Hearings to examine the semiannual monetary policy report to the congress.

Morning.

Good morning. Today the today the committee welcomes Chairman Kevin Warsh for the his first semi-annual monetary policy hearing since taking office. I know it's been seven weeks, but it probably feels like a couple of years. We are really happy to have you with us and really excited about the direction of the Fed.

Mm-hmm.

Today is about how the Fed is serving the American people and how Chairman Warsh is working to combat years of mission creep at the Fed and restoring the Fed's credibility, especially to the general public. The decisions that the Fed makes affect everyday life in South Carolina and around our country. For example, those decisions affect the mortgage payment a couple is trying to afford, the credit card bill a single mom is trying to pay down, and the decisions a small business owner makes about whether they can af afford a loan or not. Frankly, the Fed even has impact on the interest rate interest rate environment, as you know. Reagant member and I spent over a year working on a housing bill that will actually help us increase housing supply, help us expedite the process of building a house through NEPA reform. It'll create more diversity in housing selection at the end, the removal of the chassis requirement. These are important issues that will make housing affordability incredibly easier, but it will never get to the main point of interest rate. The interest rate is something that you control that we don't control. We want you to follow the facts, however. Because that is really important for the long-term durability of our economy. But in North Charleston, where I grew up, families do not talk about monetary policy, Kevin. Uh, they just don't talk in those terms. But they fully understand the principle that when prices rise faster than paychecks, it's really hard to make their ends meet. That is why affordability must be at the center of our conversation. The Federal Reserve has a mandate to pursue and promote a strong labor market through maximum employment and stable prices. Those are serious responsibilities and I'm glad that you are the man for the job and you've taken it seriously. They require clear thinking, steady leadership, and the commitment to follow the data, no matter the political ramifications. It also requires understanding the forces shaping our economy, including AI's impact on jobs, wages, productivity, and prices. Independence is not a slogan. It is a responsibility. And the best way for the Fed to protect its independence is to stay focused on its mission. For too many years, the Federal Reserve drifted into issues outside of its core responsibilities, and America paid a price for it. Mission creep makes the Fed less accountable and undermines public trust. I am encouraged by the steps that you are taking to reform our central bank. The s- that starts with a more disciplined approach to how the Fed communicates. Moving away from overly detailed predictions about where interest rates might be going in the next several months is a helpful step to make sure the Fed is able to adapt when conditions change. Families, small businesses, and markets are better served when the Fed follows the data in front of them, not a forecast that may change in an instant. Less guessing and more discipline will help the Fed stay flexible, credible, and focused. The five independent task forces that you set up also sends a very important signal, that the Fed is willing to start from its core principles and pursue thoughtful reforms to deliver on its statutory mandate. You and I had a a quick conversation before walking in here and I wanted to note that I think that the working groups are fantastic. Uh frankly I think the the composition of the working groups really important. One of the things that we talked about was a balance sheet working working group. Uh I must concede that I'm a fan of Abraham Lincoln's approach of these team of rivals. And it seems like you have Jeremy Stein, you might know Jeremy, from Harvard, as well as the uh former governor of the India central bank, Mr. Rajan. They have very nicely put competing approaches and philosophies about the balance sheet. But if you're gonna be intellectually honest, you need to have a serious debate about what direction to go and frankly, how to get there. And so, I'm really excited about what you're doing there and I look forward to hearing how that works out for you, for the Federal Reserve, and more importantly for the American people. Because uh unwinding a balance sheet the size that we have today is gonna take a deliberate effort that will have to be paced properly not to create instability and volatility in our market. So thank you for taking that seriously. As AI reshapes the economy, the Fed should understand its impact on jobs, productivity, and prices, and the fi- financial system without using technological change to expand its mandate. That same discipline should guide the Fed's approach to bank regulation. The US banking system is sound and resilient, but we cannot take that for granted. Preserving that strength requires regulation and supervision that are clear, appropriately tailored, and focused on real real risks. According to the July twenty twenty-six monetary policy report, bank capital is near historically high levels. As the Fed finalizes Basel-three endgame and other capital rules, it should pursue better calibrated requirements that preserve resilience without unnecessarily restricting lending. When capital is stuck on the sidelines, family in Irmaul, South Carolina may find it very difficult to get a mortgage. A small business may find it hard to get a loan. A community bank may spend more time satisfying Washington than serving its own customers. That is why this committee will continue pressing for regulations that protect the system without cutting off access to credit. I want the Fed to be very successful. We need the Fed to be successful. Prices become more stable when your job is done well, markets gain confidence, wages grow, and more families have the opportunity to save, invest, buy a home, and live their version of the American dream. Welcome today. Right, can you move over? The floor is yours.

