Examining the Structure of the Federal Reserve System

The task force on monetary policy, treasury market resilience, and economic prosperity will come to order. Without objection, the chair is authorized to declare recess of the committee at any time. Today's hearing is entitled " Examining the Structure of the Federal Reserve System." Without objection, all members will have five legislative days within which to submit extemporaneous materials to the chair for inclusion in the record. I now recognize myself for five minutes for an opening statement. Good morning. To my colleagues and our witnesses, welcome to Oklahoma City. I'm grateful to everyone that traveled to join us here today. Today's field hearing of the Task Force on Monetary Policy, Treasury Market Resilience and Economic Prosperity is focused on the topic of the structure of the Federal Reserve System. It is fitting for us to be discussing this topic while in the heartland of the country. One of Oklahoma's first senators, Robert Owen, saw the failures of the first two central banks and knew that part of the reason they were not enduring was because they weren't appropriately responsive to the concerns of Americans across the country. That's why, as sponsor of the Federal Reserve Act of nineteen thirteen, Senator Owen set up the federated system we have today, twelve private reserve banks with district-specific geographic and industrial expertise overseen by the Board of Governors in Washington DC. The Reserve Banks act as Lender and Supervisor of member banks, ensure the safety of our payment system, and inform monetary policy. This public-private partnership we have with our central bank serves as a check against the federal government dominating our monetary system. The boards of directors for each of the banks is composed of nine directors, three representing member banks, three representing the public, and three appointed by the Board of Governors with consideration of agriculture, commerce, industry, services, labor, and consumers. They play a s- an essential role in governing the Federal Reserve Bank and ensuring they represent the districts they serve. Importantly, the nineteen thirteen Act also set up the Federal Advisory Council uh for the board. It's compr- it's comprised of one banking representative from each of the districts who bring insight and analysis directly to the board. The Community Advisory Council also allows for direct representation from community leaders and industry experts to enlighten the board on economic conditions around the country. By design, each district brings to the table its own perspective. Our country has many different viewpoints and our central bank should be able to reflect all of them. St. Louis developed an impressive database, FRED, to provide the broader system with, and the public, with the Fed's economic data. Dallas provides extensive oil industry expertise. Richmond has a special focus on economic conditions of rural communities. The Kansas City Bank supports the broader system through its expertise in agricultural economics. And as someone with a degree in that subject, I know well the unique considerations of raising food and fiber and those economic impacts. Whether it's the inelasticity of demand, and my spouse reminds me never to use that in a open public crowd.

Hmm.

risk management practices, or the impact of global markets, equipment leasing, and the weather forecast, all of these issues determine how the economy moves through farm country. Monetary policy transmission is different in Oklahoma than it is in New York. That's why it's so important that our farmers and ranchers have a seat at the table when monetary policy decisions are being made. Through rotating voting seats on the federal open market committee, five Reserve Bank presidents help set the administered rates. The Reserve Banks act as the conscience of the OMFC. Thank you again for being here for this important discussion, and I yield back. I now recognize the ranking member of the task force, Mister Vargas from California, for five minutes for an opening statement.

Thank you, Mr. Chairman. Well, let me begin by thanking Chairman Lucas for organizing this hearing, and bringing us to Oklahoma City to discuss the importance of the structure of our federal reserve system. I would also like to thank the witnesses for taking the time to discuss the issue and lending your expertise to this task force. I'd also like to thank Mr. Chairman, your your committee and uh your staff because they have shown great hospitality to myself and my staff member. I appreciate that very much. So it's great to be here in the tenth federal reserve district. The presence of the Kansas City Fed's branch here in Oklahoma City is reflective of one of the founding principles of our Federal Reserve System. The Fed, the monetary policy broadly, should be responsive to the whole country. The geographic diversity represented helps build the trust and buy-in from the public necessary for our central bank to succeed. The Federal Reserve has been our third this, the Federal Reserve has been our third attempt at the creation of a central bank. The first bank of the United States expired in eighteen eleven, and the second bank was dismantled in the eighteen thirties. both in large part because the concerns about the concentrated financial power in too few hands. What followed was decades of financial instability, bank panics, monetary chaos, and economic disruption. That ultimately made the case for a new approach. The structure established in nineteen thirteen, twelve regional banks and a board of governors, was a direct response to those failures, designed to distribute power and perspective across the country. That structure is held for over a century, and today we have an opportunity to examine how it continues to serve the public. With that historical foundation in mind, it's worth reflecting on what that structure was actually designed to do and what it and why it still matters. The twelve Reserve Banks are not outposts. Each conducts its own independent economic research, drawing on the local data and local expertise to inform the national monetary policy conversation. That means the OMC is isn't relying on a single institution's view of the economy. It's drawing on twelve from different spanning the energy corridor here in Oklahoma, as was stated by the chairman, the defense and innovation economy as we have in San Diego, and the financial markets of New York. The the that diversity of perspective isn't just good policy, it is itself a form of independence, ensuring the Fed can't be captured by any single region, industry, or point of view. making sure voices and experiences from across the country have a uh they have a seat at the table when the Fed makes monetary policy in Washington, is what the current structure was built to do. That lesson, that independence has to be structural, not just aspirational.

Mm.

It's why the founders built the Fed the way they did, and why the design has outlasted every political pressure placed on it over the past century. The structure of the Fed is also inse- inseparable from its mission. Congress gave the Federal Reserve two jobs, price stability and maximum employment. That dual mandate was a deliberate choice, a recognition that the central bank's decisions ripple through every corner of the economy, touching the price of groceries, the cost of mortgages, and the availability of jobs for working families. The regional structure supports that mandate by ensuring that policymakers hear from a broad cross-section of the American economy. The regional banks are not just a feature of that structure. They are the guardrail, ensuring that voices of Main Street are part of the conversation before decisions get made, not after. History shows us what is at risk when the independence erodes. In the early nineteen seventies, political pressure on the Fed to keep rates low contributed to a decade of inflation. And that hurt working families across the country, and the painful correction that followed hurt them again. The decentralized structure we are examining today was designed precisely to prevent that kind of outcome, to make sure no single pressure point, political or otherwise, can override the Fed's judgment about what the economy actually needs. That is why the question about the Fed's structure matters, and why this hearing is very important. The witnesses here today bring expertise from economics, policy, and financial systems that can help us and the task force clearly think about what is working and what could be strengthened and what has stood the test of time for good reason. Accountability and independence are not in conflict. Robust transparency, congressional oversight are part of what makes the Fed's independence legitimate in the first place. The goal should be a Federal Reserve that is answerable to the public and insulated from short-term pressures and the regional structure we are discussing today, is central to that achievement. Again, I look forward to the testimony today and I yield back, Mr. Chairman.

The gentleman yields back. Today we welcome the testimony of Mister Thomas Hynek, a distinguished senior fellow at the Mercatus Center of George Mason University, Miss Esther George, the former President and CEO of the Federal Reserve Bank of Kansas City, Mister Gary Kelly, the Deputy Chair of the Board of Directors for the Federal Reserve Bank of Dallas, and Mister Benjamin Keen, an Associate Professor of Economics at the University of Oklahoma. We thank each of you for taking the time to be here, and each of you will be recognized for five minutes.

Well thank you Chairman Lucas and and Ranking Member Vargas for the opportunity to talk about the Fed structure and examining the structure of the Federal Reserve today. It's a real privilege on my part and I appreciate it very much. I would start by just saying as intended The Federal Reserve System structure divides power between essential and regional authorities and between public and private interests. As a former Reserve Bank President myself, I won't su- it won't surprise you that I'm confident that such a system is the most effective not perfect framework for assuring diversity of views and better policy outcomes for an economy as complex as that of the United States. This decentralized structure better insulates the institution from short-term political influence while also keeping it ultimately accountable to you, Congress. To argue such a structure is somehow inefficient, fails to appreciate its true value. The nation's regional differences are illustrated in a variety of ways, both simple and complex. One need only look at the differences in manufacturing activities among regions, average home prices, labor markets, or scope of services to appreciate how economically diverse this nation is, and how such differences can be magnified during times of financial crisis. The fact is that we may be one uh one nation, but we are, I would say, have large differences and not so united uh when it comes to perceptions, biases, and the economies themselves. The founders of the Federal Reserve were clearly addressing these differences when they created it, its decentralized system in nineteen thirteen. Even then, decades before today's high-speed technology, there was no physical necessity for having separately chartered reserve banks with separate boards of directors. The structure rather followed the lessons learned from the two earlier failed experiments in which Congress created a reserve bank s- a single reserve bank centralized and monolithic uh as an institution. In both instances, fear of centralized powers, as you noted, and regional distrust in no small way contributed to their demise. Fast-forward to the twentieth century, as the United States became a growing economic force, Congress determined it again needed a central bank. This time, however, Congress understood that no- that to provide for a more effective and durable institution, it needed a structure that distributed responsibility and power across the c- country, not just with central government or with Wall Street itself. There are twelve separately charted regional banks operating across the nation. Each bank has a board of directors who, along with the board of governors, share oversight for each bank. These directors have roots that run deep within the communities, which provide vital knowledge regarding their economies and which enhance public understanding of the Federal Reserve system itself. The regional banks serving next to the board of governors serve to keep the system c- con- connected with Main Street America. This structure is as important today as it was in nineteen thirteen. perhaps more so. One need only account recount the banking crisis of the nineteen eighties, the tragedy of nine eleven, the great financial crisis, covid, to appreciate its advantages of structure. During the great financial crisis, for example, while the Board of Governors and the Federal Reserve Bank of New York focused on liquidity for some of the largest banks or insurance companies or broker-dealers just as importantly Reserve Banks in the South the Midwest and West were addressing the needs of large regional and thousands of community banks and other financial institutions, which had they failed for lack of liquidity, would have devastated those regional economies and perhaps the nation overall. Periodically, there are questions appropriately raised regarding whether the Federal Reserve structure inhibits its efficiency. As a former CEO of a Reserve Bank, I can say that I work daily with experienced Reserve Bank directors from the private sector, CEOs and CEOs of other reserve banks constantly reviewing the system's operations, upgrading payments, information technology and human resource system, including consolidated operations when it was needed. Another concern I also hear from and raised is whether the decentralized structure creates too many voices speaking on the FOMC policy, creating confusion for markets and the public. I think this concern, however, gives too little credit to the value of debate and transparency in policymaking, or to the benefits of having regional independent voices in the policy discussion that affects every American citizen. Put most simply, the Federal Reserve System reflects the nation's federal structure. To consolidate and centralize it would narrow its perspective, make it more bureaucratic, less responsive to change, and less accountable to the public it serves. And it would not serve the f- future of the economy well. Thank you very much, sir.

