agency just couldn't do
because it was too hard, and that Congress should do it. So
now, I think central banks around the world have an inflation
target. They have transparency so that they can be held to
account for it. We are not waiting. We are using our tools now
to--and that is really different than it was in the 1970s.
Also, inflation expectations have been anchored for a long
time. They really weren't then. They were allowed to become
unanchored without much of a response. That would not happen in
today's world, and it will not happen.
Mr. Kustoff. A few weeks ago when the CPI number came out,
I was on my way to a breakfast meeting in Jackson, Tennessee,
which I represent, and one of my constituents and I, when we
were talking about the new CPI number, he said, ``I don't care
what the number is because I know that I am paying 50 percent
more in gas than I did 12 and 18 months ago. I know I am paying
20 to 25 percent more in grocery prices than I did a year ago.
I know what the price of a new car and a used car is.''
If you were me, if you were a Member of Congress, what
would you tell your constituents about the rising costs, the
expensive cost to just live today?
Mr. Powell. Inflation is too high. We understand that, and
we are working on it. It is going to take some time, but we are
going to get it back under control.
By the way, we are seeing this everywhere in the world. We
are seeing it more in the United States because our economy is
stronger, but we are seeing it everywhere in the world.
Mr. Kustoff. Let me, if I can, follow up on a few questions
that some of my colleagues asked about.
Ranking Member McHenry asked you about the next meeting and
your plans for the next Fed meeting, and I think you eloquently
laid it out. But you also talked about the situation that has
developed in Russia and Ukraine. My inference from your answer
is that if Russia had not invaded Ukraine, the Fed would be
more aggressive as it relates to the balance sheet and to rate
hikes. Is that a proper inference?
Mr. Powell. No, I think that remains to be seen. As I said,
we are moving ahead at this meeting, it would be my
expectation, in 2 weeks with a rate increase. And we are going
to make progress on agreeing on a plan at this meeting to
shrink the balance sheet, and I am confident we will.
The question of when we implement that plan is not answered
yet. I don't think that is clear at this point. That certainly
is something that we can't answer now.
Mr. Kustoff. Mr. Garcia referenced the President's State of
the Union remarks last night. The President, when he talked
about addressing inflation, said that we need to control costs.
Did you hear him say that?
Mr. Powell. I did not. I was too busy getting ready for
this hearing. I did not watch it.
Mr. Kustoff. I won't tell the President.
Mr. Powell. I probably just did.
Mr. Kustoff. When the President said he wants to control
costs, or that businesses should control costs to address
inflation, would you have any idea what he is talking about?
Mr. Powell. I really can't comment.
Mr. Kustoff. Fair enough. In a follow-up to questions from
Congresswoman Wagner, she asked you about cyber. I know pre-
pandemic, pre-invasion, one thing that you said kept you up at
night was a cyber attack. If Russia were to retaliate against
the United States in some form of a cyber attack, what degree
of confidence do you have in our nation's banks to thwart a
cyber attack from Russia?
Mr. Powell. What I can tell you is that everything that we
can do to protect ourselves against cyber, we are doing it. The
private large financial institutions are doing it, and they
have been for some time.
It is very hard to say what is possible to happen, but we
are certainly on high alert, and we will continue to be.
Chairwoman Waters. Thank you very much. The gentleman's
time has expired.
The gentlewoman from New York, Mrs. Maloney, who is also
the Chair of the House Committee on Oversight and Reform, is
now recognized for 5 minutes.
Mrs. Maloney. Thank you. Thank you very much, Chairlady
Waters, for your leadership and for calling this hearing.
Mr. Powell, first, I want to say that at a time when we are
still recovering economically from the COVID pandemic, and we
are facing challenges at home and now in Ukraine, I think and I
feel deeply that the Fed should not be subjected to political
stunts in the Senate with boycotts by the Republicans, and the
Senate should consider the pending Fed Board nominations as
soon as possible.
The Fed has an important job to do, and President Biden has
put forward qualified nominees, and we need to get this done.
That is just my main point.
With that said, as you and I have discussed in the past,
the economic recovery has not been even and we still have a
ways to go to ensure our economy works for everyone.
Just as one example, the Black unemployment rate remains at
nearly 7 percent, which is more than double the White
unemployment rate, and later today, the House Select
Subcommittee on Coronavirus Crisis is having a hearing where we
will be looking at the depth of the pandemic's impacts on child
care providers and workers and the results that has on our
families and our economies.
I want to ask you about the monetary policy report the Fed
released on Friday. The Fed notes that the labor force
participation rate remains well below estimates of its longer-
run trend as a result of retirement and people out of the labor
force and engaged in care giving activities.
From both a macro perspective and a micro perspective, what
does this drop in labor force participation mean for the U.S.
economy and what does it mean for those workers who leave the
workforce to care for their children or family members?
Mr. Powell. Having a lower labor force participation rate
now--it is a little more than a percentage point lower than it
was--reflects a lot of retirements, and what it means is that
our labor force is smaller. That has consequences, including
contributing to the labor shortage that we are seeing across
industries and all across the country. If we had a few million
more people working, then we wouldn't be feeling that quite so
much. It also means the potential output of the country is
lower.
Many of the people who are not in the labor force are
retirees who have made a choice. But some of them are people
who still want to come back, but perhaps can't, because of
childcare activities or fear of COVID or other factors.
In any case, the decline in the labor force participation
that we have seen has been much larger than that of other
comparable nations, and it was not something we expected, and
it is certainly something that is now contributing to wage
inflation and actual inflation and to the labor shortage that
we are currently seeing.
Mrs. Maloney. Thank you.
It has been announced that as a result of the Ukraine war
and other disagreements, Russia and China are now moving to
trade completely in their currency, are no longer using the
dollar, and Pakistan has flown in to meet with Russia. There is
some talk that they may be part of it.
What effect would that have on the U.S. economy if China
and Russia no longer use the dollar in certain block trades
around the world and with each other? What effect, if any,
would it have on our economy?
Mr. Powell. We do benefit from being the main reserve
currency for the world, and that really is because we have open
capital accounts and the rule of law, and we have inflation
over a long period of time under control so that the dollar
preserves its value.
And so, our markets are the most liquid and it is the place
where people want to be. Over time, the question is, if some
want to move away from the dollar, what will be the effect on
us?
I don't think it is something you would feel right away.
Over time, they would have to create an economic ecosystem
whereby another currency becomes a better currency for them to
use.
What we can do is we can make the dollar the most
attractive currency by continuing to have the rule of law and
open capital accounts and make it an attractive place for
people to invest and to use in their businesses.
There wouldn't be any short-term effect of that. Over time,
though, I suppose it would diminish our status as the reserve
currency. It is also possible to have more than one large
reserve currency, and there have been times when that was the
case, so it is not really clear.
Mrs. Maloney. Thank you. My time has expired. I yield back,
Madam Chairwoman. Thank you.
Chairwoman Waters. Thank you. The gentleman from Oklahoma,
Mr. Lucas, is now recognized for 5 minutes.
Mr. Lucas. Thank you, Madam Chairwoman.
And to continue several points that a number of my
colleagues have raised, as Putin's aggression in Ukraine has
continued to escalate, the U.S. and its allies have responded
in a unified voice to condemn Russia and apply economic
pressure.
Chairman Powell, could you discuss the difficulty of
predicting what the implications will be of locking Russia out
of SWIFT?
Mr. Powell. Again, on sanctions, we are not the right folks
to ask. We don't design them. We don't implement them. That
would be, literally, a question for the Administration.
Mr. Lucas. Let me word it this way: How sweeping do you
foresee the ripple effects through the U.S. financial system?
Is there an effect on us as those actions take place?
Mr. Powell. With big actions like this, there may well be
unintended and unexpected effects, and it's hard to say what
those might be.
In the economic sphere, not directly to your question, but
we are seeing concerns over palladium and neon and corn and
wheat--shortages of those, potentially.
But it will be difficult to say exactly what the effects
could be over time. The United States--our financial
institutions and our economy do not have large interactions
with the Russian economy. It is a relatively small thing and it
has gotten smaller and smaller in recent years.
So, there wouldn't be direct effects from these kinds of
things on the U.S. economy. It is hard to say what the second-
order effects might be.
Mr. Lucas. Thank you. You have answered my question.
As Congresswoman Wagner touched on, the price of oil has
continued to climb during the past year to its highest level in
more than 7 years, and we now see international banks,
appropriately, shunning Russian oil even without energy
sanctions. Could you describe the range of different scenarios
the Fed projections are playing in regard to this, and along
with that, how do you see this potentially impacting the
already-rampant inflation issues?
Mr. Powell. Obviously, the price of oil depends on events
that haven't occurred yet. It really depends on where this
goes, going forward.
We have seen prices move up, including just in the last
couple of days, and they moved up quite substantially since--if
you go back 3 months before this incident kind of began.
Prices are up quite a bit. The effects are going to be
passed through into gas prices, into lower economic activity,
and into headline inflation, and the larger the increase, the
larger the effect.
But the question then will become, is that going to lead to
repeated inflation increases at that time, and that is not
necessarily the case, and, of course, we would use our tools to
make sure that it is not the case.
Mr. Lucas. And, of course, representing the constituency I
do, which is both oil and gas production, and agriculture, we
take very careful note of how those actions will affect world
crude oil prices. And, of course, Ukraine being a very historic
major grain producer, my wheat people also are prepared to step
up and match that.
But it all underscores, I suppose, the increase in energy
production in the United States, and supporting policies that
will not penalize or drive capital away from domestic oil and
gas production.
That is more of an editorial on my part, Mr. Chairman. But
I note that we stand ready in this country to replace resources
that may not be available or affordable for the rest of the
world, and we just need a little incentive and encouragement
from this side of the room to utilize those things.
My last question in the time I have remaining is, the
economy is currently operating in what I think we had all
described as, at the very least, massive economic uncertainty.
And when you deal with this 40-year inflation, and supply chain
issues, and the COVID-related issues--and hopefully, we are in
the final stage--can you elaborate on how critical it is for
the health of the economic system to be reliable and to
maintain liquid markets so we can navigate through whatever
lies ahead of us?
Mr. Powell. Yes. I would say our markets have been
functioning well. There is a great deal of liquidity out there.
Between our swap lines, and our repo facility with other
foreign central banks, and our standing repo facility in the
Treasury market, we have institutionalized liquidity provision,
and I think just the knowledge that is there will help support
good market function which, despite all this volatility, we
still have.
Mr. Lucas. Thank you, Mr. Chairman. I will yield back,
Madam Chairwoman.
Chairwoman Waters. Thank you. The gentlewoman from New
York, Ms. Velazquez, who is also the Chair of the House
Committee on Small Business, is now recognized for 5 minutes.
Ms. Velazquez. Thank you, Chairwoman Waters.
Chairman Powell, thank you for being here today.
Given what you said about the upcoming meeting in March,
and the illegal invasion of Ukraine, how is the Fed
coordinating with other central banks around the world and
accounting for their actions when considering adjustments to
interest rate policy here at home?
Mr. Powell. We are in ongoing contact, it is fair to say,
with our major central bank colleagues, and we actually have a
meeting of all of them on Monday morning. It is a virtual
meeting at 7 a.m. on Monday.
It is something that we do regularly. That said, we conduct
monetary policy to achieve domestic objectives, specifically,
here in the United States, maximum employment and price
stability, and that is what we use our tools for.