Uh, thank you, Mister Chairman, and welcome back, Mister Warsh. So about two months ago, you appeared in front of this committee for your nomination hearing. And you refused to answer basic factual questions. I assume because you were afraid of contradicting President Trump. Your answers during the hearing were so troubling that this committee had a party line vote for Fed chair for the first time ever in our history. You were confirmed by the Senate in the tightest vote for a Fed chair in US history. So you now face an battle to show that you have the independence needed to run America's central bank and to serve American families and not just President Trump and his billionaire friends. Now, President Trump's corruption and failed economic agenda is raising costs across the board inflation has kept real wages from growing for the third consecutive month. That means in the Trump economy, Families are falling behind with less to spend every day that goes by. High interest rates are making mortgages, auto loans and credit cards more expensive. More and more people are falling behind on their bills. Ninety-five percent of Americans believe that the US is suffering an affordability crisis. While President Trump continues to call affordability a hoax, telling Americans their concerns about the cost of living are made up. Lower interest rates would provide some relief to families, but the Fed hasn't lowered interest rates and may be forced to raise rates even more, all because of one man, President Trump. Now, the President knows this. So, instead of changing course, he wants to take over the Fed. Installing you as Fed Chair was a critical part of his plan. You reportedly told the president, uh, exactly what he wanted to hear in your Oval Office interview and Trump confirmed it afterwards saying, quote, "Wash things you have to lower interest rates." Now, for your part, you were the only member of the last Fed meeting who declined to submit economic projections, projections that are supposed to show how the Fed's decisions under your leadership are likely to affect American consumers, and American workers. People might look at that and conclude that you don't wanna tell the truth about inflation under Trump. Trump may have you in his pocket, but he will not stop until he controls the Fed. And he just needs one more seat to do that. And that's why he has had his Department of Justice open bogus criminal investigations into both Governor Lisa Cook and former Chair, Jerome Powell. And that is why he illegally tried to fire Fed Governor Cook. His own Supreme Court recently blocked the firing, at least for now, but Trump has vowed to try again to fire Governor Cook. The fight for control is a fight over interest rates, but it is also about corruption. President Trump likes to play king, and the Fed offers many appeasement opportunities for the president to enrich himself while he fleeces the American people. Start with crypto. Trump's family crypto company is World Liberty Financial, the centerpiece of the crypto enterprise that let him rake in one point four billion dollars in twenty twenty five alone. Now it is currently applying for a bank charter. After that charter is granted by Trump's own bank regulator, world liberty could seek special privileges from the Federal Reserve to juice its own profits, like a master account that would give Trump's own company direct access to the Fed's core payment rails. And there's more. If he can control the Fed, Trump could threaten to revoke banks' access to Fed's services if they refused to do his bidding. He could hijack the Fed's extraordinary powers to bail out financial markets, making sure that he rewards his friends and punishes his enemies in a crisis. And you better bet that Trump will turbocharge the Wall Street deregulation that is already underway, juicing mega-bank profits and CEO bonuses, knowing that American taxpayers will be on the hook once again if there's another devastating financial crash. Congress and the American people will be watching closely whether you serve the public or whether you become yet another instrument of Donald Trump's corruption. Thank you, Mister President, uh, Mister Chairman.

Thank you, ma'am. Chairman Warsh, thank you for being with us. The floor is yours.

Uh.

Five minutes.