Thank you very much. And Miss George, you're now recognized for five minutes for your opening oral remarks, I should say.

Thank you, Chairman Lucas and Ranking Member Vargas and other members of this task force for the invitation to testify on the structure of the Federal Reserve System. Three years ago, I stepped down from my post as president of the Kansas City Fed, having reached mandatory retirement and concluding some forty years of service to the Federal Reserve. It was an honor. to serve the nation's central bank and to represent a region that includes all or part of seven states including the state of Oklahoma and as you noted home to former senator Robert Owen who was one of the architects of the federal reserve system. The design of our central bank reflects something that I think is deep and durable in the American character, a wariness of concentrated power and a preference for decentralized institutions. This sentiment Congress to shape the Federal Reserve in a way that would garner the trust and confidence of the American public. And so my comments this morning focus on how the decentralized structure of the Federal Reserve System enables it to effectively achieve its broad objectives across three important dimensions: public trust, operational effectiveness, and independent thinking. As Congress deliberated in nineteen thirteen how it might approach a third attempt at central banking it rightly understood the monolithic structure of the nation's first two central banks was ill-suited to represent and serve the diverse interests geographies and industries that make up the U S economy. To that end, Congress settled on a model that would achieve both public accountability and shared control by creating an independent government agency and twelve regional reserve banks to comprise the federal reserve system. The Board of Governors in Washington DC plays an important oversight role for the entire system, without which a meaningful role for the Regional Reserve Banks would not likely be acceptable to the public. However, to ensure there was appropriate balance in representation, the Federal Reserve Act also called for Reserve Banks to be located across the country. This decentralized design is not simply about geography. It also provides for private citizens from communities across the nation to serve as members of the Regional Bank's boards of directors. These individuals represent broad and varied sectors of our economy, and their expertise contributes meaningfully to operational oversight, budget discipline, and monetary policy deliberations. The Federal Reserve structure also has proven to be valuable in carrying out its operational roles. Whether responding to a crisis, delivering financial services, or supervising banks, a deep understanding of regional interests facilitates effective performance of these duties. Importantly, the Reserve Banks are designed to understand credit availability issues at the local level as they fulfill their discount window function. And it enables the Federal Reserve to respond quickly in times of stress. For example, we witnessed in two thousand eight and again in twenty twenty as Wall Street and global financial markets seized up. Problems also developed in other parts of the country that needed to be addressed including in the Kansas City Feds region, where thousands of communities rely on small and regional banks for credit and other core financial services. Likewise, the Reserve Banks are able to gauge the local effects of financial market conditions and economic drivers through their delegated role in supervising banks. Their connections to thousands of financial institutions and fifty state banking departments provide essential information about the economic health of small business, credit conditions, and the impact of broader regulatory issues. Finally, the decentralized structure brings a wide range of perspectives, an independent thought to monetary policy deliberations. Policy decisions have broad impact on American households and businesses, and benefit from the system's independent research and analysis and public input. While a mosaic of perspectives and input is sometimes messy, the Federal Reserve's deliberative process produces a decision that reflects the majority's consensus view, while also making the nature of differing views fully available to the public. Robert Owen might not have imagined that the Federal Reserve System would have proven so durable over the past century, amid the economic and political challenges it would face. But I do think he would be pleased to see that the Fed, by design, has continued to honor its deep roots in the economic experience of the American public, as it fulfills the mandates assigned to it by Congress. Thank you, and I look forward to this morning's discussion.

Thank you. Mister Kelly, you're now recognized for five minutes for your oral remarks.

Thank you.

Thank you. Uh, Chairman Lucas, and Ranking Member Vargas, and members of the task force, uh, good morning. Thanks for holding this hearing, uh, and uh, thanks for the opportunity to testify here this morning. I'm honored to be the uh Deputy Chair of the Dallas Fed. I am uh even more proud of all the uh people at the Dallas Fed. Uh before I joined, I spent my career in the private sector, uh four decades at Southwest Airlines, uh and that experience has given me a very deep appreciation for the importance of strong institutions, credible governance, and economic stability. So my core message is the Federal Reserve's federated structure is one of its greatest strengths. The U. S. did not arrive at this model by accident. Before the creation of the Federal Reserve in nineteen thirteen, our country experienced repeated episodes of financial instability, bank failures, panics, recessions. And Congress responded by creating a central bank that combined national oversight with regional representation, ensuring that monetary policy reflects perspectives from across the country and not just Washington or major financial centers. That's where the twelve regional Reserve Banks play such an important role. At the Dallas Fed, we represent the eleventh district, and that includes Texas, southern New Mexico, and northern L- Louisiana. And like other Reserve Banks, we carry out core responsibilities such as cash operations, payments, lending, credit risk, and bank supervision. And just as important, we bring regional insight into the national monetary policy process. Our board reflects a diverse cross-section of industries, including banking, energy, education, telecommunications, real estate, social services, and transportation. The diversity is intentional, and it helps ensure that the information re- re- reaching the Federal Reserve reflects the broader economy of our district. We provide oversight and governance of the bank's operations, and we serve as a bridge between the Federal Reserve and the communities that we represent. We review economic conditions, submit recommendations on the discount rate, and provide input ahead of each FOMC meeting. Regional input is strengthened further by branch offices in El Paso, Houston, and San Antonio. In addition to that, we have five advisory councils. And together they help capture a wide range of economic conditions, from energy markets and border trade, to small business activity and community development. Independent research from the Dallas Fed is another key part of the regional model, and our research team analyzes issues such as employment, inflation, energy, and trade, further informing our participation in the FOMC. We stay closely connected to the communities that we serve, and through surveys, round tables, ongoing dialogue with business and civic leaders, we gather firsthand insights about economic conditions on the ground. And this helps ensure that policy decisions are informed not only by data, but by real-world experience. And that connection is crucial. A central bank serves the country best when it listens to the people and the places that make up the economy. The Federal Reserve's regional federated design is not an historical artifact. It's a practical and enduring strength that supports independence, accountability, diversity of thought, and a deeper understanding of the American economy. And I think those qualities are essential. Thank you all very much.

Thank you. Professor Gein, you are now recognized for five minutes for your oral remarks.

