House Budget Committee Hearing with Federal Reserve Chairman Jerome H. Powell

House Budget Committee

“The Economic Outlook with Federal Reserve Chairman Jerome H. Powell”

Thursday, November 14, 2019

 

Key Topics & Takeaways

• Trade: Powell said the Fed does not comment on trade policy but that he has heard from businesses that the uncertainty is impacting their supply chain, investment, manufacturing and exports. He said that free and fair trade could be beneficial for the U.S. economy. Powell stated that the passage of the United States-Mexico-Canada Agreement (USMCA) would provide greater trade certainty in the U.S.
• Continued Economic Expansion: Powell stated that the expansion is benefiting everyone, especially those on the lower end of the income spectrum. He added that areas for improvement include labor force participation, productivity, keeping job creation at a solid level, retaining consumer confidence and driving wages up. Powell said that the Fed is working on its capital buffers testing improvement plan, as well as its faster payments system.
• Unemployment Rate, Labor Force Participation and Wage Growth: Powell said that there have been beneficial side effects in today’s labor market as a result of the continued economic expansion, which has allowed the Fed to use its tools to incentivize individuals to rejoin the labor market. Powell added that incentives to drive labor force participation include training and re-skilling for the aging workforce. He also noted that the U.S. lags behind other wealthy nations in productivity. He expressed his opinion that the traditional wage and inflation relationship has most likely evolved over the last 40 years, and that it is an area the Fed is monitoring to drive inflation upward to the targeted 2 percent rate
• Rates and Inflation: Powell said that the Fed does not have room to cut rates five percent as they once did following World War II due to the possibility of future downturns. He said the Fed would act appropriately according to what economic data shows. Powell suggested that there are fiscal policy measures to couple with monetary policy in the chance of a downturn. Powell said the 2 percent objective is the stable inflation target rate for central banks globally. He expressed that the Fed is committed to achieving maximum employment and price stability, and that currently, there are no signs of an overheated economy.
• Repo Markets: Powell said that financial institutions currently have a lot more liquidity on their balance sheets compared to 2008, a lot of which is held in Fed reserves. He said that the Fed has been testing to find the level at which the balance sheet can shrink without reserves going scarce. Powell said the disruption was technical and showed that the level should remain at the September mark of $1.5 trillion in reserves. Powell continued that following the implementation of capital requirements, Treasury securities have been the preferred instrument used by large institutions.

 

Witness

• The Honorable Jerome H. Powell, Chair, Board of Governors of the Federal Reserve System

 

Opening Statements

Chairman John Yarmuth (D-Ky.)

Yarmuth submitted his statement for the record and stated that he looked forward to Chair Powell’s testimony.

Ranking Member Steve Womack (R-Ark.)

Womack also submitted his statement for the record.

Testimony

The Honorable Jerome H. Powell, Chair, Board of Governors of the Federal Reserve System

In his testimony, Powell stated that the U.S. economy is in its eleventh year of expansion with a favorable baseline outlook. He said that gross domestic product (GDP) is at 1.9 percent as of quarter three of 2019 after rising around 2.5 percent last year and in the first half of 2019. Powell continued that the unemployment rate is at 3.6 percent as of October, a near half-century low and that inflation has continued to run below the Federal Open Market Committee’s (FOMC) symmetric two percent objective. Powell said that the index for personal consumption expenditures (PCE) increased 1.2 percent over the last 12 months, with core PCE inflation at 1.7 percent over the same period. Powell opinioned that there has been a weakening in business investment while household consumption has been favorable. He continued that mortgage rates have declined thus increasing residential investment. Powell added that the Fed will continue to monitor sluggish global growth and trade impacts, as well as the low inflation and any impacts of the national debt. He said that the Fed adjusted interest rates to one and one half to one and one-third percent to help keep the U.S. economy strong and meet inflation objectives. He emphasized that the FOMC is committed to ensuring its policy framework remains well-positioned to meet its statutory goals and believes the existing framework has served the Fed well. Powell said that the Fed will continue to report on their discussions and release their Financial Stability Report, as well as continue to hold events through their Fed Listens program. Powell noted that the Fed set administrated rates to control the federal funds rate and adjusted their balance sheet through maintaining their level of reserves at or above the level prevailed in early September via the purchase of Treasury bills.