Th thank you very much, Mister Chairman, uh, Ranking Member Warren. Other members of the kid committee, good morning. It's a privilege to join you. It's my first appearance before this panel as Chairman, and I'm particularly honored to represent my superb colleagues from across the Federal Reserve System. In submitting the monetary policy report, I can't help but think of a long line of central bank chiefs who came before the Congress in keeping with the Federal Reserve Act and I can't help but think of the best of the Fed's traditions. As a country, we just marked our two hundred and fiftieth year. And when Americans count our blessings, we can include an economy predicated on the brilliance of our constitutional design and system of ordered liberty. An economy without equal in all it's done for human flourishing. Some forms of communication, including some that the ranking member referenced, are discretionary. But not this one, and for good reason. It's a prudent and wisely conceived obligation designed to keep the Fed responsible, accountable, and faithful to the mandate that you gave us of full employment and price stability. These obligations are of a piece with the Fed's rightful independence in the conduct of monetary policy. Today, we're at a hinge point in history. And it's up to each of us, myself included, to meet this moment. The Fed's number one objective is to get monetary policy right. That's our clear and constant aim, the star by which we steer by. And if we get policy right, and we will, the inflation surge of the last five years will be a thing of the past. Just a month ago, I chaired my very first FOMC meeting. My colleagues and I recognized that high inflation has been an undue burden on American households and businesses. And while monthly fluctuations are inevitable, especially in an unsettled world, underlying inflation over longer-term horizons is determined largely by monetary policy. As I've said before and will say today, inflation is a choice. The members of our committee have no tolerance for persistently elevated inflation, and we share a resolute commitment to restore price stability. That was our focus when we met a month ago, at which we decided to hold the target range in the federal funds rate at three and a half to three and three quarters percent. Naturally, our work at the Fed demands a proper reading of economic conditions. As you might have seen in our report, economic activity is expanding at a solid pace, showing resilience in the face of recent developments. Household consumption, growth is moderate, And manufacturing output has moved up steadily this year. The housing sector, however, strikes a different note. It gives a different picture and continues to lag. I wanna highlight the most striking feature of our economy right now, and it's business investment. It is a surge in capital expenditures. Compare that to what we've seen for a long, long period of financial engineering. This is a better situation. The rapid rate, the rapid pace of capex, which appears to be accelerating, reflects in large part the construction of infrastructure, including in and around AI and the immense demand for AI related equipment and software. Investment in equipment overall increased about eight percent for the year and the first quarter. Within that category, high-tech spending logged an especially impressive growth rate of about twenty-five percent. We don't yet know the extent to which the economy will benefit from this build-out. Yet it seems inevitable, at least to me, that what is now called AI investment will soon just be called investment. Even so, new opportunities for the economy introduce new challenges for policymakers. We at the Fed are monitoring the implications for the inflation and for the labor market. That brings me to the supply side of the economy, a subject worthy of equal attention, where productivity growth has been strong. And I'll note that this productivity growth predates gains from AI adoption. America's labor force appears to be broadly stable. Job creation has kept pace with the workforce. The unemployment rate low, and has changed little, quite frankly, over the last year. We're seeing relatively few layoffs and only slight variance in the rate of job vacancies. Solid growth in nominal wages too. I've been heartened by the welcome I've received. And by the encouragement encouragement of my colleagues, we have a duty to point the institution forward, to take a fresh look at current practices, to make sure we're serving our objectives, and we're going about it systematically. As the chairman referenced, I appointed a task force in each of five areas that are central to the conduct of monetary policy. I'll m- just reference them and close. First, Fed Communications. Second, our balance sheet policy. Third, our use of existing data. Fourth, productivity and jobs, and finally, the Fed's inflation framework. Our purpose here is to make better decisions in the conduct of monetary policy and put these years of high inflation behind us. We are the Federal Reserve, Mister Chairman, and as determined as ever to fulfill our mission. Thank you and I welcome your questions.

Thank you, Chairman. Each member will have five minutes to ask. questions and get answers and i'll start that off and i'll start off with the with your working groups uh i think credibility equals transparency and the names that i've seen on your your working groups from doug macmillian former ceo of walmart to mark andreessen on productivity and ai tells me that you're serious about getting real world experience and expertise involved in making decisions at the fed i wanna give you just a just a minute of my time to to walk us through perhaps one or two pieces of that, as we talked about the importance of uh having contrast on the committee, on the working groups, really important from my perspective. I think it lends itself to having more confidence in the Federal Reserve. I wanna give you a minute to talk about uh one part of it, and then I wanna move quickly to AI.