But of course, foreign events are very much top of mind
right now, and it is enormously helpful to understand the
perspectives, particularly, of the Europeans who are so much
closer physically to what is going on.
So, that is an important channel for us.
Ms. Velazquez. Thank you.
And, Chair Powell, last week the Fed published its 2022
Small Business Credit Survey. Among other things, the report
found that small business applicants that used online lenders
for their financing needs reported more challenges with their
lenders than did applicants at other sources.
The top challenges faced by borrowers from online lenders
were high interest rates and unfavorable repayment terms. Can
you explain the report's findings and what it could mean for
small businesses that utilize online lenders to satisfy their
financing needs?
Mr. Powell. If I recall that survey, it did raise some
interesting questions, and our people looked at it and actually
saw differences in data gathering.
It is not clear that the data in the two surveys was
comparable. But I do think it raises interesting questions, and
we will be happy to get back to your office on that.
Ms. Velazquez. And it might raise some interesting
questions where we, through legislation, could provide some
relief and regulations so that small businesses are not
shortchanged when it comes to the most important element for
any small business: access to capital, affordable capital.
Chair Powell, during public remarks last month, Acting
Comptroller of the Currency Hsu stated that in the not-too-
distant future, the OCC, the Fed, and the FDIC will issue a
joint notice of proposed rulemaking (NPR) to update the
Community Reinvestment Act (CRA).
Does the Fed also believe a joint NPR is possible, and when
do you expect it to be released?
Mr. Powell. Yes, we do. We think that will be ideal, and we
are working very closely with the OCC and the FDIC to come up
with a consensus notice of proposed rulemaking reflecting all
of the comments that we got on our advance notice of proposed
rulemaking (ANPR).
I think the timing is soon. I wouldn't want to put a
specific date, but I know that we are going back and forth and
it feels like we are getting very close.
Ms. Velazquez. Right. Thank you.
And, Chair Powell, a note published by a Credit Suisse
strategy over the weekend warns that a decision to exclude
certain Russian banks from the SWIFT system, which I support,
could result in missed payments and giant overdrafts with
significant consequences for money markets, thereby forcing the
Fed and other central banks to intervene to enhance liquidity
to offset missed payments.
Do you see this scenario as likely?
Mr. Powell. No, I don't see that as likely. Of course, we
always appreciate looking at different risk scenarios. But,
again, given the relatively modest exposure that our banks have
directly to Russia, and given the existing tools that we have
to provide liquidity, I don't see that as a likely outcome.
Ms. Velazquez. Okay. Thank you. I yield back.
Chairwoman Waters. Thank you.
The gentleman from Texas, Mr. Sessions, is now recognized
for 5 minutes.
Mr. Sessions. Madam Chairwoman, thank you very much.
Chairman Powell, thank you for not only taking the time to
join us today, but for your insights into monetary policy.
The monetary policy report of February 25th, seemingly
still hot off the press, brings about, I think, a good review
of the Fed's analysis of where we are, and I know there is that
temptation by Members of Congress to hold you accountable for
things which are not within your purview.
But on page 3 of your February 25, 2022, monetary report,
you talk about special topics like low labor supply. Next, it
goes to several other issues, and then, supply bottlenecks.
As a Member of Congress from Texas, both of these are
highlighted to me on a daily basis as I receive feedback. This
is inflationary also.
We have taken a bit of time with you to probe with you your
ideas that, I think, you have handled professionally on behalf
of yourself and the Fed--the issues related to energy.
But the bottom line is, we can't get people back at work.
We find that turns into a low labor supply and then we have
bottlenecks. These are all hand in hand, glove in glove,
together, in my opinion.
I took a few minutes just now to look at the labor unions
and teachers' unions. But let us move to the Federal
Government. Where is the Federal Government in terms of their
employees coming back to work now, according to the Office of
Personnel Management (OPM)?
Mr. Powell. I don't know. We are an independent agency. I
will tell you where we are, which is we are in the middle of
that process, probably closer to the beginning than the middle.
Mr. Sessions. I know you are but, you see, if they don't
come to work, then others don't come to work. So, I think your
point and my point is well made.
I believe that what we need is your robustness, not just
your acumen, in these issues and your robustness within the
Administration to actually let them know that for this report--
for monetary policy to be correct, that you believe inflation
is a short-term meaningful hindrance on our economy.
They, meaning the White House, are going to have to make
policy. They are going to have to understand what caused this.
And I think that this Administration, and I think the
Democratic Party, and I think this Congress, have made friends
with inflation to encourage it, and that if your
prognostication is going to come forth that we end this
inflation, we are going to have to have serious changes.
Because right now in Texas, which has been relatively open,
I don't see relief on the horizon, and I think that this
Administration and this Congress have a lot to do with it.
Without chastising you, I meant to help you. I would like
for your voice in this Administration and within the halls of
Congress, perhaps doors that are shut, for them to understand
that they have actually made friends with and are continuing
inflation, whether it be with teachers unions or whether it be
with OPM, and we have to get serious about getting people back
to work, because as you tap down the amount of money that is
put in the economy, as that moves, we're going to have to
correspondingly have people come to work who pay taxes that
move the economy. Gross domestic product (GDP) is a term we
used earlier today. It is shifting this big, massive task.
I have almost a whole 30 seconds left. But I would like you
to say to you that I would like for your voice of reason, of
prosperity, a future, to come true as you would like.
Did I ask you a question? Okay. I am going to support you.
I am for you. How can we help you?
Mr. Powell. Honestly, we have the tools and we will use
them to get inflation under control.
But to the extent we get help from the supply side, it will
make that job so much easier. It is about labor force supply.
It is really about supply constraints and shortages and that
kind of thing.
It is also about exogenous events, like a war, which will
drive up the price of oil and gas, and that will get into
prices, certainly, and we will make sure that it doesn't
provoke a cycle of inflation.
Mr. Sessions. This is what happens when you have to rely on
other people for your food, cheese, and energy. Thank you very
much, Mr. Chairman.
Chairwoman Waters. Thank you, Mr. Sessions. You can help
Mr. Powell by asking your friends on the Senate side to confirm
his appointment.
[laughter]
Chairwoman Waters. The gentleman from Georgia, Mr. Scott,
who is also the Chair of the House Agriculture Committee, is
now recognized for 5 minutes.
Mr. Scott. Chairman Powell, how are you?
Mr. Powell. Fine, thank you. How are you, Mr. Scott?
Mr. Scott. I want to sound the alarm here this morning, and
I want you to listen to me, and I want the nation to, because I
am the Chair of the House Agriculture Committee, and I am very
worried about this turmoil over in Ukraine, and Russia's
violent, illegal, and criminal actions that they are taking and
the impact that this has on global trade and, most importantly,
our own food security.
We could very well be on the verge of a hunger crisis all
over this world. I want to share with you, and with the nation,
some research so that we can understand what this Ukraine-
Russia situation is causing.
Today, Russia alone is producing more than two-thirds of
the 20 million metric tons of fertilizer used to grow corn and
wheat around the world--one country producing 66 percent of the
fertilizer that is needed.
And when you combine Ukraine and Russia, these are also the
two largest exporters of wheat, corn, and barley, producing a
quarter of the world's wheat in these two countries, making
this impact a crisis of soaring magnitude when you have this
much, and these two countries are warring with each other.
I want to sound the alarm on this. Chairman Powell, the
disruptions and rising prices from these commodities will
destabilize global food markets and threaten our food stability
and social stability.
My question to you, Chairman Powell, is to what extent
could these developments create a financial stability risk here
at home and abroad, and what must we do? We can go without a
lot of things in this world, but the one thing we cannot go
without is food.
And when you have this much power on our food security for
the world in the hands of these two countries warring each
other at this time, what can you do about it?
Mr. Powell. I think your point is very well taken and I
think it is shipping, it is corn, it is wheat. As you pointed
out, it is fertilizer, and we see that getting into food prices
and into the food supply just in these early days after the
sanctions that have been put in place in a war less than 2-
weeks-old now.
The Fed doesn't really have the tools to address this. This
is really a matter for Congress and the Administration, I
think. But you are right to call attention to it, and I do
think that it is understood that help will be needed here.
Mr. Scott. I just want to say that we cannot allow the
world to get into this desperate situation. So, I am giving
this as sort of a Paul Revere moment here. I am not saying the
British are coming, but I am saying the Russians are already at
the door, and they could cause worldwide hunger, and I hope
that free nations around the world can come together and
realize that this is not just Ukraine's fight. It is our fight
and we have to win this fight, and hopefully, we can get more
of our nations to come together and end this situation in
Ukraine and Russia before it causes, truly, a worldwide war.
Chairwoman Waters. Thank you very much.
The gentleman from Florida, Mr. Posey, is now recognized
for 5 minutes.
Mr. Posey. Thank you, Chairwoman Waters.
Chair Powell, when your former Deputy, Mr. Quarles, came
before the committee last May, I pointed out to him that just a
week before, the April inflation rate had been recorded at 4.2
percent, much higher since 2009. The rate in March of 2021 had
been only 2.6 percent.
I asked him if we were paying the price for monetizing a
huge Federal debt, what the late Dr. Friedman and former
Chairman Bernanke both called, ``helicopter money.'' Mr.
Quarles told me that he didn't believe the Federal Reserve was
monetizing the debt.
Mr. Chairman, looking back a year, does the Fed continue to
deny that it has been monetizing the debt, and do you believe
that you should have acted before now to rein in the inflation,
rather than let it now exceed 7.5 percent, the highest rate
since 1952?
Mr. Powell. I think by monetizing the debt, what that means
is for the central bank to purchase the debt with the intention
of holding it, and that is not the intention here.
We are about to start shrinking the balance sheet and we
will return the balance sheet to a size relative to our economy
that it was before.
Also, that is not at all our intention. We purchase longer-
term securities in order to drive down longer-term interest
rates to support economic activity. I would also say that is
not really what we think of as the source of inflation,
admitting that inflation, proclaiming that inflation is far too
high and that we are committed to using our tools to get it
back down.
It is really about very, very high demand, particularly in
the goods sector, related to a spending shift that happened in
the pandemic and supply constraints that we didn't foresee--
international supply chains, labor constraints, low labor force
participation, right across the economy.
It is a very different kind of inflation story than we have
had in the past, but it is one that we have to deal with, and
we will deal with it.
Mr. Posey. Chair Powell, when you appeared before this
committee in March of last year, and I asked you to clarify the
purpose of the Federal Reserve collecting data and employing
stress tests related to climate change, you assured us that the
Federal Reserve would be collecting the information to help
financial institutions learn about climate risk and wouldn't be
using the information for regulatory purposes.
In recent weeks, considerable controversy has emerged in
the confirmation process to fill four vacant seats on the
Federal Reserve Board. One of the nominees has a record of
advocating for aggressive Federal Reserve regulation related to
climate change, including actions that would regulate capital
allocation away from fossil fuels.
I won't ask you to comment on the confirmation process. But
can you continue to assure us that the climate data--the stress
test proposed by the Federal Reserve won't be used for
regulatory purposes and driving investment away from
traditional energy sources here?
Mr. Powell. We call them climate stress scenarios, and we
haven't--we are actually just building the capability to do
this, and the idea is not to use them in the way that we use
the traditional stress tests to set capital levels, in effect.