Question & Answer

National Debt

Reps. Bill Johnson (R-Ohio), Joe Morelle (D-N.Y.), Scott Peters (D-Calif.), Ralph Norman (R-S.C.), Rob Woodall (R-Ga.), Jimmy Panetta (D-Calif.), Chip Roy (R-Texas), Yarmuth and Womack asked about the increasing debt. Powell said that as the debt grows faster than the economy, fiscal policy tools will have to be used to avoid long term consequences.  He added that the U.S. could continue for a while under the same spending considering the U.S. is the largest economy, acts as the world’s currency reserve, has the strongest labor force as well as the best institutions.

Federal Independence

Reps. Dan Kildee (D-Mich.), Ro Khanna (D-Calif), and Peters asked if the Fed considers political commentary in making policy decisions. Powell said that the Fed has a long-standing precedent of using data in their economic analysis. He said that the Fed does not consider political factors and aims to be transparent in their policy process.

Trade

Reps. Seth Moulton (D-Mass.), Hakeem Jeffries (D-N.Y ), Dan Crenshaw (R-Texas), Steven Horsford (D-Nev.), and George Holding (R-N.C ) asked about the impact of trade uncertainty on the economy, the USMCA and the Fed’s plans. Powell said the Fed does not comment on trade policy but that he has heard from businesses that the uncertainty is impacting their supply chain, investment, manufacturing and exports. He said that free and fair trade could be beneficial for the U.S. economy. Powell stated that the passage of the USMCA would provide greater trade certainty in the U.S.

Continued Economic Expansion

Reps. Jason Smith (R-Mo.), Brian Higgins (D-N.Y.), Brendan Boyle (D-Pa.), Kevin Hern (R-Okla.), Janice Schakowsky (D-Ill.), Crenshaw and Morelle asked how to sustain the economic expansion and the Fed’s plans. Powell stated that the expansion is benefiting everyone, especially those on the lower end of the income spectrum. He added that areas for improvement include labor force participation, productivity, keeping job creation at a solid level, retaining consumer confidence and driving wages up. Powell said that the Fed is working on its capital buffers testing improvement plan, as well as its faster payments system.

Unemployment Rate, Labor Force Participation and Wage Growth

Reps. Rosa DeLauro (D-Conn.) Robert Scott (D-Va.), Pramila Jayapal (D-Wash.), Albio Sires (D-N.J.),  Barbara Lee (D-Calif), Sheila Jackson Lee (D-Texas), Jimmy Panetta (D-Calif.), Horsford, Schakowsky, Moulton and Yarmuth asked about increasing labor force participation, the minimum wage, wage growth, immigration policy, artificial intelligence and income inequality. Powell said that there have been beneficial side effects to today’s labor market as a result of the continued economic expansion, which has allowed the Fed to use its tools to incentivize individuals to rejoin the labor market. He said the Fed does not comment on setting the minimum wage, as it is the job of Congress to determine the baseline. Powell added that incentives to drive labor force participation include training and re-skilling for the aging workforce, which is particularly important for emerging technological changes. Powell also stated that the Fed is breaking down data to analyze the impact of GDP on different incomes and demographics, especially for lower- and middle-income individuals.

Rates and Inflation

Rep. Chris Stewart (R-Utah), Daniel Meuser (R-Pa.), Tim Burchett (R-Tenn.), and Jayapal asked about the Feds rate cut goals, concerns of overheating and potential negative interest rates. Powell said that the Fed does not have room to cut rates five percent as they once did following World War II due to the possibility of future downturns. He said the Fed would act appropriately according to what economic data shows. Powell suggested that there are fiscal policy measures to couple with monetary policy in the chance of a downturn.  He also noted that the U.S. lags behind other wealthy nations in productivity. He expressed his opinion that the traditional wage and inflation relationship has most likely evolved over the last 40 years, and that it is an area the Fed is monitoring to drive inflation upward to the targeted 2 percent rate. Powell said the 2 percent objective is the stable inflation target rate for central banks globally. He expressed that the Fed is committed to achieving maximum employment and price stability, and that currently there are no signs of an overheated economy.

Repo Markets

Flores and Woodall asked Powell to address the need for the Fed to act on liquidity in the repo markets and the preference of Treasuries. Powell said that financial institutions currently have a lot more liquidity on their balance sheets compared to 2008, a lot of which is held in Fed reserves. He said that the Fed has been testing to find the level at which the balance sheet can shrink without reserves going scarce. Powell said the disruption was technical and showed that the level should remain at the September mark of $1.5 trillion in reserves.  He added that the Fed is only allowed to purchase Treasuries or Agencies for their reserves. Powell concluded that following the implementation of capital requirements, Treasuries have been the preferred instrument used by large institutions.

For more information about this hearing, click here.