Alright, let let me let me brief be brief, Mister Chairman, but you're highlighting something that's awfully important. all institutions, including the Federal Reserve, which I am so proud to lead, filled with great people. On occasion, we need to bring new ideas to the fore. And after sixty-three months of inflation above the Fed's target, it struck me that any new leader should arrive at this organization and look to the very best minds that we could find. There's a lot of great ones at the Fed, but there's a lot of great ones that aren't even in the economics profession. And I reached out to fifteen people who I have known and trusted. with a diversity of views to see whether they would take the most important questions that are gonna be the determinants of monetary policy and the determinants of the economy next five years and see if they could sharpen their pencils and do their best work. It's a move towards transparency and new ideas. I'll just give one example before turning it back to you. In the last couple of days we've gotten uh data on consumer price index today on the producer price index. Um any central bank would be happy to have the data going in the right direction. My view is these are all imperfect measures of the state of underlying inflation. So one of the task force is gonna see whether we can do better, have better data from external sources, and even better ideas as to how important organizations like the Bureau of Labor Statistics the Bureau of Economic Affairs might think about how they could do a better job in, uh, in an evolving economy.

Thank you. We met uh just a few weeks ago with Doctor Phelan who's slated to be the head of the president's uh economic advisors. And we talked a lot about artificial intelligence and the impact it will have on our economy and whether or not it will destroy jobs, create jobs, and ultimately at the end of the day, his conclusion was it'll create more jobs. Artificial intelligence has an opportunity to change how we do so many things. And much of the debate for me can be bifurcated into automation,

Mm-hmm.

things go away, and augmentation. people make more money because production goes up and you've argued that perhaps there's a way for us to see a reduction in interest rates because of that increase in productivity one of the things standing in the way uh of that conversation is what's happening in south carolina where data centers or meaning real headwinds new york has basically banned them we have a moratorium in parts of south carolina because of issues like electricity bills water use aesthetics So getting to the future that we're talking about, and frankly beating China in this AI race might come down to something as important as electricity bills and water usage, which could prevent us from having a serious conversation about productivity gains. Thoughts?

Yeah, uh, it's I can't thank Mister Chairman of a more consequential change to the US and global economy in my li in my adult lifetime than the surge of investment and the potential in around AI. Um, that's part of the reason why one of my task forces is to focus on what's the effect of this general purpose technology on both parts of the Fed's mandate, on uh ensuring stable prices, but also on full employment. You gave us both parts of that.

Yep.

We don't have any legislative orphans at the Fed. There's no disfavored part. I would say it is a huge opportunity, but it's not without challenges. I'll make two other brief points. I think the United States is extremely well positioned to be at the cutting edge, and extract more productivity, which should be good for US companies and US workers, than any other country in the world. Any other country would exchange positions with us, uh, in a moment. Second thing is, I do wanna make it clear that in the near term, I think this investment

My time is up, but I will uh submit one uh question for the record around the issue of indexing indexing our regulatory thresholds. Uh, we've seen so much growth in the last since twenty nineteen that our institutions might need to see a little calibration a recalibration on on the thresholds that we we have uh put upon them. Regular member Warren.

Uh, thank you, Mister Chairman. So the Federal Reserve has long been plagued by a culture of corruption and coziness with Wall Street. Over the last five years, at least six senior Fed officials have been implicated in serious ethics scandals related to personal stock trading and self-dealing. But, instead of trying to repair this broken culture, I'm concerned that you seem to be embracing it. At the time of your nomination, you owned more than a hundred million dollars worth of shares in private investment vehicles called the Juggernaut Funds and THSDFSLLC. And you refused to disclose the underlying assets to the Senate and to the public. You say now that you've sold those shares. In other words, somebody wrote you a check for more than a hundred million dollars days before you entered office. Chair Walsh, who wrote that check?