Chairman Lucas, Ranking Member Vargas, members of the task force, thank you for um the opportunity to testify today regarding the structure of the Federal Reserve System. I wanted to speak to you today about something that is rarely discussed in policy debates about the Federal Reserve. And that is what the regional structure of the Federal Reserve does for economist students in communities outside of Washington DC. Early in my career career I worked as a research assistant at the Federal Reserve Bank of Cleveland. I later served as a visiting scholar and consultant at the Federal Reserve Banks of St. Louis and Dallas. Those experiences shaped me as an economist in ways that classroom training alone could not have accomplished. I gained direct exposure to real policy questions, questions about inflation, interest rates, financial conditions, and labor markets, as they were being worked through in real time. The Federal Reserve's regional structure does not merely scatter offices across the country. It provides Americans, like me, who do not live in Washington, D. C. with access to our central bank. Consider what a fully centralized Federal Reserve would look like. It would be a single institution that would concentrate central bank research and expertise in one location. Economists at universities across the country, in Oklahoma, in Texas, in Ohio, would have far less opportunity to engage in the intellectual work of the central bank. The Federal Reserve in turn would lose the benefits of perspective and research methods from scholars across the country. The regional federal reserve banks prevent that from happening. They organize seminars, they host visiting scholars and PHD interns, they compile economic data, and they open avenues for economists outside of Washington to engage with policy-relevant questions. That engagement with policy issues often leads to scholarly research, work that is examined, tested, refined over time, and feeds back into the policy process. The benefits also reach directly into the classroom. At the University of Oklahoma, my federal, my federal reserve experience enables me to bring institutional knowledge and real-world policy context to students who may never set foot inside a Washington policy institution. Undergraduates in Norman, Oklahoma can learn not just the theory of monetary policy, but how it is applied in practice. Graduate students gain exposure to the kinds of research questions and modeling challenges that arise inside policy institutions. This is, that is a meaningful educational benefit, and it flows directly from the regional structure of the Federal Reserve. And the benefits extend beyond campus. Through public lectures, media interviews, and community conversations, academic economists who have worked with the Federal Reserve can help explain monetary policy to households and businesses in plain terms. Monetary policy affects every community in this country. And the regional structure helps insure that the people explaining it live, work, and teach in communities throughout the country. A single centralized federal reserve might be simpler and less costly to administer. I acknowledge that, but it would risk something uh important, the concentration of access, expertise and perspective in a single location. The regional st- structure guards against it. It builds a national network of research, education and public engagement, one that allows ideas to flow outward from the central bank and allows regional perspective and academic insights to flow back in. For those reasons I believe the regional structure of the Federal Reserve provides substantial value, well beyond its formal governance role. It is in my view one of the most underappreciated strengths of the current system. Thank you for the opportunity to testify and I I welcome your questions.

Thank you, Professor. I will now turn to member questions and I'll recognize myself for five minutes, uh, for questioning and note to my colleagues, uh, the nature of the subject matter and how far all of you have traveled, uh, be prepared for perhaps a second round questions, so don't be frantic. You're five minutes. Let's start with you, uh, Doctor Honig. And thank you for sharing your insights with us again. Can you expand on your written testimony, why should having a decentralized system like ours produce better monetary policy outcomes as opposed to a bank concentrated in Washington DC or, New York City?

Well, uh.

We'll just cut to the chase.

No. Thank you very much, uh, for the I would tell you that uh the uh the best way to describe it is, I've sat on many FOMC, in many FOMC meetings and in part of that meeting you have a go around of each of the districts, each of the twelve districts and through that you you learn about what is going on in the region and as you go around the room, you kind of paint a picture of the US economy on the ground, that is you're not looking at aggregate data looking backwards, you're looking at what's happening today, and it can vary very substantially among those districts. And by doing that, you have a better understanding of the economy as you discuss the issues, and where the differences are. And from that you can begin to say, well, what can bring a a consensus towards a policy decision? Or even more importantly, if they're going to be differences in the sense, you understand where the dissent is coming from. So you you really find yourself coming to a better conclusion about what the policy should be, whether you can agree or can't, and how you can form a policy that all can live with, and is in the best interest of the country as a whole. And I don't think you can get that if you're all centered in Washington, looking at aggregate data, looking backwards.

Thank you. Miss George, last year the Kansas City Fed established the Center for Agriculture and the Economy. to serve as a central hub for agricultural and research for the Fed. Of course, this was after your retirement, but the tenth district has long served as the expert on agricultural economics, given the prominent role of the industry plays in the district. Tell us how the Kansas City Fed and its branches in Oklahoma City, Omaha, and Denver provide invaluable analysis on the farm economy to the rest of the country.

So as you noted, the region itself has an outsized proportion of ag influence on its economy compared to the nation as a whole and the direction of that economy can flow directly from how interest rates how inflation how inputs to that process work and so the kansas city fed has long been part of this large geography that covers the heartland invested in understanding how agriculture is faring in this part of the country and has developed data through surveys, we're monitoring ag conditions, we are creating round tables, and I will tell you, as President of the Kansas City Fed, it was not unusual to find me going out and talking directly with producers in Enid, Oklahoma, in Caldwell, Kansas, and places around that region to hear firsthand what was happening in that economy. So, watching the Kansas City Fed create this center, which is now a resource more broadly shared across the country, I think provides valuable insights. They were ones I used at the Federal Open Market Committee table.

Thank you. Uh, Professor Gein, in the amount of time I have left in this particular round, would you like to provide your thoughts on that as well? Why does proximity matter? Uh, how does it benefit future farmers and economists at OU and OSU, uh, when it comes to agricultural research in their backyard?

So, I will go back to the experience that I had uh when I was uh working on my PHD. I had the opportunity to uh, I was staying in Richmond, Virginia one summer for a few weeks and was able to go into the Richmond Fed after uh contacting some people there and it it's the opportunity to learn not only the data resources that are available, uh to have access to all the research tools but the economists that are there allow for mentoring, uh they you know help young economists that are just getting out learn um how to really the system works and how to publish papers and how to conduct research and it allows them to expand beyond their their university and having the idea of having a federal reserve district in different cities instead of having to go to Washington it allows different students in in areas throughout the country to be able to experience that whether it be in um you know St. Louis or in Richmond or any of the districts.

Thank you. My time is about to expire. The chair now recognizes the ranking member of our Task Force on Monetary Policy, Mister Vargas of California, for five minutes.

Thank you very much, Mister Chairman. Uh, Mister Kelly, you look the same. I used to fly Southwest Airlines. uh from California from San Diego up to Sacramento and I always would get that little magazine and you always had that uh that message from the of the CEO you looked the same I I wish I would have flown Southwest here because uh I almost didn't get on the plane there were twelve of us uh it was Amer- I shouldn't say but it was American Airlines since I guess we gotta speak the truth here and uh there were twelve of us couldn't get on the plane I guess because the weight issues. Turned out that we were two of us were Democrats. So um we came back and the pilot said I guess they could put six more people on. I had to tell him well well I'm a I'm a Republican and finally let me know no you wouldn't have done that Mister Kelly right no way no way but again it's good to see you here in person. Um I do wanna ask this so obviously there's been a couple failures in the past and so we're we're here today with this system it seems to have held up, it seems to have been quite resilient. But the situation has changed. I mean, we're talking about data. You know, we're talking about information. But information is very different today than it was in in nineteen thirteen. And in fact, with the AI revolution that's beginning, I think data is going to be very different once again. Um, what what is it in this structure that will allow it to continue to be robust and necessary? Now, I think the system works, and I I like the way the system works, but I think there's certainly gonna be a challenge on issues of efficiency. And so, well, wait a minute, do we really have to have this large inefficient system to get the data that we need? When we have AI, we have all these other process. Would someone like to comment on that? Mister, how do you wanna go with? Oh, uh, Mr. George, why don't we go with you first?

Yeah. No, you

So I was just gonna say certainly we are gonna see changes and we already have seen changes in the Federal Reserve in thinking about how to take advantage of what technology gives us today. But when you talk about the access to information, I think back to how the FOMC works today. You have nineteen people around that table, twelve of which are the Reserve Bank presidents, which are really working off the same national data. But what we are doing is putting context around that data, and I think that is gonna continue to be an essential part of what accrues trust in this institution, an institution that is setting policies that are touching the lives of every American, people wanna know that we are coming at not just the efficiency of it, but an effective way to characterize what it means on the ground. And I think this structure should continue to serve that purpose, even as it looks at itself and finds ways to be more efficient in how it does that.

If I could add, Strong data is a starting point. um, I agree fully with that, and I also would point out that we've never really been starved for data. uh, AI will be another form. It also will look back and then try and project forward. But there's no substitute for those who are actually in the economy, who have to make daily decisions, who are affected by data and changes in circumstances. And they bring that together, talk to one another, and then talk to the policymaker. And that is the huge advantage that has been constant since nineteen thirteen, to the present, and I think will be an advantage for decades to come. It is the human element, the knowledge, the immediacy, that makes the difference in terms of policy and confidence in the decision making.

Anyone else like to comment on that? Mr. Kelly, yes sir.

And thank you for your kind comments. Um, I I certainly don't feel young any longer, but uh, uh, but thanks, thanks for being a a a customer as well. But, um. uh you know just starting with the purpose uh of the Federal Reserve System, it's here to serve the American people. So I think what, whatever changes are, that are contemplated, it needs to maintain that as the North Star. Um and for all the reasons that have already been um uh articulated, I think it's really important to continue to have the federated system. Having said that, uh the world has definitely changed since nineteen thirteen. It continues to change. I would argue that that's one reason to maintain the the basic structure, so that it it can adapt, um, as opportunities come forward. But, um, yes, there's a cost to having a federated system, but there's also a very significant benefit, and those need to be, uh, loo looked at in balance. Uh, so there are opportunities to improve the efficiency of the system, uh, and and uh, as a, uh, uh, as a member of the Dallas board, I can say that that work is important and it's underway in something that we're uh very interested in. At the same time, uh, as we all know, change carries a risk. So we just wanna make sure that the changes are, are wise and that they, they still allow us to maintain uh, our, our mission which is to serve the interest of the American people.

Thank you, Mr. Chairman.

Almost time has expired. The chair now recognizes the chair of our subcommittee on financial institutions, Mister Barr of Kentucky, for five minutes.