The idea is more to allow financial institutions and also
regulators to better understand the extent to which and the
ways in which climate financial risks have any implications for
the banks.
That is the purpose of it. I will add, though, that we
don't think it is our job to tell banks which legal companies
they can and can't lend to, and I don't see that as an
appropriate role for us.
Mr. Posey. I am really glad to hear that. So, that is an
absolute, unequivocal--a guaranteed answer that the data will
not be used for regulatory purposes in any way whatsoever?
Mr. Powell. I can just say that, first of all, we are not
even doing the tests yet--those scenarios yet. But, certainly,
that is not going to be their construct. They are going to be--
the construct will be what I said, which is to help us
understand better, not to set capital or otherwise put on
further regulatory requirements.
Mr. Posey. Thank you so very much. I deeply, deeply
appreciate that, and I yield back. Thank you.
Chairwoman Waters. Thank you very much.
The gentleman from Colorado, Mr. Perlmutter, who is also
the Chair of our Subcommittee on Consumer Protection and
Financial Institutions, is now recognized for 5 minutes.
Mr. Perlmutter. Good morning, Mr. Powell. How are you?
Mr. Powell. Fine. How are you?
Mr. Perlmutter. I am good. And I just want to thank you.
You have been getting picked on, on inflation. But I would like
to start with chart one of your book. I always ask about your
charts because I love them.
And chart one shows a tremendous growth in employment, and
chart two shows a tremendous drop in unemployment--the converse
of it--and it has dropped from about 14 percent to 4 percent.
Do you think that the Fed's monetary policy helped in
reducing the unemployment rate?
Mr. Powell. Yes, for sure.
Mr. Perlmutter. Two years ago, we were going into a
pandemic. You and I had a conversation about the potential for
a worldwide recession of a magnitude we had never seen. Did we
hit that? Did we get that recession?
Mr. Powell. No, we didn't.
Mr. Perlmutter. And you may recall, I am a bankruptcy
lawyer, so I look at things kind of with a pessimist's eye. I
expected many, many bankruptcies. Did we have those? Did we
have the bankruptcies that we thought we might get?
Mr. Powell. We sure didn't.
Mr. Perlmutter. Do you have any idea how much the gross
domestic product has grown in the last year?
Mr. Powell. I want to say five point something percent.
Mr. Perlmutter. It is actually more than that, and one of
your charts has that--I think it is on page 23, chart 14. From
2020 to now, it went from less than $17.5 trillion up to $20
trillion. So, it is substantial, about 15 percent.
Now, I don't think it is that much, but it is substantial.
Did we expect that when we went into COVID?
Mr. Powell. You mean since the trough?
Mr. Perlmutter. Yes.
Mr. Powell. I was just giving you the last year. As you
know, we were looking at some really bad scenarios and hoping
they wouldn't happen in the first half of 2020.
Mr. Perlmutter. The Fed took some pretty dramatic actions,
as did central banks around the world, did it not?
Mr. Powell. Yes.
Mr. Perlmutter. And the Congress, led by the Democrats,
took some pretty substantial and dramatic steps, including the
CARES Act, the American Rescue Plan, the infrastructure bill,
to build a better America and to help us get out of what looked
like it could be a tremendous recession.
I could ask you, did it not, but I am not going to lead you
in that one. But what I do want to talk about is the fact that
despite the one flaw that Republicans can find, which is
inflation, we have lower unemployment, and a bigger economy. Do
you know how many other countries have higher inflation around
the world than America? Sixty-four, according to trade
economics inflation of country by country. This is a worldwide
phenomena, is it not?
Mr. Powell. Yes, it is.
Mr. Perlmutter. I want you to take a look at a couple more
of your charts, because I think these are probably the most
important, and they are the median wage growth found in chart C
on page 12, and the change in the price index for personal
consumption found on page 13, diagram 8.
According to your chart on page 12, the bottom order of
wage earners have had their wages increase by almost 9 percent.
Do you see that?
Mr. Powell. Yes.
Mr. Perlmutter. And the bottom, the next quarter, by 6\1/
2\, 7 percent. Do you see that?
Mr. Powell. Yes, I do.
Mr. Perlmutter. And then, you look over to the next page
and we are running, I think you said, at about 5, 5\1/2\
percent inflation. So, wage earners in the bottom half are
making more money than they are, potentially--if I do the math,
they are making anywhere from 8, 9 percent against a 5 percent
increase in costs. Now, it is not apples to apples. Wages are
going up, are they not?
Mr. Powell. Wages at the bottom, in the bottom quartile,
have gone up in real terms. I do not think that is true for the
second, third, and fourth quartiles, but it is true for the
bottom quartile that their wages--nominal wages--have gone up
more than inflation.
Mr. Perlmutter. Okay. Last question, when you and I spoke
at the beginning of this year--my time has expired, so I will
ask it to you later on.
And I thank you for your service, sir. I thank you for
keeping us out of a recession. I think we built a better
America by staying out of a recession. I yield back.
Chairwoman Waters. Thank you so much.
The gentleman from Ohio, Mr. Davidson, is now recognized
for 5 minutes.
Mr. Davidson. Thank you, Madam Chairwoman.
And thank you, Chairman Powell, for coming here, and I also
appreciate your book and the work and, frankly, just yet,
again, I want to highlight the really heroic work that the
Federal Reserve did to create stable markets, particularly in
March and April of 2020.
Since then, of course, there have been a lot of economic
distortions, one of which is the ongoing inability of the
Federal Reserve to stabilize its own balance sheet, which is
now over $9 trillion.
I appreciate Mr. Perlmutter highlighting some of the good
news and, frankly, I am positive that he has previously
operated a lemonade stand because he can always make something
good out of the lemons.
But the concern is that in the long term, this has come at
the expense of sound money. Just over a year ago, I talked to
you about sound money, and does the U.S. dollar represent sound
money, because many of us anticipated that inflation was not
transitory and that the quantity theory of money might have
some impact on inflation.
So, in light of the fact that we have seen substantial
change in the rate of inflation now versus what was showing up
then but was anticipated, do you still think that the U.S.
dollar is sound money? And either way, what are the threats to
the U.S. dollar as sound money?
Mr. Powell. The U.S. dollar is sound money. Yes. The
threats to the U.S. dollar as the reserve currency, really, in
the near term are--to displace the U.S. dollar as the reserve
currency, if that is your question, you need to be a very
attractive place to hold large amounts of reserves.
Mr. Davidson. It is really different than that because we
are probably still going to be the reserve currency since the
world grades on a curve, and frankly, the planet has never had
this much debt since World War II.
All of the countries around the world did similar things.
We weren't even--the discipline of the Bretton Woods era was
gold. I don't know that there is magic just in gold but there
is magic and discipline.
If you look at sound money being defined by a stable store
of value, an efficient means of an exchange, and a trusted
record of account, you have at least taken some things on store
of value.
And as you have seen people decide to filter transactions,
and develop technology and regulatory frameworks that are
intended to be able to filter transactions, it is not as
trusted or efficient as a means of exchange or a record of
account. And so, those kinds of things. Not so much, do we do
okay on the curve, but is it truly sound?
Mr. Powell. I am not sure I followed the last part. But I
do think that--look, inflation is indisputably too high. We are
using our tools to bring inflation back down to levels of price
stability and we will accomplish that task.
Longer-term, the U.S. dollar is easily the best currency
and it is because of what I just said. It is also because of
the rule of law and the fact that we are the incumbent, and as
long as we observe the rule of law and keep the dollar
relatively--keep inflation low and predictable, that will
remain the reserve currency.
Mr. Davidson. Okay. Thank you, Mr. Chairman.
And, look, historically, there have been multiple reserve
currencies and, generally, when something loses its status as a
reserve currency, it is not just because of other things that
unfold but it is because the value is debased. And we can come
up with fancy words like modern monetary theory or quantitative
easing or similar to quantitative easing but not really the
same.
When the Federal Reserve's balance sheet is growing, in a
way, it represents the Fed as the lender of last resort. We are
not constrained by the taxes we collect.
We are not even constrained by the amount of money the
world will lend us. We are constrained only by the will of
Congress to not spend more, and what are you going to do, not
cover the prolific spending by Congress?
Moving on, just talking about the Fed's role, of course,
stable prices is really only one component. The other is full
employment.
And I wonder if you think in light of Mr. Perlmutter's
reference to chart 2, if chart 4, which is the labor force
participation rate, trends the right way, and as you link to
the next thing as a regulator, there is a lot of pressure for
you to do ESG.
What can the Fed do and what does Congress need to do to
strike those balances?
Mr. Powell. Relative to ESG?
Mr. Davidson. And full employment.
Mr. Powell. Well, full employment, I think, most members of
the FOMC now think we are at labor market conditions that are
consistent with maximum employment.
Mr. Davidson. With 60 percent labor force participation?
Sixty-two?
Mr. Powell. The maximum employment can never be higher than
the level that is consistent with price stability.
Chairwoman Waters. The gentleman's time has expired.
Mr. Powell. I think we are at that level, at least.
Mr. Davidson. Thank you.
Chairwoman Waters. The gentleman from Illinois, Mr. Foster,
who is also the Chair of our Task Force on Artificial
Intelligence, is now recognized for 5 minutes.
Mr. Foster. Thank you, Madam Chairwoman.
And I would like to add to Representative Perlmutter's list
of your triumphs, the record level of small business formation.
And I think that when you try to preserve the very strong
economic recovery, I realize you have a dual mandate, but keep
an eye on that one, too. It is one of the most important
successes we don't talk about enough.
Do you remember the misery index?
Mr. Powell. I do.
Mr. Foster. Yes. And when unemployment drops from 14
percent to 4 percent, so dropped by about 10 percent, and then
the inflation goes from about 2 percent to 7 percent, so up by
5 percent, does that mean the misery index is increased or
decreased?
Mr. Powell. It would be decreased.
Mr. Foster. Thank you for that.
You actually mentioned repeatedly that the inflation
problem was, largely, one of goods and not so much one of
demand, and also of labor shortage. Can you make any rough
estimate of what fraction of the inflation we are seeing was
due to sort of those three effects?
Mr. Powell. I should be clear. Inflation is also too high
in the service sector. I wouldn't want to oversell that. But
the really big change has been in goods, which had negative
inflation or close to zero inflation for 25 years.
I don't have off the top of my head the ability to just
tell you what the contribution of that is, but it is big, and
it is a significant part of it. A lot of it also is energy,
which is--
Mr. Foster. Obviously, it's a worldwide problem.
Mr. Powell. Yes.
Mr. Foster. If you could get back to me with something a
little more quantitative from your staff on that, I would just
be--
Mr. Powell. I would be glad to do that.
Mr. Foster. --interested in knowing your estimate.
Now, in terms of the labor shortage, back in the days when
we had a different Senate, they passed comprehensive
immigration reform that was then, of course, blocked by
Republicans, and many studies at the time indicated it would be
a huge positive for our economy to pass comprehensive
immigration reform, and that was at a time which didn't have an
extraordinarily-tight labor market.
Is there anything you can think of that would invalidate
those studies which showed that comprehensive immigration
reform in both the low-skill and the high-skill sectors would
be a huge plus if it was passed?
