Joint Economic Committee Hearing with Federal Reserve Chairman Jerome H. Powell

Joint Economic Committee

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

Wednesday, November 13, 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.
• 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.
• Unemployment Rate, Labor Force Participation and Wage Growth: Powell said that there have been beneficial side effects to today’s labor market from the economic expansion, which has allowed for 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 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
• Future Rate Cuts: Powell 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.
• 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.

 

Witness

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

 

Opening Statements

Chairman Mike Lee (R-Utah)

In his opening statement, Lee emphasized the economic recovery in the U.S. and highlighted the 50-year low for the unemployment rate (UR). He said that the job market has returned to pre-2008 numbers. Lee continued that unusual trends are still present in the economy, particularly consistently low inflation and Treasury yields, as well as low long-term interest rates. He said that these concerns are not unique to the U.S. Lee commended the Federal Reserve (Fed) for their increased transparency, and their Fed Listens program.

Ranking Member Carolyn Maloney (D-N.Y.)

In her opening statement, Maloney echoed many of the points of Chairman Lee. She added that she has concerns about manufacturing and the fact that business investment productivity has shrunk over the last few quarters. Maloney expressed her desire for Fed Chair Powell to discuss how the Fed plans to address the uncertainty regarding the President’s trade war. Maloney highlighted her legislation, H.R. 707, the Measuring Real Income Growth Act, which would report economic growth based on income to the Bureau of Economic Analysis. She also said that she would like to better understand if the traditional relationship between UR and inflation has weakened.

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 rates and adjusted their balance sheet through maintaining their level of reserves at or above the level prevailed in early September through purchasing Treasury bills

Question & Answer

Federal Independence

Rep. Don Beyer (D-Va.) and Sen. Maggie Hassan (D-N.H.) 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 the policy process.

National Debt

Rep. Jaime Herrera Beutler (R-Wash.) and Lee asked about the increasing debt. Powell said that there has been a downward slope in regards to decreasing interest owed, potentially due to getting inflation under control as well as aging demographics. He added that as the debt grows faster than the economy, fiscal policy tools will have to be used to avoid long term consequences.

Trade

Lee and Hassan asked about the impact of trade uncertainty on the economy 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.

Continued Economic Expansion

Rep. David Schweikert (R-Ariz.), Sen. Ted Cruz (R-Texas), Beutler and Lee asked how to sustain the 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.

Unemployment Rate, Labor Force Participation and Wage Growth

Reps. David Trone (D-Md.), Rep. Joyce Beatty (D-Ohio), Rep. Lois Frankel (D-Fla.), Sen. Amy Klobuchar (D-Minn.), Sen. Martin Heinrich (D-N.M.), Maloney, Schweikert and Beyer asked about increasing labor force participation, the minimum wage and wage growth, the traditional relationship between wages and inflation and income inequality. Powell said that there have been beneficial side effects to today’s labor market from the economic expansion, which has allowed for 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. He also noted that the U.S. lags 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 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.

China

Sen. Tom Cotton (R-Ark.) asked Powell for his thoughts on Chinese economic growth. Powell said that it is difficult to understand Chine, and their growth is an area that requires more research to analyze further. He said that he believes there is global caution about internal Chinese debt, which may be leading to global growth slowing.

Climate Change

Sen. Ted Cruz (R-Texas), Heinrich, and Beatty and Frankel asked about the implication of climate change and energy independence. Powell said that the energy independence of the U.S. is a great thing for the country. He added that climate change principles are something that may impact the Fed’s risk management perspective over the long term, but is not currently in their focus.

Future Rate Cuts

Rep. Kenny Marchant (R-Texas), Beutler, and Beyer asked about the possibility of future rate cuts 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 in 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.

Repo Markets

Marchant asked whether the disruption to the repo markets was anticipated. 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.

 

For more information about this hearing, click here.