Well, first of all, Mr. Chairman, thank you for your hospitality in the great state of Oklahoma and for welcoming all of us uh uh here to celebrate in the middle of the country the federated system of the Federal Reserve and the very unique public uh private uh hybrid approach uh to the third central bank of the United States. Uh, let me start with you, Mr. Hynek. Um, um, since its creation in nineteen thirteen, uh, uh, of course our country has experienced enormous changes and - and growth, uh, to the economy. Has the Federal Reserve System ever reapportioned what areas the country, uh, each of the twelve banks, uh, twelve, um, reserve banks, uh, oversees and serves? And given shifts in population and geographic, uh, concentrations and even changes in the economy, I believe the twelve banks is a, is a sta- is a creature of the statute. Um, uh, tell me about the history of reapportionment and would it be wise to consider reapportionment given uh population shifts and where the geographic um, banks uh currently exist?

Well, as far as um changing the boundaries, the in that sense, it has gone on. In fact, the tenth district that we're in right now Uh, the southern part of Oklahoma was in the Dallas district that was moved uh to the Kansas City so that it was a full state. Uh, that happened again in Missouri for that, and other districts as well. As far as the location of the offices, the branches and the head offices, they've been fairly, they've been constant since they were first formed. I think um you can change the boundaries and and she'll get representation. I think the cost of moving headquarters would be very depth, and uh and you would spend a lot of time and effort doing that, and i don't think the change would make improvement, it would merely make a change. And so i think keeping the boundaries, moving them as you need to is fine,

Is twelve the right number?

uh but i You know, what is the right number? Uh the main thing is, it is distributed across the country, whether it's fourteen or nine, The most important thing is it has to be enough that is actually representing a broad base across the country by region uh and I think twelve is a good number uh.

D- does anyone think it would be a good idea for Congress to reconsider the number or the location?

Congress, I mean, I've I've often said that if that were opened again, it could be likely that there would be fifty federal reserve banks and not just twelve. But I I think to Mister Honig's point, Remember, these headquarters have branch offices and the commitment to serve a region actually blankets the entire country in terms of how you are touching those various parts so yes as the population has shifted it's raised this question from time to time but I think uh in a meaningful way has not really deterred the pace.

Let me follow up with a tough question to Miss George. Um legislation has been proposed in our committee over several different terms of Congress in my service my time in service to consolidate federal regulatory agencies and maybe this is a bit of a radical idea but fold some of the regulatory and supervisory functions of the fed into the OCC and the FDIC. Those proposals haven't gone anywhere. But I have always heard the argument from uh defenders of the fed that the economic intelligence of having super supervisory responsibility over the banking system is very useful for uh monitoring economic conditions for financial stability functions of the fed and also informing monetary policy can you speak to if congress ever were to try to streamline and consolidate federal financial regulatory uh activities into fewer agencies what's the importance of keeping that responsibility with the fed

yeah this issue has come up and of course each of those agencies have a slightly different focus whether it's the comptroller of the currency with national banks, whether it's the FDIC as the insurer, when I think about the Federal Reserve's role, it has a unique function in terms of its ability to lend. It is providing liquidity provision through its discount window. And the synergies that come from understanding credit conditions benefit enormously from those connections as a supervisor in that region, to be able to know firsthand what's happening. We've seen this in other countries where they've tried to separate that from the central bank, and ultimately have shifted back to try to keep that.

Mister Kelly, my final question, the first round. Could you explain the benefits of having the three classes of directors that serve on, uh, the boards of directors of each regional, uh, Reserve Bank?

I think it, it really starts with the, um, public-private nature, uh, of the whole system, where the banks, uh, you know, unique in the world, uh are actually owned by the member banks in the district. And so as one of the benefits of being a shareholder of the bank, you get to vote for a representation on the board. Um so we have class A directors which are uh elected by the shareholders from among the community banks. Um I find it very, very insightful to have three bankers on our board. uh providing um again on the ground insights. Uh the the shareholders of each bank also elect the class the three class B uh directors which are at large uh from the district. Uh once again it's a very diverse group uh and I think we all value and and benefit from that. Uh and then finally uh I'm a class C director as as I know you know and we're appointed by the Board of Governors. So you have a nice mix of independent directors that come that are that are that come to the board from different sources uh and have different representation and then the the duties in terms of electing presidents uh and first vice presidents uh we avoid a conflict of interest by excluding the A directors uh from from uh those appointments. So I think it um it's it's uh new for me, but I think it's uh a very elegant uh solution, I think it works very very well.

Gentlemen's time has expired in this round. The chair now recognizes the chairman of the subcommittee on national security, Mister Davidson of Ohio for five minutes.

Uh thank you chairman, thanks for uh putting this together and thanks for everybody for participating in it. It's uh it's an honor to get a serve uh on this committee and uh you know constituents do talk about the Federal Reserve. Now, I won't say it's the most, it's not gonna make prime time news normally. Um, but you know, when we talk about the structure, one of the things that uh people wonder like what did we create when we created the Federal Reserve? Uh, you talk about it's accountable, um, but one of the main ways anybody's accountable to Congress is the power of the purse. Uh, and the Fed was sort of created as an autonomous entity in a way, and you say independent and people wonder well, Well, how independent? Um, and so I just, you know, I'll recognize executive orders could be unconstitutional, uh, as as could laws for that matter, but um, as you guys go down, yes or no, do you believe that the Federal Reserve uh, is it is accountable to uh comply with executive orders?

W- well, I think frankly that the Federal Reserve was created by Congress, and is accountable uh to Congress. Congress can change the laws, can change how it's funded, can change uh how presidencies look.

Right, eh, I mean, we created the Department of uh Defense too, I mean, uh, i- i- in nineteen forty-seven.

Right. Right.

So, uh, but they're clearly subject to executive orders.

Well.

Uh, are you guys subject to executive orders?

Well, we have, we do have an executive order in terms of how um s- bank supervision is carried out today. Uh, that I think is complied with. I think when the Congress created the Federal Reserve, it created it to be independent of political influence.

With respect to monetary policy, yes. I'm not asking about monetary policy. I'm just, if the federal, if the President of the United States issues an executive order that says, you know, every uh bank examination shall include whatever, or uh, you know, in the case here, uh, one of the executive orders that he issued was um, there'll be no uh central bank digital currency. Um, through the structure, the federal government uh you know chairman powell has said well we agree that congress would have to authorize us to do a retail cbdc but you're clearly working on a wholesale cbdc uh which you know from a lot of folks perspective it isn't much of a distinction on the back-end it still does all the things that a central bank digital currency would do it's just cosmetically different on the front-end uh but the president has said um there'll be no central bank digital currency. So are the Federal Reserve Banks still working on it, as an example? Uh, so, Miss George, you know, you were real active with FedNow and some people said that's a precursor to a CBDC, a wholesale system, and payments is uh, you know, part of that, so is that still, is that work still underway?

So the Federal Reserve in its role as a payments provider worked on FedNow, and did that under the uh purview of the Board of Governors. Um, in in meeting with Congress, I also testified to Congress about what that was doing. I am not aware that the Federal Reserve is working on a central bank digital currency. And I will tell you my experience is they pay careful attention to the direction that public oversight bodies have extended in terms of whether it applies directly to them or whether they will follow the spirit of those things. So I am not aware that there are any efforts uh to undermine that direction.

OK. Well, thank you for that. Um, I mean, obviously the Fed has been working on central bank digital currency, both in Boston and New York and San Francisco is literally hiring people to write code to develop a central bank digital currency. So hopefully you guys become aware of that because it's, uh, work that has been ongoing for quite a long time. Um, and, you know, when you talk about, uh, a- accountability and, uh, autonomy with, uh, cash flow, how do the banks make money? So if you look at the uh, you know, we talk about cost and benefit, what does it cost to run the Fed? How much money? We would know if there was an appropriation, you know, well, this is the line item for the Pentagon, we know how much money we give them. How much money does it take to run the Fed in a given a year? And, uh, how does that flow from, you know, say, the Federal Reserve's balance sheet, uh, to operations like payments? Uh, how all the ways that make money and if somebody wanted to look that up, where would they just go read it?

the Federal Reserve provides annually uh to Congress and makes public on its web site uh through its uh monetary policy report and through its annual report of the operations of the Reserve Banks and the Board of Governors and so you will see the sources of revenue which come off its its open market committee uh portfolio. You will see how it recovers its cost as a payments uh operator in that space and Last I recalled, it takes about six billion dollars to run the federal reserve system in total, um, including the Reserve Bank's support of the Board of Governors.

Thank you for that. Uh, that'll be all for this round.

Gentlemen's time has expired. The chair now recognizes the gentleman from North Carolina, Mister Moore, for five minutes.