Mr. Powell. If I can answer that this way, if you look back
at the trend, let's say, 5 years ago, in that range of
immigration--legal immigration--people coming in, and look
where we are now, we are now several million people, many of
whom would be in the workforce, short of that. So, lower
immigration is definitely part of the story of the labor
shortage. But that is what I would say.
Mr. Foster. Is there anything quantitative you can say
about the timescale for unwinding the balance sheet? Do you
think of this in terms of a fixed timescale that we want to go
back to normal in the next 2 years or 3 years? Or do you say we
are going to take it down by 1 percent a month? Or do you
anticipate some sort of feedback loop where we look at the
taper tantrums or the equivalent and sort of adjust it as you
go?
Mr. Powell. The way we did it last time is we set a cap on
the amount that will run off, and anything above that gets
reinvested for both mortgage-backed securities (MBS) and for
Treasuries. We haven't had that discussion at the Committee. We
will have it in 2 weeks.
But I guess it turns out that the level of the cap doesn't
really matter that much for how long it takes. Something in the
range of 3 years to get back to where you are trying to get to
and the way we define is the end.
We look at the size of the economy and the size of the
banking system and we ask, what is the level of reserves that
we will need at that point? And we set a course for that place,
and then as we start to get close to it, we might slow down a
little bit, as though it were an airplane, and that is the way
it will work.
But I think something in the range of 3 years to get back
to what the balance sheet needs to be, which is basically
reflective of the public's demand for our liabilities plus a
buffer and what we call ample reserves.
Mr. Foster. Yes. Do you have an estimate for how many hours
of your life have been spent attempting to explain the
difference between quantitative easing and monetizing the debt
to Members of Congress?
[laughter]
Mr. Powell. No, sir.
Mr. Foster. Okay.
Now, one of the most valuable functions of that is to
provide the emergency assistance to the financial systems of
the free world and you mentioned that you stood ready. Are
there specific things you are worried about in Eastern Europe,
where the economies are more tightly tied to Russia, where you
may really have to step in and get involved? Any specific
worries?
Mr. Powell. What we are watching is the global markets and
the dollar funding market and we are seeing markets that are
functioning, and, of course, we have tools and we have things
in place to deal with stresses should they emerge.
That is really what we are doing, and, as I mentioned,
markets are functioning, so we haven't had to deploy any of
those tools.
Mr. Foster. Thank you.
And my time is up. I yield back.
Chairwoman Waters. Thank you. The gentleman from Missouri,
Mr. Luetkemeyer, is now recognized for 5 minutes.
Mr. Luetkemeyer. Thank you, Madam Chairwoman, and welcome,
Chairman Powell. It's good to see you again.
We are in the middle right here of a really disastrous
situation with Ukraine, and part of the approach to corralling
the Russian advance there is on the financial side. And it
would appear to me that we probably didn't do this as quickly
as we should have. It didn't look to me like we had a plan.
If we really wanted to get involved financially, we should
have been sitting here saying whenever--when they move the
first battalion or regiment or whatever you want--amount of
troops you want to talk about on the border we should sort of
said something, well, okay, if you move another one there, we
are going to start doing things to you. And we didn't do that
until they started to invade, and then now, all of a sudden, we
are playing catch up.
That begs the question, we know that China is watching all
of these actions very, very carefully. They are looking at what
Russia does, how we react, what we do, how the rest of the
world reacts, what they do.
To me, we need to be sitting here as a country, as the Fed,
as Members of Congress, saying, we need to be ready for the
Chinese when they invade Taiwan, because I see no reason why
they will not do that shortly.
If we don't prepare for that, shame on us. My question to
you is, are you beginning to think about what kind of actions
you would take or support or suggest to the Administration,
should China take over Taiwan or attempt to do that?
Because this is going to be a completely different scenario
because of the size of China, the size of the military, the
size of Taiwan, versus getting into Eastern Europe. So, it is
kind of a large question, but would you like to jump into it?
Mr. Powell. Those questions are really questions that are
dealt with at the National Security Council and the Defense
Department and the intelligence agencies and the Treasury
Department.
We are interested students of all that, and we have our
technical expertise that we can contribute. But honestly, we
are not--
Mr. Luetkemeyer. Mr. Chairman, I listened to you very
carefully a while ago, and you made the comment that you are
looking at making policy for anticipated situations in the
coming months with regards to a number of things--what happens
with the economy, what happens with inflation.
So if you are not doing that--I understand you may not want
to tell me today because that will be helping the Chinese who
are probably watching this right now. I understand that.
But just a sort of a wink and a nod to say, yes, we are
looking at that would, certainly, be not--it will give us a
level of comfort to know that we are not going to be behind the
eight ball again.
Mr. Powell. As I also mentioned, we do model alternative
scenarios of various kinds and in fact, with every Tealbook,
which is our document that we use at the FOMC, we run half a
dozen of them in great detail. Our people study those and it
helps them think about alternatives. So, I will just leave it
at that, if I could.
Mr. Luetkemeyer. Okay. Thank you. I will let you off the
hook on that one.
With regards to inflation, we have talked about it
significantly here today, and I think sometimes that you are
given way too much credit for it, and given way too much
criticism for it. I think that there are a lot of things that
are outside your control that happen that, basically, affect
inflation, and you have to react to it.
You don't make monetary policy on the Administration side.
You don't make legislative policy for the legislative side.
And, yet, you have to react to all of those things.
I am the ranking member on the House Small Business
Committee, and I had an economist come in to talk to our
committee the other day, and I asked him to break down the
different causes of inflation.
And I said, let me identify, at least, what I think are
four significant costs. One is money supply--the amount of
money that is pumped in either through Fed actions or through
our actions as Congress--regulations, supply chain/workforce
situations, and energy.
And he broke it down like this, and he had some charts and
he started going off, and I said, just give me the percent. And
he said, roughly 40 percent through the money supply--the money
that goes in as a result of Fed actions or congressional
actions, 1 percent is regulations, 20 percent supply chain, and
20 percent energy.
If you look at that--I know Mr. Foster a while ago was
looking for some answers so, hopefully, I have helped him with
his question--if you look at that, basically, you don't have a
lot of control over regulations.
You don't have a lot of control over supply chain and no
control over energy policy, and money supply if Congress gets
involved and passes these massive bills and throws a lot of
money in there, you don't have control of that one either.
So, the amount of control over this is just probably in the
neighborhood of 20 to 40 percent at best. My concern is that
when you say that you are trying to help things with inflation,
it really balances--it goes back to the Administration and to
us as Congress.
The Administration, the first thing it did was to stop the
pipeline, stop oil drilling, and prices went up, and that right
there is 20 percent. So, it is important, I think, that we
understand that. I would like for you to comment on that, if
you would, just for a second.
Mr. Powell. Sure. Yes, that's an interesting breakdown. We
can continue this discussion. We would have a little different
assessment.
I would just say that we welcome--this is a lot about
supply-side issues, and we welcome any help we can get on that,
and we are looking for help from an improved supply side.
Mr. Luetkemeyer. Okay.
Chairwoman Waters. Thank you very much. The gentleman's
time has expired.
The gentleman from Florida, Mr. Lawson, is now recognized
for 5 minutes.
Mr. Lawson. Thank you, Madam Chairwoman.
And Chairman Powell, welcome to the committee.
Before I ask my question, I have a statement. They said one
of the benefits of inflation is that you can live in a more
expensive neighborhood without moving, and I thought that was a
very interesting statement I was seeing--
Mr. Powell. That is a good one.
Mr. Lawson. --and I thought I would bring it to your
attention.
According to the recent analysis of branch closures by the
National Community Reinvestment Coalition, between 2017 and
2021, banks have closed as many as 7,000 branches across this
country, one-third of which were in low- and moderate-income
communities and neighborhoods of color.
To what extent is the Fed considering these banks as it is
contemplating reform to implementing and stressing the
Community Reinvestment Act (CRA) and the importance of those
banks' branches for a nearby community?
Mr. Powell. I do think that is a focus of the CRA and also
of the focus that we want to strengthen in our proposal that is
out for comment. Actually, it is now--we have had the comments
and we are getting ready to put out a notice of proposed
rulemaking.
But we do understand the importance of presence in the
community and service to the community, and those things do go
into our CRA assessments.
Mr. Lawson. Okay.
Mr. Powell, according to the latest forecast from Goldman
Sachs and the Federal Reserve, which raised interest rates more
than expected this year due to high inflation and the labor
market approaching full employment, can you speak more on this?
Should we expect the Fed to raise interest rates at all in the
meeting this year, and what should we expect the Fed's main
rates to be by the end of this year?
Mr. Powell. Yes. The inflation is running well above our
target. The labor market is extremely tight. The economy is
growing strongly and our policy rate--we do expect to move our
policy rate up in a series of rate increases this year, away
from the very low setting that we put into place during the
acute phase of the pandemic and to a more appropriate level,
given the fast recovery and the strong recovery that the
economy has had, and given the fact that inflation is running
so far above our target.
We do expect that will be appropriate. We have communicated
that transparently and clearly, and markets have accepted it,
and it is our plan to return to price stability while also
supporting continued expansion.
Mr. Lawson. Okay. I wanted to make sure that I understood
the statement that was made earlier. With wages going up, as
they say, and the bottom half are making more in earnings, do
you think that we are in a better situation to deal with
inflation now than we have been with inflation in the past?
Mr. Powell. I think that this inflation is substantially
higher than anything we have seen since I was in college 50
years ago. This is strong and high inflation, and it is very
important that we get on top of it and that is exactly what we
are going to do.
I would say this: The labor market is extremely strong.
From that standpoint, I do think we are in a good place from
the standpoint of trying to get inflation under control.
Workers are still going to be getting good jobs and pay
increases for some time.
So, the economy is strong, and that means the economy can
take the rate increases that we are going to be making.
Ultimately, we need to get demand and supply back in alignment
so that we can get inflation back to a more appropriate level.
Mr. Lawson. Okay. Thank you, sir. And with that, I yield
back, Madam Chairwoman.
Chairwoman Waters. The gentleman from Michigan, Mr.
Huizenga, is now recognized for 5 minutes.
Mr. Huizenga. Thank you, Madam Chairwoman, and Chair
Powell, I appreciate this opportunity. I am actually going to
pick up on what my colleague from Florida was just talking
about, and add that to what my colleague from Missouri, next to
me here, was talking about. And you may have said that the 40/
20/20/20 ratio that came from Douglas Holtz-Eakin, breaking
that down to about 40 percent of inflation being tied to
monetary policy and spending, 20 percent to regulations, 20
percent to energy policy, and 20 percent to supply chain--you
might disagree with that, is what you had said. But do you
believe that spending has contributed to the situation that we
are in now?
Mr. Powell. I may have misunderstood what your colleague
said.
Mr. Huizenga. Madam Chairwoman, I ask that you suspend--I
think Mr. Lawson still has his microphone on, and we are
getting a little crosstalk, so if we can maybe add a few
seconds back here?
Chairwoman Waters. Okay. Is the gentleman muted now?
Mr. Huizenga. Clearly, he is not.
Chairwoman Waters. I think you can resume.
Mr. Huizenga. Okay. I would ask that you have a light gavel
at the end of my time here. I think we were having a little
crosstalk, if we could go back on that.
Chairwoman Waters. Yes.
Mr. Powell. I may have misunderstood. I thought that the 40
percent was money supply, but you made it sound more like
monetary policy. Look, we can discuss those numbers, but that
makes more sense to me.