Uh, Senator Warren, this is a discussion you and I had in the public square, uh, seven weeks ago, and, um, thrilled to tell you that i have fully honored the obligations i had under the office of the agreement i had with the office of government ethics and there is continued disclosure which i'm happy to make as consistent with the agreement

yeah i'm i'm glad you did but i ask you i ask you a very specific question who gave you a hundred million dollars right before you were sworn in was it a billionaire who has business with the fed was it stanley drunkenmiller who's made billions of dollars betting on what the fed does Or was it a different billionaire who gave you the money?

Uh, I will fully comply with the Office of Government Ethics.

That's not an answer.

And, well, it is an answer actually, Senator, because there are obligations and I will satisfy them completely.

No, it's not. It's a hundred million dollars that you got just before you were sworn in. And you won't tell the American people where it came from. Let's go to another incident. As you know, the Fed imposes a blackout period where senior Fed officials are prohibited from talking about economic issues with outsiders the idea is to quote reinforce the public's confidence in the transparency and integrity of the monetary policy process in other words no one gets some special insider information from the fed but shortly after your first fomc meeting as chair right in the middle of the blackout period the fed's vice chair for supervision michelle bowman was reportedly the featured guest at a secret dinner hosted by Bank of America for its hedge fund and Wall Street clients. At this closed-door dinner, she reportedly spoke about both monetary policy topics and regulatory policy. Now, I've called on the Inspector General to review her conduct, but you're the guy in charge. As chair, you set the tone on culture. Did Vice Chair Bowman provide any non-public information to the attendees at that secret dinner? Or discuss any regulatory policy matters that are subject to open comment periods?

Uh, Senator, I I agree with with one of the premises of your question, which is I do set the culture.

Good.

Uh, after my very first week at the Fed, I sent a letter to the twenty-one thousand people at the Fed outlining our culture.

I I appreciate that, but we have very limited time and a very strict chairman. So can you just answer the question about the Vice Chair and her secret meeting?

Sure, I'm I'm happy to, to the extent I can share it with you, I um, uh, the Vice Chair has been an excellent colleague in my first seven weeks. I'm aware of the letter you sent to the Inspector General out of an enormous respect for him, uh, his investigation, what he chooses to do with it, I'm gonna leave to him to do without trying to

So you support.

And I'd be interested in the judgments that he uh, that he comes to.

So you will support his investigation. Have you made your own investigation? Did you ask her if she spoke at a secret meeting during the blackout period?

Mm, I agree with the suggestion, um, that the Inspector General is an independent actor.

I I know you're the guy in charge.

And I'd be very interested in his decision.

You just said you're the guy in charge. Did you ask her about the secret meeting that took place? Did you ask her?

I I can answer a simple question, which is I wasn't at the meeting, I don't I don't know the facts,

I understand that. No one thinks you were.

but I'd be very interested in the fact finding

Did you ask about the facts?

being done by an independent inspector general.

Did you care enough to ask? How can you be chair and not ask your own vice chair whether or not she violated the blackout period, violated the law?

I think it'd be inappropriate for me to prejudge facts that are being discovered by an independent actor.

I don't know how you would prejudge them if you don't. Ask.

Well, I don't know how to prejudge them if I wasn't in the attendance of a meeting.

So just tell me, did you ask?

Uh, she's been an excellent colleague.

Did you ask?

We've I've asked her a lot of things about supervision and regulation,

Did you ask? Yeah,

because we've been busy doing a lot of real work over the last seven weeks.

I think that's one more question you don't want answered. I gotta say, I'm gonna take the same time you did. I just gotta say,

You hope so.

the tone that you are setting is one that seems to invite corruption, and that's gonna be a real problem.

We've had se- we've had seven weeks

It's gross.

Thank you.

senator warren and we've set a tone of performance accountability responsibility and integrity

senator reyes has the floor

thank you mr. chairman mister warsh welcome to your first meeting

thank you senator

uh let me give you an opportunity i i think eh eh i've got some questions that i think are important with regard to the basel three and what we're gonna do with it but before we get into that i'd think you've been basically harassed a little bit in terms of making accusations to you. Let me give you just a minute to perhaps respond in a just straightforward manner to some of this stuff. Anybody give you a hundred million dollars?