Thank you, Mister Chairman, and, uh, by the way, you're a great host, having us here in Oklahoma. It's been a wonderful visit. I want to thank our witnesses as well. Uh, you know, and like most central banks around the world, the Federal Reserve was was intentionally designed as a decentralized system as has been testified to previously you know one that combines the national policy making with regional representatives uh Congress recognized the economic conditions in New York may look different than those for example in my home state of North Carolina or of course here in Oklahoma uh the Federal Reserve System was designed to ensure that monetary policy and banking supervision would be informed not only by data coming out of Washington but also experiences of businesses and consumers from around the country. Uh, that reg- that reg- that regional perspective is particularly important for states like my home state, and I would say probably most states outside of some of the major uh banking or policy areas. Uh, I can tell you economic conditions facing a manufacturer in rural Western North Carolina or a small business in Eastern North Carolina, or a family in, you know, in Charlotte can be very different uh in in things viewed around the country. Um, Mister Henning, you've uh spent of course two decades as President of the Federal Reserve Bank of Kansas City. and participated in interest rate deliberations through multiple economic cycles. Um, how important is the regional Reserve Bank structure in ensuring that monetary policy reflects conditions across the entire country, rather than primarily, uh, the perspectives of Washington? Uh, you'll, everybody sort of touched on this, but, um, you know, how, how have you seen that and how, and do you, can you think of examples

Sure.

where that regional perspective probably helped the, the board take action that may have been better than if they just relied on say just what was coming out of Washington.

Well I think there are many examples, but usually it's most apparent when there's a crisis. And whether it was a crisis uh the agricultural crisis of the seventies and eighties,

Mm-hmm.

uh where this part of the country suffered very significantly relative to others, we were we at the Federal Reserve Bank of Kansas City and Dallas were very much aware of it and involved in it. in terms of trying to find solutions. With the great financial crisis, uh in fact, the as solutions were being pursued for liquidity for major corporations, major banks in this country, I was in those meetings in Washington and one of the things I was able to do was point out that uh I'm sorry but the Midwest has some pretty large companies, pretty large banks, let's make sure these policies or these programs that you're developing for liquidity purposes extend into the Midwest and into these. And had I not been at that table, I'm sure they would have been some coverage, but it would not have been anywhere near as detailed or anywhere as thorough as they were, uh, by having that input into the process. So, it, that's, those are just two examples, but you can see it in COVID, you could see it in the, uh, in the terrible periods of the nineteen eighties, where the regional banks

Mm-hmm.

came forward and found solutions to to problems that would have been much more devastating to that region had they not been done.

Well, thank you. And of course, I - I would submit one of the greatest uh strengths of the Fed is the ability to gather information from local businesses, banks, and community leaders. And Miss George, let me ask you this, how in- how valuable are the regional advisory councils and business contacts in forming policy decisions and do you also have examples where the information gathered from say local companies differed from the traditional economic data that was suggested.

So we do take advantage of drawing resources in. So we talked about the the boards of directors, but we do have round tables and advisory councils that allow us to really drill down to more specific sectors of that economy and understand it. And when you do that, you begin to appreciate that there can be things at the macro level you might miss. but you will understand, and when you go to the Federal Open Market Committee meetings, be able to articulate, for example, in my region, whether it was energy or agriculture, the way transmit- the transmission of monetary policy works can feel different. If you're a farmer with an operating loan, if you are making capital decisions around drilling uh for energy. And so the expression of those at that table allow you to calibrate How is that policy working across the country?

And just as a follow-up to that, Miss George, what benefits would you say that sector-specific expertise brings to monetary policy dis- decisions?

Well, I think again, it begins to fill out for this committee what is a very large and diverse economy in this country and even as we see various industries grow, there are still thousands of communities in this country where those effects can hit harder. And again, I reflect on ag and energy transportation. Transportation is often one of the early warning signs we hear as the economy is turning and when you're able to pick up anecdotes that say we see a shift in this industry, it matters to the discussion that we have at the FOMC.

Thank you. My time's expired, I'll yield back, Mr. Chairman.

Yeah, my time's expired,

Thank you.

we'll now turn to a second round of questions and I'll recognize myself, uh, for an additional five minutes. Uh, turning to you, Mr. Kelly, we know proximity is important, but it's not just about geography. From your experiences at the Dallas Fed, why is it important that the Dallas board insures the bank is actually representative of the community it's supposed to serve? How does this uh how does this happen in a practical way?

Well, I think diversity, you know, i- i- i- taken in all forms is uh is really helpful. We have a very large country, we have a very complex economy, um, the, just just picking up on on the previous comments, um, we have twelve banks that are independent of each other. At the same time, uh, I've been impressed on how they do collaborate. Uh, so, each district has its, uh, uniqueness. Um, Texas and the - the eleventh district, I - I believe, produce sixty percent of the oil and gas in the US and so there is a deep expertise uh that's developed there. But, well beyond uh energy, if you just take um, you know, current conditions, all the discussion around AI, every board uh that I'm on is uh, you know, deeply interested uh and concerned uh about those opportunities. And um, having a diversity of uh voices available to us who are knowledgeable about data centers, knowledgeable about in uh energy, knowledgeable about water, uh and and in such a huge emerging issue uh is absolutely invaluable. So uh we have very broad uh representation on our board, on our advisory councils, uh with our branch offices, uh it's very rich uh and I found it to be personally very rewarding to have that that kind of access.

Continuing with you, Mister Kelly, the Dallas Bank's energy survey is widely looked to in order to understand crude oil production and energy conditions. Expand on what you just said. How does the Dallas board view that responsibility of providing that perspective to the FOMC and to the broader public? You're a resource for everybody.

I think Yeah, yes sir. I I think our board um understands very well um its duties on the board number one uh and understands that uh we do need to have expertise in the areas that uh are unique for our district uh and i think clearly understand how important energy is to our district so uh the board is extremely supportive we have energy represented directly on our board we have an energy council uh i've i've attended uh those meetings uh and they're very very uh very good Um, we have major, uh, energy companies' headquarters in our district, and oftentimes those CEOs are - are part of our - our councils. So, um, I think it is extremely important, I think the board is very, very well aware of that and very supportive of that.

Miss George, your testimony emphasized that federal - that reserve banks need to have a deep familiarity with community banks, small businesses and the economic conditions and regulatory issues that affect them. Why do you think that those perspectives allow for a more effective Reserve Bank, especially in economic crisis times?

Well, when when you have a deep understanding of what drives the liquidity, the credit quality of these institutions, when you understand where small businesses can often find a gap in their funding, it makes a difference when the Fed then has to respond in a time of crisis to know where is that likely to hit. In twenty twenty, when we began to see the economy experience its free fall, there were banks that were trying to connect with their customers in this community, and understanding from the Federal Reserve's point of view these were otherwise viable institutions that were trying to meet um the needs of a manufacturer, they were trying to meet the needs of the grocery store in their country,

My time is about to expire. The chair now recognizes the ranking member of task force on military policy Mr. Vargas for an additional five minutes.

I thank you, Chairman. Um Professor Keen, you and I had a discussion off-line before this hearing started, and one of the things we spoke about was the potential disruption of AI. Um, Mr. Kelly just mentioned it, but more I think focusing on the issue of water and energy. But I think that that there's gonna be a tremendous disruption, I think, in our economy and maybe even at the Fed because of AI. I I I like history and I I think of people talk about the issue of the computer and how that disrupted our economy. And I think you have to go back further and really look at industrialization. I think that was the great disruption where you saw people coming from the the the farming communities to the large cities, the disruption that you had there. Um, would you comment a little bit about that? Uh, I'll get back to Mister Kelly on the issue of of the energy and water, but the the disruption that AI might produce when we talk about data independence of the fed and all these other things because ai is going to have i think uh an immense impact on our economy on the way we do things

well ai presents the possibility of having a large productivity shock to the us economy it's gonna expand the pie and so we're gonna expand gdp that solves problems uh that that exist out there the concern is we are going to dislocate potentially entry-level labor. There is some concern that companies are no longer hiring entry-level labor right now, so these entry-level workers are future CEOs, they're future executives.

When you say entry-level though, do you do you mean also white-collar, entry-level jobs?

I'm I'm talking about college graduates in particular.

OK, OK.

That's who I'm talking about.

OK.

And so there's a concern about that. Now the question is is how is this going to evolve? I don't think there's a historical precedence the best that you can go back to it's like you said with the industrial revolution but we need to be vigilant and we need to watch this occur I don't think you we need to rush to to do something, but we don't need to be um waiting to to respond so I think it's watch very carefully and see how things develop.

OK. Mister Kelly you were the first one I believe that mentioned AI you ment- mentioned it within the context you watch it very carefully with respect to water issues and energy issues, because those are the ones that are most salient at the moment. But what else do you see in AI that's coming to us?

Well, uh, uh, I'll start out with a aviation analogy, uh, just with the rate of change here if from the Wright brothers until a man on the moon was was sixty-six years. And um we we've all lived through uh over recent decades uh massive change, and I think I I think indeed uh you know this is probably gonna be the the biggest yet. Uh it's here and it's not coming, it it is here. So um uh it the the impact on the economy right now is ab is outsized. So, I think that is a concern. Uh, if it stops, uh, the impact on markets, uh, whether it's equity or debt, though it is a, a massive, uh, undertaking, uh, that, that's, that's, that's taking place. Um, what I hear, uh, from our district are, are these concerns. I don't know that, uh, that, that the board are

But, but what about the issue of the independence. So, for example, right now, I, as you probably know, there there's an issue, as there always has been, by the way, the independence of the Fed. We see it, I think, a little more, um, theatrical maybe these days, but there's always been pressure on the Fed to not be independent, you know, to to drive the rates down. But how will this information that's gonna be so massive, how will that affect the independence of the Fed in this system?