Mr. Huizenga. But the point being, has spending contributed
to inflation?
Mr. Powell. Yes. I think a number of factors have,
including monetary policy.
Mr. Huizenga. I would agree with that, and frankly, many of
us have sort of warned or talked about this situation. We have
record debt right now, previously without conflict. Now, war
and rumors of war that we hope are not going to happen may even
increase that debt. And I am afraid that our spending habits
are putting you and all policy decision-makers in an even
tighter box.
Look, we all know that inflation is real. It is hitting,
whether it is gas at $3.79 versus $2.74 a year ago, groceries,
you name it, housing. And when you were here in July, I talked
about the housing situation--my family is in construction--and
what that means. And we can't just wave a magic wand and say,
``Oh, we are going to lower prices.'' That just simply isn't
realistic.
But what I heard last night is that the President is
acknowledging that people are living paycheck to paycheck, and
he understands that, yet the message I keep hearing from the
President and my friends on the other side of the aisle is that
we need to spend even more. And I am concerned that is going to
put us again into an even tighter box than we currently are, so
if you care to touch on that before I move on?
Mr. Powell. I should stay away from fiscal policy, if you
don't mind.
Mr. Huizenga. And look, I am not asking whether you support
a particular bill or not. Theoretically, for your classroom--
America is your classroom as they are watching this right now--
spending is a contributing factor to inflation. Correct?
Mr. Powell. It is, but it is not really our job and not
ours to comment on. We do have--
Mr. Huizenga. I understand that.
Mr. Powell. --a role here and we need to do it.
Mr. Huizenga. I fully understand that. Just the facts.
Okay.
I am going to move on to another issue, which is a rules-
based approach to monetary policy. In the 114th Congress, in
2015, I introduced the FORM Act, which would lay out a rules-
based monetary policy. And I know in your testimony today you
indicated that a rate increase is expected, and you confirmed
that with the ranking member.
What I am curious, about, though, is that since 2017, the
Fed's monetary policy report included a section on monetary
policy rules, and you have been very clear, and now Secretary
Yellen has been clear that a lot of rules are modeled and
looked at. The only exception to this was 2020, the first year
of the pandemic, and maybe more surprisingly, the report that
was just released this month, for example, in 2017, the
monetary policy section of the report stated that, ``Monetary
policymakers consider a wide range of information on current
economic conditions.''
It is not included in this report. Can you shed some light
on why it was omitted this year?
Mr. Powell. I honestly didn't know that was the case, or if
someone talked to me about this before the thing was printed
and sent up here, I don't remember. That is also a real
possibility, given the number of things I have on my mind right
now. But as you say, we didn't have it in July of 2020. We will
have it in the next one. There was no big thought, as far as I
know, going into that. It is just sometimes we include it and
sometimes we don't.
I will say that thinking about policies through rules is
something that I learned about in monetary policy, doing that.
When you are actually implementing policy, no committee has
ever really viewed its policy rules as a way of setting policy.
They use them to inform your thinking.
Mr. Huizenga. Yes, and I guess my idea with the format was
to then inform the market, and that includes us as citizens as
well. And I would like this committee to re-examine that.
I appreciate the indulgence, Madam Chairwoman, as we had
that crosstalk at the beginning, and I yield back.
Chairwoman Waters. Thank you.
The gentleman from Illinois, Mr. Casten, who is also the
Vice Chair of our Subcommittee on Investor Protection,
Entrepreneurship, and Capital Markets, is now recognized for 5
minutes.
Mr. Casten. Thank you, Madam Chairwoman. And thank you,
Chair Pro Tempore Powell.
I am always struck that there is a real risk of hubris for
those of us in our line of work, at least up here. If we get to
write laws, sometimes we conclude that means we can write the
laws of physics as well, which is dangerous. And I am troubled
by some of the questioning of my colleagues and some of the
debates around confirmation of your colleagues around climate
change.
The Intergovernmental Panel on Climate Change (IPCC) report
which came out last week said that climate change effects are
outpacing our ability to adapt. We are seeing communities that
sort of simultaneously have droughts, floods, and fires, and
money is moving in surprising ways. We have seen personal
stories just in the last months of one coastal community where
the roads are being washed out, that haven't yet paid off the
bonds that were used to pay for the road, and they don't know
how to reconnect those communities. And in another community on
the coast, the mayor is sitting there realizing that in one
neighborhood, he can afford to build a sea wall, and in another
neighborhood, it is cheaper to relocate people and then deal
with the political fallout of that decision.
We have massive political risks that are coming, and we
know they are coming because the laws of physics do not care
how we vote. And I am concerned by your response to Mr. Posey--
I think you said we have not even done the scenarios yet on
climate change. I understand these are complicated, but if
those scenarios haven't been done, I want to start--if we do
not deal with the financial fallout, the political fallout is
going to be far worse.
And I just want to start with a very specific question.
NOAA and NASA came out with a report, I think last week, or 2
weeks ago, saying that Florida is looking at 12 inches of sea
level rise in the next 10 to 20 years, and 18 inches by 2050,
which means that there are whole communities in Florida where
there is going to be complete property loss before a 30-year
mortgage is repaid; that was issued today.
Are Fannie Mae and Freddie Mac changing their lending
standards in response to those risks in those communities in
Florida and elsewhere that are now within 30 years of being
unable to repay those notes?
Mr. Powell. I don't know.
Mr. Casten. I ask the question there, because in the U.S.
Commodity Futures Trading Commission (CFTC) report, ``Managing
Climate Risk in the Financial Sector,'' which came out in 2020,
they noted that the higher an area's risk for coastal flooding,
the more likely that commercial banks will be offloading their
risks onto Fannie and Freddie. So, if the sophisticated players
in the system are seeing this risk, and we, at a Federal level,
are backstopping, how are we isolating our Federal balance
sheet from that risk exposure?
Mr. Powell. I think that is a very likely outcome,
actually. As private lenders move away from that, will the
government force people to move away from the coast, or will
they wind up--the government, that is, us--wind up picking up
the tab? It's more likely to be the latter, it seems to me.
Mr. Casten. Moving away from offloading the risk onto the
taxpayer, back when I was in the energy industry, one of the
tells that we had that we knew there was a downturn coming in
energy markets was when the big banks started creating a
special opportunity Fund 5. We all knew that was code for
taking your Dodd-Frank Act compliance, that capital, and moving
it into an equity pool and selling it off to the least-
sophisticated people in the equity space. Anybody who has spent
time in the banking industry has seen that game.
To what degree does the Fed or the Treasury have the
ability to monitor where the sophisticated folks who are seeing
this coming are shifting the risk off to the less-sophisticated
folks in the private sector?
Mr. Powell. There is a lot of thinking going on about this.
I would have to think about that. But there is a lot of
thinking about what will happen over longer periods of time in
coastal areas and things like that. I can look into that for
you.
Mr. Casten. And it is not just coastal, right? It is
California fire risk. Do you rebuild that house where the fire
is, and who is holding the paper if it burns the second time,
before it is paid off? Drought risk in communities, running
away the capital movements. And to be clear, we are going to
create so much wealth in the transition to a clean economy, but
I think we can find more winners than losers if we are smart
about this. But there is this huge capital play and the
nervousness I get is, as I said, partly that we are shifting
risk onto the public sector, and partly that if we don't have a
really good understanding of what the capital structure looks
like in these communities, we are not seeing it.
As you know, Senator Schatz and I have introduced this bill
to push and encourage you and your colleagues to do these
climate, whatever we are talking about, scenario analyses. But
we know the sophisticated people are going to offload the risk,
and as the IPCC report said, the effects are outpacing our
ability to adapt and we need to get ahead of this much quicker.
Mr. Powell. I want you to know we are working on the
scenarios. It is an active effort on our part.
Mr. Casten. Let us know how we can help you, make sure you
have the resources to move a lot quicker.
Thank you, and I yield back.
Chairwoman Waters. Thank you.
The gentleman from Kentucky, Mr. Barr, is now recognized
for 5 minutes.
Mr. Barr. Thank you. Mr. Chairman, it's good to see you
again, and thank you for your testimony today. I appreciate
your testimony that overspending has contributed to the
inflation crisis we are facing right now, but I also appreciate
your humility with respect to the Fed failing to meet its price
stability mandate and the fact that you admit that inflation is
primarily a monetary policy phenomenon. I want to focus on
monetary policy in my questioning.
I know you understand that this has human costs. I want to
share a couple of anecdotes from my district. A painter, Gerald
Holland, from Nicholasville, Kentucky, says a gallon of paint
costs $10 more today than a year ago. The Suffoletta family
from Georgetown, Kentucky has been in the retail home
furnishing business since the late 1940s. In a conversation
last week, they informed me that in the last year, the cost of
goods from their manufacturers have increased 30 to 40 percent,
and they are still receiving price increase letters every week,
and like most small businesses, their costs of labor and
overhead have gone up over 25 percent. So now, they are having
to determine how to operate without passing those costs on to
the end consumer, and still have some profits left at the end
of the year.
I could share dozens, as many of my colleagues could share
dozens of these kinds of stories, including from constituents
on fixed incomes who cannot afford the dramatic reduction in
their purchasing power.
Before November 2021, Chair Powell, when you declared it
was time to retire the word, ``transitory,'' in relation to
inflation, my colleagues and I repeatedly, in hearings last
year, after the $2 trillion spending bill, cautioned you that
inflation wasn't transitory, that we were hearing from our
constituents, individuals and small businesses, that inflation
was hitting them hard and was sticky. But the FOMC kept up with
the unconventional monetary policy. And even after you retired
the word, ``transitory,'' as late as February 2022, the Fed was
continuing its QE liquidity injections, even though inflation
was at 7.5 percent, a 40-year high, and the Fed had rejected
and immediately halted the QE at both its December and January
policy meetings.
This week, economist Mohamed El-Erian published an op-ed,
in which he states that the Fed's insistence that inflation was
transitory is, ``an error that will likely be remembered as one
of its biggest ever.'' And pardon me for contributing to your
humility on that.
But my question is, has the FOMC learned from its mistake?
Has it learned that unconventional monetary policy at a time
when it is not needed is harmful for the economy? Has it
learned that QE during a time of recovery is a recipe for
inflation, and has it learned that we cannot print our way to
prosperity?
Mr. Powell. I think the main thing that we have learned is
that the supply-side constraints that we saw were not as
transitory as we had hoped, and thought, and as I mentioned,
every other mainstream economist and central bank around the
world made the same mistake. That doesn't excuse it, but we
thought that these things would be resolved long ago.
Mr. Barr. Does the FOMC--do you and your colleagues concede
now, in hindsight, that the overly-accommodative monetary
stance for too long was a mistake, a monetary policy mistake?
Mr. Powell. I will just answer for myself. That is for
other people to assess. I would say that we had an expectation,
and as I said earlier, I always thought there was a chance we
would be wrong, and that if we were wrong, we would be able to
pivot. And we did pivot, and we pivoted pretty quickly, but by
then the economy really was moving very, very fast.
Mr. Barr. On the pivot, how quickly do you expect a higher
Fed funds rate, removing the accommodation to bring down
inflation, and how does that affect the pace at which you would
tighten?