I d- I don't I don't necessarily see that as a challenge to the independence. I do see it, as we were discussing earlier, as an, it is, it is a change, there's an opportunity for efficiencies. Uh, and I think whether it's the Fed or business or, or any other entity, uh, we're gonna have to embrace that change and make sen- and make sensible changes, uh, and adapt. But I see that as a separate issue, uh, for from independence. It is, again, serve the American people, do it in the most efficient way possible, manage the risk of change very, very carefully so we we don't impair our our mission. Uh, but uh, I think the independence uh, uh is important and I think that should be retained.

Thank you. I yield back.

Gentlemen's time has expired. The chair now recognizes the chair of the subcommittee on financial institutions, Mister Barr of Kentucky, for an additional five minutes.

Well, well thank you very much and thanks again to our witnesses. Fabulous testimony, great insights. I think all of you all have made uh a very powerful and persuasive case for retaining the federated system and the diversity of thought, the independence that it brings, the operational uh effectiveness, and the public trust that it creates. Great. However, as you all know, there are critics of the Federal Reserve, and m- in most recent history, uh uh a good example of critics uh pointing out that the Fed made a major mistake in twenty twenty one underestimating how persistent inflation would become by describing it as transitory, waiting too long to begin raising interest rates and continuing quantitative easing, purchasing a hundred and twenty billion dollars per month in treasury and MBS all the way through March of twenty twenty two when CPI was almost already at nine percent. Um, a- and because of that, I think the, the critics and mem- you know, members of Congress, we said, now wait a minute, the Fed delayed tightening and that ultimately uh forced the Fed uh to move much more aggressively in twenty twenty two and we were actually sounding the alarm I remember a a an oversight Humphrey Hawkins hearing with uh Chairman Powell who I have great respect for and we said, well wait a minute the Chambers of Commerce back in Kentucky are telling us everything's too expensive. And that was that was a year before tightening began. W- was there a failure in the federated system? Why didn't that data get back to the Board of Governors sooner? And if it, and maybe you were sounding the alarm earlier than the FOMC was able to take action, and they just ignored you. Can, uh, Mr. Honig, can you speak to that?

Yes, and, and in my comments I said it's, it's the best system, it's not perfect. Uh, but I will tell you, um, this is where the, the role of dissent matters. And in other periods, for example, myself, where I may have had that kind of disagreement, At least I made that argument to the committee, and the committee then had to make a major decision whether to take that and wa- give more weight to it or not. And the fact that you have this decentralized system and you can bring these dissents forward doesn't make it necessarily perfect, or that you'll get the answer that you want it as a, as a minority dissenter, but it does bring greater debate to the system, and mistakes will be made, hopefully fewer mistakes than otherwise would be a mistake without the ability to have independent views voiced strongly in those meetings.

Well, quick follow-up for anyone, you've made the case for why the current system is a good system, I agree, but what doesn't work? What reforms should we consider in Congress uh uh to the Fed to improve effectiveness?

Can I, I'll I'll make one quick comment on that.

Sure.

I I do think that over time the, you know, there's always been a tension between the center and the reserve banks and the and the and that. And I think more and more there's a deferment to the chairman, uh, don't wanna dissent unless you absolutely have to. That culture is, I think, uh, weakening the system. I think the boundaries need to be clear. The board has oversight, Reserve Banks have independent views, and those views ought to be expressed and voted on, uh, without any kind of reservation. And I think that's something we need to think about for the future, a strong independent Reserve Bank system.

Mi- Ms. George, um, I wanna ask you about the discount window function for the, for the Reserve Banks. Uh, yeah, as you know, we've been having this in our subcommittee, a big conversation about deposit insurance reform post-SVB. What changes can we make along the lines of de-stigmatizing the discount window to help member banks access the discount window to avoid deposit flight, uh, and bank runs?

So the the stigma we've seen has been an issue the Fed has dealt with for some time. And I think after the great financial crisis, you recall that there was a requirement from Congress that we disclose publicly, those that borrowed from the discount window. I think all of those have contributed to trying to make sure that this is used. There are legitimate and and reasons that you want that liquidity mechanism to work. And the Federal Reserve, I see, is working hard on trying to communicate that to the banks it supervises, to the broader uh s- banking community. It is essential that they understand there are legitimate reasons to use that discount window. And if Congress has ideas about how to do that, I'm sure there would be ways that the Board of Governors and the Reserve Banks would welcome that.

Well, thank you for that. Um, I I think de-stigmatizing the discount window is something we really should. look at it as a as a policy alternative to uh increasing assessments with deposit insurance uh levels but thank you again Mister Chairman for uh this terrific hearing.

Chairman,

I yield back.

this time has expired, the Chair now recognizes the Chairman of the Subcommittee on National Security, Mister Davidson of Ohio for additional five minutes.

Uh thank you Chairman and you know following Mister Barr you know was certainly there for some of those uh disagreements on uh w- whether inflation was really gonna happen and you know, what the word transitory really means, uh, uh, you know, in the sense life is but a vapor, I guess, isn't at all transitory. So we're still dealing with that and you guys are, uh, market intelligence dealing with it. And I think it's related to the Fed's balance sheet in the sense that, um, you know, uh, Miss George, when we were speaking earlier, you you said, you know, it costs about six or eight billion dollars a year to run the Federal Reserve. And when you look at a balance sheet that's been as high as nine trillion dollars, obviously the interest off of that is you know, you know, substantially more than that, a hundred plus, I think about a hundred and eighty billion or so last year, uh, in cash flow off of that. And people say that, well, where does all the rest of the money go? So could you talk a little bit about the liability side of the Federal Reserve and, you know, the repo markets and the things that go on there to provide liquidity in the market? What's the function like that, that and, and who operates that and how do the, uh, regional banks work together in that sense?

So you're talking about how federal reserve really is able to set monetary policy, the tools that are available to it as it carries out that function. And as you note, coming off of two thousand eight and nine, the Fed began to use what then was considered unconventional policy tools, and that was beginning to go in and purchase large scale asset purchases uh for its balance sheet. Those purchases were intended both to stabilize market functioning at the time it was viewed as an opportunity to lower longer term interest rates because the Fed was buying that. And so, this tool has continued and not without consequences of I've argued in my own policy uh statements from time to time.

Well, it certainly facilitates inflation, right? Cuz, you know, when we fiscally spend the money and you guys uh, you know, put it on your balance sheet instead of uh winding up in the rest of the market, where does the money come from for the Fed to grow its balance sheet from say four trillion dollars to nine trillion dollars?

Well, the Federal Reserve has a unique function by virtue of being the central bank, that it is a creator of money. And that's why it's a discipline and its accountability to Congress is so important,

So

so that the stability of the money supply and of inflation continues to be in its,

Right,

in its focus.

so you can basically keystroke it into existence and now you get nine trillion dollars, but the interest that comes off of that's real and it gets dispersed through the system, so How does that go out in liabilities?

So the liabilities of the Fed, um, as we've seen,

Who gets paid?

the reserves that the Federal Reserve creates through this system, Congress has now authorized that interest can be paid on those reserves. And that's become a component of how the Federal Reserve's uh ability to set interest rates is affected.

Right. So for for almost the first hundred years, uh, if of the Federal Reserve, if banks, uh, you know, had even required reserves, they had to manage their own balance sheets. And then I think in O seven or O eight, uh, the policy became that the Federal Reserve could pay interest on required reserves that you have to keep with the Fed, uh, or keep on your balance sheets. You could hold that at the Fed and get interest on that. Now we're paying interest on excess reserves. And, uh, you know, the banks put deposits in. But they're also, as funds come off of the money that was kinda key-stroke into existence from say four and a half trillion dollars to nine trillion dollars. They're also collecting interest off of that, someone is, right? So, when that flows through, that's providing quite a lot of liquidity into the the banks, right? To the member banks.

To to any commercial bank that that holds that portfolio.

And and so

Again, the congressional authority to do that was not a Federal Reserve policy, but I think it has allowed the Federal Reserve in this regime of large amounts of reserves to be able to calibrate its federal funds rate.

So is it safe to say that that dynamic has created a massive amount of demand for Federal Reserve Master accounts?