Mr. Powell. As I mentioned, I expect the Fed funds rate to
go up in 2 weeks, and I expect a series of rate increases this
year. But as I mentioned earlier, given the current situation,
we are going to move carefully.
Mr. Barr. My concern is that to break this inflation fever
now, you do not have a lot of good options. It is going to take
some aggressive tightening in order to break historically-high
inflation levels.
Not to belabor the point, but one final thing on the
climate stress testing. Last year, in response to my questions
about the Fed's decision to join the Network for Greening the
Financial System, you affirmed that the Fed's job was not to
combat climate change. But in your confirmation hearing, you
said that, ``We are looking at climate stress tests. This will
be a key tool going forward.'' To clarify, which is it? Is it
that you will not use this, as Mr. Posey asked you, to support
capital surcharges for banks serving fossil energy companies?
Mr. Powell. That is not the design nor intent of the stress
scenarios that we are working on right now. It is really to
assist us and financial institutions, who are doing these
things themselves very actively, the larger ones, to understand
the risk.
Mr. Barr. My time has expired, but as we look at a global
energy crisis with the Ukraine and--
Chairwoman Waters. The gentleman's time has expired.
Mr. Barr. --it is critically important that we do not
redirect capital--
Chairwoman Waters. The gentleman from Massachusetts, Mr.
Lynch--
Mr. Barr. I yield back.
Chairwoman Waters. --who is also the Chair of our Task
Force on Financial Technology, is now recognized for 5 minutes.
Mr. Lynch. Thank you, Madam Chairwoman. And thank you,
Chair Powell, for your service and your great work.
I do want to ask you a question about the SWIFT network,
and I realize that the sanctions piece of this is owned by
Treasury. But I am curious if in any of your risk analyses, you
have looked at the possibility that if we did completely ban
Russian banks from use of the SWIFT network, and it became a
target of the Russian cyber forces, have we basically gamed out
how that might happen, and do we feel comfortable that
structurally and architecturally, the SWIFT network would be
able to resist a state-sponsored assault on that messaging
service?
Mr. Powell. I'm sorry, Mr. Lynch, I am really not the right
person to answer that question. That is really a question that
our Treasury Department or our Administration, more broadly,
and the intelligence groups would be able to address.
Mr. Lynch. I am a little surprised at that, because earlier
in your questions, you talked about cybersecurity and how that
was in your lane, in part. But I will let that go.
You did mention the recent Fed report on CBDC, and in that
report it more or less pushed responsibility back to Congress
to resolve some of the major issues around the creation of a
Fed CBDC. And I know that we have a working group at MIT and
the Boston Fed that are doing great work on this. It started
under Chairman Gensler, but I believe Neha Narula is running
that effort.
In all honesty, I am not sure that Congress is equipped by
itself to make those key decisions around architecture and the
shape and form of any CBDC for the United States. I think we
are relying on the Fed and the Treasury to help us. And so, I
was hoping for a little bit more instruction with the Fed
paper, and is there any way we could collaborate rather than
pushing the responsibility on Congress, with all of the other
issues we have to deal with, and also with the disparity in
background in dealing with CBDC and those crypto issues?
Mr. Powell. Yes. Let me address that. What the great people
in Boston are doing is really technical experimentation around
how you would build a CBDC if you were going to do one, looking
at different structures and options and technologies. That is
separate from the policy questions of whether we should do
this.
How we are thinking of this is there is technical
experimentation, there are all of the technology questions that
have to be solved, but there are also the policy questions--
should we do this and why, and how, and what should be the
structure, and that kind of thing. So, we will be working on
this project in coming years, and we hope building trust in
Congress and in the public that we are doing it as a fair,
honest, independent group who really is just looking out for
the best interests of the country and of our citizens. And we
will be making recommendations on the appropriate structure, if
we do come to make a recommendation.
The point is, though, that our existing statute doesn't
really contemplate a central bank digital currency so, ideally,
we would get legislation, that would be authorizing
legislation, and we would take part in it. It is not that we
would be asking Congress to start this from scratch and figure
out all the answers. We would be working with you to build
trust in our process and ultimately come to you with a
proposal, and then Congress would do its work and authorize.
Mr. Lynch. Thank you, but Mr. Chairman, the concern is that
the architecture and the security of the system will guide
policy. So, I believe we need to work together. But thank you.
Madam Chairwoman, I yield back.
Mr. Powell. No, I agree.
Chairwoman Waters. Thank you.
The gentleman from Texas, Mr. Williams, is now recognized
for 5 minutes.
Mr. Williams of Texas. Thank you, Madam Chairwoman, and
thank you, Chairman Powell, for being here. It is always good
to have you come before the committee.
There hasn't been a Federal Reserve Chairman since Paul
Volcker, in the 1980s, who has dealt with inflation at these
levels that we talk about today, and historically, the Fed has
been unable to reduce prices without sending our economy into a
recession. And to further complicate the situation, the central
bank has previously never had to deal with winding down such
aggressive asset purchases to go along with increasing interest
rates.
You are going to have to take action on both of these
pressing issues, with the backdrop of what we see in Ukraine,
between Russia and Ukraine, and the general global instability
that we have. Needless to say, you have a very tough job ahead
of you.
Mr. Chairman, how do you plan on getting inflation under
control without completely hampering growth, or worse, causing
the economy to go into a recession?
Mr. Powell. That is exactly our objective. We are going to
use our tools, we are going to raise interest rates, and we are
going to shrink our balance sheet over the course of this year.
As I mentioned, during this critical phase of global events we
are going to do that with care, and we will always move with
care but particularly now. And that is how it works. We remove
accommodation and the very high levels of demand that are, to
some extent, a result of our accommodative policy. Those rates
will go up. Take housing, for example. The housing market
should cool off. It is very, very hot right now. And that
should happen broadly in the economy over time.
We talk about getting to a neutral rate, which would be
somewhere between 2 and 2.5 percent. It may well be that we
need to go higher than that. We just don't know. And we don't
know what events will intervene in the meantime. We haven't
faced this challenge in a long time, but we all know the
history and we all know what we need to do.
I also do think, and I think it is more likely than not
that we can achieve what we call a soft landing, and they are
far more common in our history than is generally understood,
and that would be what you described, which is to get inflation
back under control without a recession.
Mr. Williams of Texas. Some of us in this room remember the
1980s.
Mr. Powell. Sorry?
Mr. Williams of Texas. Some of us in this room remember the
1980s and what it was like.
We know that there is a lag period between the Federal
Reserve's actions and the inflammatory implications being felt
in the economy. The San Francisco Fed, which we have mentioned
today, admits that this latency period could last anywhere from
3 months to 3 years, and for families and business owners, like
myself, the 3 years would be an extremely long time to deal
with prices at these elevated levels.
Mr. Chairman, when the Fed eventually decides to raise
interest rates, what tools will you have at your disposal to
ensure your actions are felt with as little a delay as possible
so we can once again have price stability, like we have talked
about?
Mr. Powell. In this world that we live in now, when we make
a decision about interest rates, or frankly, even talk about a
decision to raise interest rates, markets pick it up like that.
Financial positions have already tightened. We haven't actually
lifted off from zero, but as of a week ago, the market was
pricing in, it was literally already reflected in financial
conditions, to some extent, six or seven rate increases. It is
less than that now, and we haven't made a decision to do that
yet.
Our decisions get into financial conditions very quickly.
It does take time, of course, for that to affect economic
activity, and that is where you get 3 months to longer than
that. I think by the end of a year, much of the effect is
generally thought to be in.
But that time period has already started, because monetary
policy really works through expectations, and we are now
expecting rate increases, and they have already happened, in
effect, and we have to ratify them, of course.
Mr. Williams of Texas. We are seeing them. Finally, in the
past year you have referenced productivity gains as being key
to increase the living standards for American workers over
time. Unfortunately, we have seen the Biden Administration
implement many new, time-consuming regulations that are forcing
businesses, again like mine and others, away from productive
activities. The American Action Forum conducted a study which
estimated that new regulations from President Biden's first
year in office will culminate in over 131 million new paperwork
hours.
Quickly, Mr. Chairman, can you discuss the correlation
between a company's regulatory burden and the effect on
productivity?
Mr. Powell. I am a little bit familiar with the research,
and it has actually been difficult to make those connections in
research. But we know, as a practical matter, we all want just
the right amount of regulation, not too much, and to the extent
that you are spending resources unnecessarily, that will hold
you back.
Mr. Williams of Texas. Thank you very much, and I will
yield my time back, Madam Chairwoman.
Chairwoman Waters. The gentleman from New York, Mr. Torres,
is now recognized for 5 minutes.
Mr. Torres. Thank you, Madam Chairwoman. During his State
of the Union, President Biden reported that the U.S. has seen
the fastest job growth in history, the U.S. has had the fastest
economic growth in more than 4 decades, and the U.S., among
advanced economies, has had the fastest economic recovery from
COVID. And so, the inflation that we have seen is the
consequence of a strong economy colliding with a supply chain
disrupted by COVID-19.
Given the Russian invasion of Ukraine and the inflationary
pressures that could likely follow, is there a risk that
raising interest rates could backfire, that it could cause a
recession without actually reining in inflation? How
significant is the risk of stagflation?
Mr. Powell. There are several questions in there. Our goal,
of course, is to raise interest rates in a way that restrains
inflation and gets it back to levels that we would call
consistent with price stability, and to do that while still
sustaining an expansion and a strong labor market. That is our
goal, and that is how we will use our tools. There are no
guarantees in life, but that is our intention and what we
propose to do.
Mr. Torres. The U.S., as you know, has severely sanctioned
Russia, and Russia is expected to engage in cyber retaliation.
There are financial institutions, commercial banks that invest
up to $1 billion every year on cybersecurity. How much does the
Fed invest in its own cybersecurity every year?
Mr. Powell. I don't have a dollar amount for you, but it is
quite substantial. We have very good cyber people at the
Reserve Banks and at the Board here in Washington. And as I
mentioned a little earlier, we have been at a very highly-
elevated level of oversight on cyber issues for several months
now, as this event has increased. And we haven't seen any
troubling incidents yet, but we remain on high alert.
Mr. Torres. The ability of the U.S. to hold rogue states
like Russia accountable depends heavily on the SWIFT
international payment system. In your view, how easily could
China and Russia create an alternate messaging service that
could seriously compete with SWIFT and seriously undermine the
effectiveness of SWIFT sanctions?
Mr. Powell. That is an interesting question to speculate
about. I think in the near term, that is not something you can
create overnight. I know that China does have their system. It
is really a question for the longer term, and not for the
immediate term. It is not something you could do quickly like
that, but let me think about that.
Mr. Torres. Fair enough. I have a question about
stablecoins. The leading stablecoin issuers have chosen to peg
their stablecoins to the U.S. dollar, which to me represents a
vote of confidence that reinforces rather than challenges the
status of the dollar as the world's reserve currency. The U.S.
has no central bank digital currency (CBDC) of its own, and is
unlikely to have one in the years to come. Do you believe, as I
do, that dollar stablecoins can play a role in out-competing
China when it comes to digital currencies?
Mr. Powell. I will say it this way. I think there may well
be a role for well-regulated stablecoins. I think there is the
possibility over time, and this is not what we see right now,
that they could be efficient and popular among consumers and
things like that.
I think in terms of helping us compete with China, I don't
know but possibly, yes.
Mr. Torres. I am assuming it is better to have stablecoins
pegged to the dollar than to have stablecoins pegged to China's
currency, or the currency of another country?
Mr. Powell. I would agree with you that, in a way, that is
consistent with the role of the dollar, and most of the
stablecoins are, of course, dollar-based.
Mr. Torres. I have a question about the Community
Reinvestment Act (CRA). Even though the CRA exists to prevent
racial discrimination in matters of lending, also referred to
as redlining, regulators fail to consider race when enforcing
the CRA. Do you think race should be considered?
Mr. Powell. We went out with an advance notice of proposed
rulemaking a couple of years ago. We took in a whole lot of
comments, and took those into account, and I think we are now
sitting down with the OCC and the FDIC to come up with a notice
of proposed rulemaking, and that is one of the issues that we
have been thinking about very carefully. And I don't have any
announcement for you, but that is something that is going to
come out of those conversations.
Mr. Torres. But you are open to considering it?
Mr. Powell. It is something we have been considering. We
asked for comment on it.
Mr. Torres. That is the extent of my questioning. Thank
you, Madam Chairwoman.
Chairwoman Waters. Thank you. The gentleman from Arkansas,
Mr. Hill, is now recognized for 5 minutes.
Mr. Hill. Thank you, Madam Chairwoman. I appreciate the
hearing. And Mr. Chairman, thank you so much for coming back
for your Humphrey Hawkins testimony, and we all wish you the
best of luck as you complete the confirmation process in the
Senate.
I enjoyed hearing Mr. Kustoff from Tennessee talk about
William McChesney Martin, or actually he was talking about the
1970s. I guess my friend from Kentucky, Mr. Barr, brought up
William McChesney Martin. And it made me think about the 1970s,
and you and I both started our business careers in that decade,
where inflation was really considered the number one economic
concern in the United States and around the world. Arthur Burns
was your predecessor then, and I recently read a talk he gave
called, ``The Anguish of Central Banking.'' Have you heard of
that before?
Mr. Powell. Yes, it rings a bell.
Mr. Hill. Well, I commend it to you. It was delivered in
1979, so he was no longer the Chairman, and he was reflecting
on his tenure at the Fed and also on fiscal policy of the 1960s
and 1970s. So, I commend it to you and the Federal Open Market
Committee, and to my colleagues here on the committee. And with
your permission, Madam Chairwoman, I would like to insert it in
the record.
Chairwoman Waters. Without objection, it is so ordered.
Mr. Hill. It is a stark reminder that when we abandon
fiscal discipline and our core financial principles, and
instead embrace what I consider economically-illiterate
concepts like modern monetary theory, we get into economic
anguish. And in this talk, Chairman Burns reflects on his own
mistakes at the helm of the Fed, as well as the abandonment of
conservative government finance, when Burns warned, ``fear of
immediate unemployment rather than fear of current or eventual
inflation comes to dominate economic policymaking.'' That was
his warning to us, and I think it merits at this time--you said
you don't want to go back to the 1970s. In fact, you argued
that is what we are trying to absolutely avoid. So, I do
encourage people to read this report, because inflation is a
thief.
You answered a question from Mr. Huizenga that you were not
aware that in the 2022 monetary policy report, the rules
section in the monetary policy was not included. Is that right?
Mr. Powell. I was aware of it a couple of days ago. What I
said was, I don't remember any prior discussion, but that
doesn't mean it didn't happen. It just means I didn't remember
it.
Mr. Hill. Right. In the FOMC meetings, do they still have a
presentation, part of the staff presentation, sort of a trend
analysis on using those rules that have traditionally been in
the policy? Does that still go on in FOMC meetings?
Mr. Powell. Yes. Yes, it does.
Mr. Hill. Yes. I think that is an indication that it is
probably best that it be included in the report.
I was looking at some forecasting about the so-called
Taylor Rule, dating to the 1990s, which you have testified on
many times. Are you aware of what the Taylor Rule would
indicate now in its formula, vis-a-vis the inflation that we
have today?
Mr. Powell. Generally, yes.
Mr. Hill. Do you know the range that--
Mr. Powell. High.
Mr. Hill. Yes. The answer I saw was 9.55 percent, which
doesn't mean it is right or wrong, but it is one of those
indicators about how far off we are maybe in our funds rate
targeting. I am glad to hear that you will consider that being
put back in the report.
I also wanted to raise the subject of the Fed mandate. You
have taken some questions on that today, too. We have had
legislation in the past to reconsider the 1977 approach
Congress took in the middle of that inflation to have both
price stability and full employment, and we have debated that
in this committee before. And in my view, considering the
fiscal policy stimulus and the monetary policy that we have had
in the last couple of years, we really have to focus on price
stability. And in Congress, we are here to really prevent that
kind of inflation, and I recognize and I am happy to say that
it is both a fiscal responsibility and a monetary policy.
I am proposing that we go back to price stability. And we
won't be alone. As I understand it, New Zealand, Canada,
Australia, and the United Kingdom have that as their sole
mandate: price stability. Is that your understanding too, of
those central banks?
Mr. Powell. Yes. I think the European Central Bank (ECB)--
that would be a matter for Congress, obviously. I would say, if
I were to show you monetary policy response to five central
banks, or six central banks, I would say three of them would be
like us, a dual mandate, and three of them would be just
inflation. You wouldn't actually see any difference in their
reaction function because they do have to look at resource
utilization, which is employment, in order to determine policy.
So, you wind up with very similar answers.
Mr. Hill. I thank you for your testimony, and again, wish
you well in your final confirmation process. And Madam
Chairwoman, I yield back.
Chairwoman Waters. Thank you. The gentlewoman from North
Carolina, Ms. Adams, is now recognized for 5 minutes.
Ms. Adams. Thank you, Madam Chairwoman, and Chair Powell,
it is good to see you again, sir.
Mr. Powell. It's good to see you.
Ms. Adams. Thank you so much for being here, and of course,
I would have preferred to be congratulating you on your
reappointment to the Federal Reserve, but hopefully, we can get
that done. I did publish an op-ed this morning with Chairwoman
Waters, Congressional Black Caucus Chairwoman Beatty, and some
African-American colleagues on the Financial Services
Committee, calling on Senator Toomey to return to the table and
give you and the other four nominees the vote that you deserve.
Let me ask you--a simple yes or no will do here--do you
believe that the Federal Reserve would be better able to serve
the American people if it had a fully-staffed Board of
Governors?
Mr. Powell. I want to thank you for your kind words and
support, but I wouldn't want to comment directly or indirectly
on the Senate. I am a nominee, and I await the Senate's
judgment, and I would prefer not to get into that process,
other than as a nominee.
Ms. Adams. Okay. Thank you, sir.
Let me switch gears and talk for a moment about Russia. As
we have discussed extensively today, Russia's invasion of
Ukraine has consequences far beyond the geopolitical. We have
discussed the potential systemic risks the invasion poses to
global markets and the mechanisms to keep Russia isolated from
the international economy for the duration of this illegal
aggression.
But I am concerned about the potential systemic risks here
at home. The European Central Bank has identified systemically
important financial institutions with ties to Russian banks,
and those institutions could potentially require assistance to
live up to their obligations. Are there any U.S. institutions
that you are monitoring that have outside default risks as it
pertains to the freezes on Russia's assets?
Mr. Powell. Basically, no. Our financial system and our
financial institutions have relatively little exposure to
Russia, and even the largest exposures that any of them have
are not very big. It would need to be a second-order thing,
whereby a foreign financial institution has exposures to Russia
but also has exposures to our banks. And we don't see that as a
primary risk, but it is something we are watching.
Ms. Adams. Okay. With my remaining time, let me ask you,
your November report indicated that the forthcoming rise in
interest rates will have ripple effects throughout the entire
economy. Can you speak to the interconnection between the Fed's
rate hikes and the freeze on Russian assets as it pertains to
the prices of certain commodities?
Mr. Powell. The price of commodities is generally set on
the world market by supply and demand. And we do intend to
raise interest rates this year, as we have said, but as long as
we are in this very sensitive phase of events in Eastern
Europe, we are going to be careful in doing so. We are going to
avoid adding uncertainty, as I mentioned a little earlier. And
we do believe that over time, as we raise the interest rates
and as we get relief from supply-side improvements, as well for
inflation, that we will get inflation back down. We expect to
see that happening, and to the extent that we don't see it
happen, we are prepared to move more aggressively.
Ms. Adams. Great. Thank you very much. Madam Chairwoman, I
yield back.
Chairwoman Waters. Thank you. The gentleman from Ohio, Mr.
Gonzalez, is now recognized for 5 minutes.
Mr. Gonzalez of Ohio. Thank you, Madam Chairwoman, and
thank you, Chairman Pro Tempore Powell, for being so
forthright. I think your answers to Mr. McHenry's questions at
the outset were incredibly helpful. I think it was probably the
most direct that you have been with respect to how you are
viewing interest rate policy heading into the March meeting. I
certainly appreciate that, and I suspect others do as well.
Thank you for that transparency.
I want to start with Ukraine and Russia, and I know this is
just evolving. My view, despite some, what I thought was a
little bit of flowery rhetoric last night from the President,
is that this is the beginning of a long-term conflict. This is
not something that will be over in a matter of days, but
months, and perhaps years, as the Russians encircle Ukraine and
our lack of response, in many respects.
I know you are a student of history, and you are a student
of monetary policy history. When you look at a world where this
is a longer-term conflict, how do you view a longer-term
military engagement in Europe impacting rate policy and balance
sheet policy, and if you haven't begun that study yet, is that
something that the Fed will endeavor in the coming weeks and
months?
Mr. Powell. It is a really good question, and I would have
to agree with you that this event does seem to be one that is a
game-changer and will be with us for a very long time.
As I mentioned, we don't understand yet. There are events
yet to come that we haven't seen and we don't know what the
real effect on the U.S. economy will be. We don't know whether
those effects will be lasting or not. But it is something that
we are going to be thinking about a lot. It is exactly the
things that we will be thinking about. It is really too early
to say, but it is not too early to try to imagine and assess.
Mr. Gonzalez of Ohio. Thank you. And I know my thoughts and
prayers are with the Ukrainian people, as are many of my
colleagues--all of my colleagues, I think we are unanimous in
that, that we hope for a successful outcome, although
admittedly, the days ahead appear to be quite choppy, and it is
hard to see a positive outcome in the near term.
I want to shift to another thing the President said last
night about companies needing to lower their costs, not their
wages, and that is how we are going to fight inflation. That
sounds wonderful. How do you magically sort of lower your costs
as a company? It is sort of implied that it is corporate greed
that is leading to inflation. I have read your comments. I
think they are spot on with respect to the supply-demand
dynamics. But are you aware of a way for companies to just sort
of unilaterally lower their costs?
Mr. Powell. First, I would not comment on the President's
comments at any time, and I won't do that now.
I think, and my experience in the business world very much
was that businesses are constantly managing their costs. That
is a lot of what businesses do, so it is an ongoing thing. But
I didn't watch the speech and I don't know the context, and I
would never comment on anything the President says.
Mr. Gonzalez of Ohio. Thank you. Shifting to my last
question, there has been talk of whether cryptocurrencies
represent a good vehicle for sanctions avoidance. I think you
have rightly said that is maybe for the purview of Treasury.