I'm not sure I understand the connection to that, but

There are a lot of, lot of banks, a lot of people that want a master account in the payments world right now. As we're talking about stable coins, we're talking about uh digital assets, Custodia Bank had to sue because they said, you know, we complied. Did this, did this checklist, yes, we did it all. And the statute said, shall issue the master account. Then the federal service said, no thanks, we're not gonna issue you a master account, cuz you're not really one of us. You're not allowed in the club. Uh, so we're in fact trying to create skinny master accounts because at a four percent rake you're double the double the rake that you're getting for running a hedge fund. So it's pretty good, pretty good amount of cash flow and not even all the cash flow had to come from your own activity. It's can be keystroked into existence. So I think that's one of the things that we wanna look at is, should we even be paying interest on reserves? And in the sense of a regulatory framework, how how steerable is this essentially autonomous organization? Because uh, you know, under Humphrey Hawkins, the chairman comes and speaks once a year, but we don't have to like the answers, and we don't have appropriations either. So, well, uh, more to follow, uh, Yield.

The chair recognizes the gentleman from North Carolina, Mister Moore, for five minutes and would he yield to me for a moment?

Absolutely.

It's starting to sound like maybe the biggest challenge the federal reserve system faces is Congress. Yield back to my colleague.

I wouldn't argue. You've been there a lot longer than I have, Mister Chairman, I'm I'm the newest guy sitting up here.

I don't I don't have much influence yet.

Uh. Uh, one one question that I get when I'm back home and early around and and and I believe that affordability is is a legitimate issue around the economy. uh and around the country. And I can tell you that a lot of the things that we've done in Congress, whether it's road to housing, um you know to try to increase housing supply, whether it's a lot of the reg reform to allow more energy to hopefully deal with that, notwithstanding you know some geopolitical events at the moment, that that's r- that that is probably the issue that I hear about the most, and I don't, it's certainly not something that happened overnight, probably four years of a lot of spending right during and after COVID contributed greatly to that. But I'd, I'd, as, as the questions have actually come through in the conversation and the very thoughtful responses of, of our witnesses today, uh, it, it got me thinking, what are things that the Fed could and should possibly do, and this is up in any of the four that wanna take this question, when it comes to helping address on a macro level affordability?

Right. I think that affordability is a, is a, is an issue around monetary policy and the disciplined monetary policy. So one of your issues around massive purchases of - of uh assets on the - onto the Fed's balance sheet is what it did to asset values and affordability. Another is uh stable prices. If you do not have a disciplined monetary policy, you have price problems, inflationary problems which are - is highly, highly regressive. So, to - to your point, The Fed has, as a system, a responsibility to pursue stable prices. When I say stable prices, I mean both inflationary and asset inflationary prices. If it fails to do that, then it is, it has, it made a mistake, and it needs to correct that. But that's the key. And the other part of it for, for the central banks, and central banks around the world is, to know what monetary policy can do successfully and what it cannot do. And it cannot solve every, distributional problem in the United States or anywhere else.

I agree. I agree. That's true.

Yeah, I would just add, if you were to listen to the conversations around the Federal Open Market Committee table this very point often comes through which is the Federal Reserve's policy tool is really what is often referred to as a blunt tool it affects all parts of the economy so when we look at housing for example you will see noted that housing prices have risen and the question is where is that having an impact on the economy? Are those barriers coming from regulatory issues? Are those barriers coming from consumer incomes not keeping up with the price of things? And so the issues are well articulated. The question is what is it within the Fed's purview and its appropriate role to affect? And that is where these issues often move beyond what an interest rate is able to do.

Mm-hmm.

I'll mention we're talking about AI.

Mm-hmm.

Productivity shocks are disinflationary, so if we have a big productivity shock from artificial intelligence that's gonna lower firm cost, firm cost are then eventually gonna force them to lower their prices, that creates a disinflationary uh trend in in the economy. So that's a possibility as something that would help.

I don't really have anything to add. Uh, it's - it is a blunt tool. Uh, I would just re-emphasize, you know, the - the mandate uh, for price stability because inflation is insidious and it affects everybody. So there are by-products, but more than anything else, uh, I - I - I think price stability has to be pursued. And, uh, um, and that ultimately, hopefully you have breakthroughs with - with productivity. Um, no doubt they will come, but uh in the meantime uh we're we're not hitting our inflation target. And uh there just needs to be a maniacal focus on uh on hitting that target.

Yes sir. Those are my questions, Mr. Chairman. Glad to hear back. Thank you very much.

Gentlemen, you're back, uh I would suggest to my colleagues on the dais, we've had some really good interactions, some really good discussions. If we could have one more round, I'll try and focus myself on one question. And then we'll uh let our witnesses uh go back to to their world. Miss George, one, and I recognize myself for up to five minutes. I wonder if you can enlighten us on the process of building the beige book. Of what community involvement and surveys go into the product so that we can be confident it truly represents the economic conditions around the country. Talk about that for a moment.

Yeah, the beige book has been around for a long time. and its role is really an important one, as we've discussed here, in terms of bringing forward these regional perspectives. So the Beige Book is released eight times a year. It typically comes out ahead of a federal open market committee meeting. And it shows across these twelve regions what are the themes coming out of it, how are they, uh, contradicting or supporting data that again is often backward looking but it gives a more real time sense of what these twelve banks are seeing in their regions. That information is really compiled over a six to eight week period in between those meetings from drawing on the boards of directors' feedback, going to these surveys that the reserve banks collect, taking anecdotes from the round tables and advisory committees it has, and really putting them in a document. form that can be shared publicly and can be discussed at the FOMC table. What it does for you is really tell you, is it confirming the trends in the more backward-looking data we're seeing? Is it contradicting it? Are we seeing themes that would tell us something about the direction of the economy? So I think it's been a great expression of what we see coming out of these diverse regions, puts it out in front of the public so they can see that eight times a year.

I would simply conclude my comments by saying that while the country and the Federal Reserve System have faced many challenges since nineteen thirteen, there are a couple of historic instances that were dramatic in their impact on my congressional district and my constituents. The Great Depression of the nineteen thirties, which I think we would all agree was a failure not just of the Federal Reserve System, but it was a failure of Congress and physical policy that led to that. And in the second great experience which I lived through, the early nineteen eighties when we had a twin bust in agriculture and energy, which dramatically impacted this uh region of the country, that took in instance, some instance of fifteen years to come out of, are examples of why these issues matter and matter to my constituents. I think we've learned a great deal, both on uh the side of the table where all of you used to work, but also on my side of the table, But the bottom line remains, the banking system and the Federal Reserve System in this country still has to deal with the things that Congress and the executive branch does. You don't create those situations, you have to mitigate those situations. So we have a responsibility ourself. And with that, little bit of a bemoaning, I will now yield to the ranking member, Mister Vargas from California. for five minutes.

Again I thank the Chair and again thank you very much for the your hospitality, the hospitality of your staff and and all the others that have been here, I appreciate it very much. If if I were to be asked, you know, what did you get out of this hearing, I'd probably say that one of the test, one of the things that I heard in the testimony was that it's important to have this decentralized system, because you get a context of the data. So you could still get the data, but you get a context of having these banks, having people involved throughout the country. I would also call that buy-in. You know, in other words, you get buy-in from these places, so it's not just not those coastal elites, you know, not those people that just fly over, we don't let us land, that's why we're, by the way, we're not here, you don't let us land. But that, putting that aside, um, one of the things I guess I would ask is this. OK, so I get it, it's buy-in, you got the data, but what, we've talked a little bit about it, you know, it's worked. What hasn't worked? We touched on it a tiny bit, but What what is not working? And we heard a little bit about dissent from Mr. Honing. You said, you know, that the dissent should be a little more vociferous or at least a little more obvious, that you shouldn't um just go along to get along as they say with uh what's what's, you know, what what the chairman wants. But what uh what else, what else is there that we should look at that maybe isn't working? Uh, Miss George, thank you.

Yeah, thank you. I think one of the things you want to continue to keep a focus on in this system when we've talked about it, is this idea that you were balancing um an agency in Washington DC that plays an important oversight role with twelve banks. And as the economy has changed, as technology has allowed these reserve banks to begin to consolidate functions, for the purpose of being as efficient as they can, for purposes of delivering the right services to the public, you run the risk of blurring the lines. between those important distinctions between oversight and consolidated functions. And I think it will be important as the economy continues to evolve to make sure that you are being true to the design of the institution on the ground, even as you are trying to find ways to make it efficient, to continue to deliver its functions in a most efficient way. And so that is the hard work that happens within the Federal Reserve System, with the Board of Governors, and I think, Congress monitors are we continuing to get the effectiveness out of this institution?

Well, let me push you a little bit on that because,

Do you wanna do that?

you know, one of the things that I found out as a politician a long time ago is that there's a system, but they say, well, that's the law, yeah, but we get to change the law. And I realized that when I was on the San Diego City Council. Yep, that's the law, well, it won't be for long. So in other words, you said this was the way the system was designed, you're following it. But I guess my question was, OK, you, if you had the opportunity to change the design, not necessarily following the design. You know, the question was brought up, well, should there be more banks? They said, well, there'd be fifty of them. You know,

Yeah.

if there would be every what what but what what if you could change something? In other word, it's not the design that you inherit, but if you could change something because it's not working, what would it be?