But generally speaking, a system that transactions occur on a
public ledger that are auditable and reviewable by the entire
world--anybody in the world can go and check and monitor these
things--and in a world where those same systems have
transaction speed limits, essentially, do you think in that
world, a public ledger is a good way to launder money or avoid
sanctions?
Mr. Powell. I am not an expert on sanctions, so I'm
reluctant to comment on that in the context of sanctions, just
because it is not our field. I would say there's a balance you
have to strike between privacy, which is very important, yet
also the ability of law enforcement and national security to
track payments. And I think to the extent that cryptocurrencies
are a means by which you can evade both law enforcement and
national security concerns, then that is not something we
should tolerate.
Mr. Gonzalez of Ohio. Thank you. Thank you for, again, your
transparency, and I yield back.
Chairwoman Waters. Thank you. The gentlewoman from
Pennsylvania, Ms. Dean, is now recognize for 5 minutes.
Ms. Dean. Thank you, Chairwoman Waters, and thank you,
Chair Powell, for being before us again today with such
forthright testimony in such challenging times.
I wanted to just start with the question of inflation and
something that you said to one of our colleagues in response to
a question. You said that inflation is too high, we are seeing
it everywhere in the world, and ours is worse because our
economy is stronger. Can you flesh out that duality a little
bit, maybe contrast it with others globally who are struggling
with inflation but do not have a strong underlying economy?
Mr. Powell. I think maybe the closest economies and
political systems would be the countries of Western Europe and
Canada. Advanced economy countries like that are all having the
highest inflation they have had in a very long time. Places
like Germany, which is famously inflation-averse, has high
inflation.
Ours is a little higher. Our economy is now well above the
level of output that we were at before the pandemic. If you
just look at the output the economy had before the pandemic to
where it is now, we are way above that, and other countries are
kind of just getting back to that level. We have just had a
stronger recovery, and that is because of monetary policy and
fiscal policy and also just vaccines and a whole range of
factors. So, of the advanced economies, ours is generally
higher.
And we're going through this same process that the Bank of
England and other central banks are going through, which is
raising rates and trying to get inflation back under control.
We are very committed to doing that. It is a common problem.
Again, ours is worse, because our inflation is higher, largely
because our economy is that much stronger.
Ms. Dean. I know you have a series of meetings and possible
rate hikes, you talked about in 2 weeks, likely the 25 basis
points increase. For my constituents, my consumers, what impact
will we begin to see, will they begin to see with the small,
incremental rate hikes?
Mr. Powell. It is a little bit like the rate hikes that
took place in the first part of this century. The rate hikes
that took place after the global financial crisis were much
slower. They were every other meeting. But the cycle before
that, there were rate hikes at consecutive meetings. What you
feel is these are fairly small rate increases, a quarter of a
percentage point every 7 weeks. And, by the way, we haven't
made any decisions after this meeting, but the thought is that
rates move up, our policy rate moves up, and with it, rates on
mortgages, rates on car loans, rates on the loans that people
take out to buy appliances, things like that. So companies,
their borrowing costs go up.
And you get to a point where you have raised it a few
times, and it is still a gradual process, even though it is as
much as twice as fast as the last cycle. But people start to
spend a little bit less, and economy demand returns to a lower
level. By this time, we hope that the economy is going back to
normal in terms of supply chains and the breakdown between
goods and services spending, things like that. We hope we are
getting help on the inflation front from a bunch of things.
In any case, we do have the responsibility to generate
price stability, and we will use our tools to do that, over
time.
Ms. Dean. I thank you for that. One particular area of
concern for me is the role that increasing market consolidation
has played in contributing to inflation. An example that we
have seen is the huge price spikes in the meat industry, which
has become incredibly concentrated, and consolidated. To what
extent would you attribute supply chain fragility and recent
price increases to market concentration?
Mr. Powell. We are not the competition authorities, and so
I would defer to the competition authorities on all of those
questions.
In terms of inflation, though, inflation is mainly a
macroeconomic phenomenon, which doesn't link in the aggregate
very well to concentration. Some of the most concentrated
industries, in fact, were those that drove low inflation. I am
thinking there of warehousing and retail and things like that.
Those industries consolidated and they drove lower prices. So,
it is not so obvious.
There clearly are industries where that may be the case,
where they become consolidated and they are able to raise
prices. It is not clear if they would be able to generate an
inflationary cycle, but they can certainly raise prices, in the
first instance. It is not a settled question in the economics,
but again, we defer to the competition authorities.
Chairwoman Waters. The gentlewoman's time has expired.
Ms. Dean. Thank you, Madam Chairwoman.
Chairwoman Waters. Thank you. The gentleman from West
Virginia, Mr. Mooney, is now recognized for 5 minutes.
Mr. Mooney. Thank you, Madam Chairwoman. Inflation remains
a serious concern for my constituents in West Virginia.
Inflation erodes the real value of every paycheck. When the
cost of filling a tank of gas or buying groceries increases,
all Americans lose money.
Today, I would like to focus on a slightly different aspect
of inflation, which is inflation's corrosive effect on
Americans' savings. The combination of low interest rates and
high inflation has clobbered returns on common savings tools,
like savings accounts, money market funds, and certificate of
deposit. January's 12-month Consumer Price Index of 7.5 percent
pushes the yield on these savings tools into deeply-negative
territory. In other words, with inflation as high as it is,
Americans who have saved responsibly for years are losing their
money over time.
Chairman Powell, my first question is, how concerned are
you about the effects that inflation and negative savings
yields are having on the long-term health of our economic
recovery?
Mr. Powell. I would agree that inflation falls heavily on
people who are living on, for example, bank deposits and CDs.
This is typically retired people and the elderly, and of course
they do bear the brunt of this. That is one of the reasons we
need to get inflation back down to appropriate levels, and that
is what we are working on.
Mr. Mooney. Thank you. Savings is an important way to
achieve financial goals, like purchasing a new home, or paying
for college, or retirement. Savings is a way to take control of
your financial destiny. Savings is a part of how we can achieve
the American Dream.
I would like to raise another potential issue about the
declining value of savings and its implications going forward.
I am concerned that our current economic environment will
discourage savings altogether. Chairman Powell, are you
concerned about the effects that inflation and negative savings
yields could have on Americans' incentives to save money going
forward?
Mr. Powell. Interesting. If it were to persist for a long
time, I would be concerned. Of course, right now the level of
savings on people's balance sheets is at historic highs because
they saved during the pandemic. They were not able to spend
money on travel. Right now, we are looking at a couple trillion
dollars of savings above where they would have been without the
pandemic.
But over time, yes, savings is important, and I would agree
that high inflation can be a disincentive.
Mr. Mooney. Thank you. I think it is important that we
monitor the savings rate closely with this in mind. If
Americans save less, it could have economy-wide implications,
both now and especially in the future. So, we should be careful
to ensure that monetary policy encourages savings going
forward.
That is all I have. Thank you, Madam Chairwoman. I yield
back.
Chairwoman Waters. Thank you very much. The gentlewoman
from Texas, Ms. Garcia, who is also the Vice Chair of our
Subcommittee on Diversity and Inclusion, is now recognized for
5 minutes.
Ms. Garcia of Texas. Thank you, Madam Chairwoman, and thank
you, Chairman Pro Tempore Powell, for being with us today. I
think I am going to be last, so I'm going to try to be soft.
In a recent press conference, you had mentioned that
forecasters expect inflation to subside as supply chain
disruption issues are resolved. I understand this has been
addressed, and my colleagues and I are working on addressing
the supply chain crisis through multiple legislative solutions.
At home, in Houston, one of the nation's shipping and
energy capitals, we are focused on expanding and developing the
nation's ports and waterways to continue building our role in
facilitating global energy and trade. You also said in your
remarks today that we understand that high inflation poses
significant hardships, especially on those least able to meet
the higher costs of essentials like food, housing, and
transportation.
I want to focus on housing. In Houston, housing costs have
skyrocketed, with the median price rising 18 percent last year,
and the average, 16 percent. Nationwide, housing indirect
prices account for roughly one-third of the CPI, and most
economists do not expect this problem to be resolved as quickly
as supply chain bottlenecks.
In your earlier exchange with my colleague, Congressman
Williams, you mentioned a soft lending, wherein the Fed will
address inflation first, and survey the housing prices trending
downward. My question is this: Is the Fed looking at
alternative plans? In the event that housing prices do not
trend with inflation, how might that impact inflation reviving
if low housing supply continues the upward pressure?
Mr. Powell. We do. As you mentioned, housing costs and
housing services costs, and if you are a renter, they are a
very big chunk of what goes into the inflation indices. And to
the extent housing prices--we are not saying they will go down,
but we are saying that the increases will be much smaller. We
don't need housing prices to actually decline. What we can't
have is, we don't want to have them increasing at very high
levels as they have been doing.
Largely as a function of supply and demand--I don't know
about Houston, but in many places in the country, it is
difficult to find lots, difficult to find labor, and difficult
to get materials, because materials are very expensive.
Ms. Garcia of Texas. We are experiencing that.
Mr. Powell. Yes, and demand is very strong, interest rates
are low, and what you get is a lot of buyers and not enough new
houses.
What will happen as we raise interest rates--and this is
already happening, it is already priced in--is that mortgage
rates will go up and you will see that prices will begin to go
up more slowly, demand will decline, and hopefully, we will get
back to a place where demand and supply are well-aligned.
Ms. Garcia of Texas. Will we ever get back to the pre-
pandemic levels?
Mr. Powell. Of price?
Ms. Garcia of Texas. Yes, sir.
Mr. Powell. No. I would only expect that we could limit
further price increases. We are not trying to drive prices back
down. What we are trying to do is limit future prices.
Ms. Garcia of Texas. Okay. How concerned are you that there
seems to be a lack of investment in affordable housing, and how
that could cause inflation to become a long-term problem, even
if the Fed is able to get inflation under control in other
segments of the economy, specifically, public housing?
Mr. Powell. Public housing is, of course, not our--our
policy tools don't generally meet the need for affordable
housing. It is really more of a fiscal policy and a housing
policy question.
But I know that economic research shows that high housing
costs for workers are making it difficult for people to live
close to where they need to be going for work, and it is
limiting the ability of people to be in the workforce, and
ultimately limiting our economy. I will say that.
Ms. Garcia of Texas. Last question, you mentioned in your
remarks that it impacts essentials like food, housing, and
transportation. What does increased inflation do to the poverty
rate? I know unemployment is down. Does that basically mean
poverty is coming down, or does it continue to rise with
inflation?
Mr. Powell. Those things would have offsetting effects. To
the extent inflation is going up faster than people's wages--
and that is actually not the case for people at the lowest end
of the spectrum, because that is where the highest wage
increases have been, in the aggregate--but to the extent that
was happening, it would potentially increase poverty, but to
the extent people are going back to work, that would decrease
it.
Ms. Garcia of Texas. Thank you. Madam Chairwoman, I yield
back.
Chairwoman Waters. Thank you very much. I would like to
thank Mr. Powell for his testimony today.
The Chair notes that some Members may have additional
questions for this witness, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to this witness and to place his responses in the record. Also,
without objection, Members will have 5 legislative days to
submit extraneous materials to the Chair for inclusion in the
record.
This hearing is adjourned.
[Whereupon, at 1:03 p.m., the hearing was adjourned.]
A P P E N D I X
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March 2, 2022
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