I think the Federal Reserve is working, and I think as

Oh, I agree, I agree.

as as things change, though, I think to your point, it is a fair point and it's one that the it's one that your body and it's one that I think the institution has to constantly ask about what is gonna serve the American public best in this design, assuming that you think it continues to serve. And again, I think it will happen more in the context of don't blur the lines between the Board of Governors' oversight and extending too far in to dictating to the Reserve Banks and that the Reserve Banks, again, be able to have the ability to understand what their operational roles mean there. And so that's what I meant.

Thank you very much.

Thank you.

I appreciate that. Uh, Mr. Chairman, those are my questions.

Gentlemen's time has expired, and the chair now recognizes the gentleman from Kentucky, Mister Barr.

Well, thanks again to our witnesses, great hearing, great testimony, uh, uh, really educational and I I really wanna thank my colleague from California's a line of questioning because that's really what I wanted to follow up on too, uh, is, is, you know, again, um, we - we - we should be constantly striving to improve upon a system that does work. And again, you all have made a great case for decentralization and a federated system. But let me make my final question to - to Mr. Kelly as Vice Chairman of a - of a Reserve Bank of the Dallas Fed. opportunities are there to make enhancements um so that uh Mrs. George's concern is addressed, so that the the maybe we could elevate the status of that dissent, elevate the status of these decentralized reserve banks in the system so that the Board of Governors don't overpower uh all of the incoming data in real time from the Reserve banks. And so to that end, Mister Kelly, what opportunities are there for Reserve Bank directors and even Reserve Bank branch directors? I say that as someone from Kentucky. We only have one uh presence of the Fed in Kentucky uh outside of Cleveland and St. Louis, and that's Louisville. We have a branch bank in Louisville. Um what opportunities are there for those branch directors to interact with each other with the Reserve Bank presidents and the Board of Governors and would there be utility in holding an annual conference where the entire leadership of the entire system are together so that the Board of Governors and that all important Chairman can have access to all of these people in these branches and out in the country who are actually there seeing the data and hearing from the the participants in the real co- economy in real time.

Well, thank you very much for that question. Um, I completely agree with uh what Esther described. the the need for the independence. And so I do think that the, it starts with, uh, first of all, a recognition that that's important. Uh, the, uh, the boards have a duty, they have a duty of loyalty, care, uh, good faith, and they need, they need to recognize that that is an important thing to exercise, that, that independence. Uh, and I completely agree with your point. there are ne- it doesn't matter what the entity is, there needs to be a constant view of improvement. Uh, learn from past mistakes and try to, um, mitigate them and take advantage of opportunities. Chair Warsh has already made it clear there are policies that he would like to review. I think boards welcome that, um, that, that perhaps would get back to your earlier question about why were these things, um, uh, missed, if you will. Um, and so I - I think continuing to review policy is important. Uh, just the opportunity to continue to improve the operations of the banks, make them more efficient, have better information quicker. Um, there are plenty of opportunities to do all of those things. And, uh, we - yeah, we've gotta strive very hard to do that. The - and Tom mentioned this earlier, the ability for nineteen people to be able to speak up and speak their mind is critically important. So, despite the fact that mistakes, it's a human endeavor, we're trying to predict the future, there will be mistakes. But, it, if we don't allow that going forward, then we, we're almost guaranteed to make more mistakes in the future, because we'll, we'll allow ourselves to devolve into groupthink. the independence of the banks from the governors and among the banks, I think is critically important. Finally, you said that getting together, there is a council of presidents that I think is very uh functional. There is also a council of chairs among the boards. I'm a member of that, so it's the twelve banks, the chair and the deputy chair, uh and there are absolutely opportunities for engagement at that level, and they uh the the the chairs meet three times a year um and engage with the Board of Governors. I think there's opportunities to improve that uh as well, so I completely agree uh with uh with with your urgings.

Thank you. Uh you're back.

Gentlemen, you're s back, the chair recognized, gentlemen from Ohio, Mister Davidson for five minutes.

Uh thanks again Chairman and uh thank you all. Um you know you know earlier you know we mentioned the Federal Reserve can just create money. They have a unique role in that sense. Uh, everyone else can't, um, legally anyway. And, um, you know, one of the things that has changed about the Federal Reserve over time has been payments. Uh, you know, cash was king and, uh, still is in a, in a business sense, but literally most payments aren't made with cash. Checks and ACH have come along and today, uh, we're working on faster payments and FedNow was one of those things, but, you look at stable coins and the future of money, um, you know, really government involvement, uh, private sector, bank settlement, credit cards, all these things have changed with payments. The enduring thing, though, is, you know, no government really gave anyone the right to transact. It predates government. Uh, governments have become a bit nosy. They wanna know everything about every transaction, you know, just to keep us safe, of course.

Mm-hmm.

Um, but that creates a bit of anxiety for a lot of the public. uh because it essentially puts somebody else between you and your money. A lot of people tout that as a feature of things like central bank digital currency because they call it programmable money and it'll give you these great powers uh with monetary policy i.e. coercive behavior uh which is why people don't want it, they want the payments. So I guess maybe you could go through and say where do you see the future of payments, and how's the Federal Reserve adapting to that?

Well, to your point, i think there are legit legitimate concerns about privacy and payments. Uh, it's not it's not something that's outrageous. It's it is a a a legitimate concern. And as you develop, whether it's digital currency and the private sector, it still can be traced. So how are you going to do that? And that's that is an open question that I think is now being discussed in Congress in terms of the laws around stablecoin and around uh cryptocurrency and tokens. And I hope, not to put it back on you, but I hope Congress defines the rules pretty clearly, because I don't think it's the F- the Fed's business to be defining what the criteria should be. It's the Fed's business to follow what Congress has assigned them. And when you say, you know, if you look at the, if you look at banking today, it is surrounded in regulations primarily to protect the public, And Congress developed those, those laws that then became regulation. So, we need to think about it in advance, as we apply it to not just the banking industry, but to stable coin if we're gonna have that, to tokenization. Um, it's, it's there that it, we have to address it, not after it's approved, and not after it's, you know, have access to the, uh, master account and so forth. So, it's, it's a, it's a big deal, and I agree with you, it needs to be addressed carefully.

Any other thoughts on that with the payments?

I would just say it's important, remember the Fed is trying to ensure broad access, security and safety around those payments, um and efficiency in those payments. And so as the payment system is evolving, um the Fed is not trying to dictate where that goes, but to make sure that it fulfills that function because at the end of the day, what you want and obviously what your accountabilities are, congress is to make sure trust in that money is preserved.

Yeah, so if you think about like the the nature of uh technology, part of the part of the things that people attribute to the uh collapse of Silicon Valley Bank was the fast flow of information, which led to quick withdrawals, and if fractional reserve banking has that vulnerability, a stable coin uh uh it doesn't because it's not fractional, it's fully backed. So some people see that as uh you know, more sound, but in that environment, maybe Professor, what do you see out there with the future payments?

Well I think that um there's always gonna be a demand for anonymity in terms of financial payments, at least in some sectors, and that demand is gonna be there unless it's legislated away. And I think that would be one thing that I could add.

Thank you. Thanks Chairman again for hosting and for everyone to help put it together.

Absolutely. Now we turn to the gentleman of North Carolina who'll have the final word.

Thank you, sir. Just a question, and this really switching more to the banking supervision side of things. What steps, you know, can the Fed take to, through the banking supervision side, allow more access to credit? Cuz that's the other part I hear on the affordability here, access to credit, particularly with small businesses. Anybody want that one?

Well, it, I think when you think about access to credit through the banking system, it is operating under a very sturdy regulatory framework. Mm-hmm. The Board of Governors has been given that authority, along with the Comptroller of the Currency and the FDIC who try to synthesize that. And so making sure that that credit is available is something the Federal Reserve is monitoring, of course. It's checking it through its discount window function. Mm-hmm. And I think its examiners on the ground, understanding when do credit conditions tighten, when is that an economic phenomena, And when does it have to do uh more with barriers to access to credit?

Right. Right. And Doctor Keen on um, you were talking about the AI. We, I was in a briefing about a week or two ago and the, and it was AI but then it got into the whole quantum computing thing, which is, can be a whole next level thing in and of itself. But the question came about with, with development of quantum but also the, the cryptography and the ability to maintain the security of, of our system. Is that something that an, and on college campuses I'm thinking of, that's being discussed, that folks are working on, that are, is there even a discussion about that?

I think in some college campuses there are, I know that um AI courses are say mandatory at Purdue University and other places, it's not, I think that sometimes in university settings we're more reactive

Mm-hmm.

uh than we should be, we should be proactive, so I I would hope to see more uh proactive behavior at universities we recently had a major data breach in terms of our online systems um and it was not our fault at the university but it was the the vendor but it still highlights the the issues with ai coming forward that security is an issue

no no anybody else with that i yield back mr. chairman thank you

gentlemen yields back i would like to thank all of our witnesses for their testimony i would like to thank all of my colleagues and professional for coming to Oklahoma City today for this important hearing. Without objection, all members will have five legislative days to submit additional written questions for the witnesses to the chair. The questions will be forwarded to the witnesses for their response. Witnesses, please respond no later than July seventeenth, twenty twenty six. This hearing is adjourned.

Great.