Uh no, sir, no one did any such thing.

Possible that you may have had assets that were sold based upon an agreement that you had uh uh as you became the nominee for the chairmanship?

Yes, I had earned assets over a long period of time and went over and above, uh, any ethics agreements and have sold, or in the process of selling, have nearly completely sold everything that I had earned during that period, and have rolled those into the equivalent of cash and T bills.

So, uh, basically, uh, away from investments, uh, based upon the market and back to to Tre- to treasuries.

Y- yes, exactly right. I thought that that was the prudent thing to do, given the responsibilities and the importance of setting the tone at the top. Culture is the big driver of a lot of things, and in my first seven weeks, Senator, we're doing our very best in the best of the Fed's traditions to get the culture right, to get the strategy right, and to get policy right. And if we can do those things, all of which are to the left of the decimal point, might not be of such great interest to people that are trading on Wall Street. And I think the decisions we make to the right of the decimal decimal point can be better. So we can do a better job of fulfilling the mandate you gave us.

Yeah, you uh, the the ranking member had had asked a question with regard to another member on the committee. Um, uh, Nikki Bowman. And you indicated that if there was an accusation being made as to an inappropriate meeting, that if the Inspector General was doing it, that you were gonna hand's-hap you were gonna be hands off on it. Seems to me that that's pretty appropriate. Uh, because if you would have gotten involved in it, the accusation from some members on this committee would have been that you were trying to influence it.

Yes.

Uh, can you talk a little bit about the logic, am I on the right track with regard to the reasoning that you have, for allowing the Inspector General to do the job that they were asked to do in the first place by members on this committee?

Yes, Senator, you're you're exactly on the right track. Um, I'll just say more broadly, that my fellow governors, my Reserve Bank presidents, they've received me incredibly warmly. I admit that I show up with a lot of ideas for reform in monetary policy and supervision regulation and payments. I've only been there a short while, for seven weeks. But instead of an institution acting inert, what I have found is my colleagues are really open-minded to change. What I found is we're gonna have a good family fight. I'm not imposing ideas. Part of the idea of the task force is the chairman reference. But we're gonna try to be better at our jobs, fulfill our mission, be accountable, be responsible, and do it all with the utmost integrity. That's my intention. We're early into this. I don't wanna prejudge outcomes. We made a lot of progress in a short period of time and frankly, I'm proud of it.

I I like the idea that you're putting together working groups. I think that will give up, give an opportunity for a fresh look at a lot of things going on. As I shared with you on a phone call earlier. It's not a matter of being necessarily vindictive or angry with previous chairs or previous members. It's a matter of making things better for the American people. And that's really what we ought to be talking about today. So let me just in the minute and fourteen seconds that I've got left on mine, let me talk a little bit about Basel-three in particular. I'd I'd I think you and Vice Chairman Bowman and the respective financial regulators, I think you've done a good job in terms of your roles with regard to the Basel-three re-proposal that was issued this March. The twenty twenty three proposal would have substantially increased common equity capital requirements for category one and category two banks, by approximately nineteen percent, failing to strike a balance between maintaining resiliency of our banking system and doing so without hampering lending. I think this is a really critical item, and uh next to next to what artificial intelligence is gonna do in terms of our, our, our, our productivity, I think it's one of the biggest issues out there. With the June eighteenth comment deadline now behind us, Are there any other categories of feedback that you're weighing more heavily than others? Such as the adjustments to leverage ratios or anything along that line? And if I could, is there gonna be a go live date this year sometime? Any any idea when you might actually uh uh be able to talk about the when this thing is gonna go public for us?

Uh, Senator, well, thank you for your question on supervision regulation. As as I mentioned before, I've shown up with a lot of ideas for reform, not just in monetary policy. But in supervision and regulation too. When I was before this committee uh some twenty years ago, there was a deba debate about what the Basel process should be. Boy, we should get to the bottom of that twenty years later, and we should end up with a set of reforms in the United States that makes our financial system, our banks, safer, sounder, and more competitive. It is that competition which provides better and more uh agile credit to the real economy. Uh The Basel endgame, Senator, is not America's endgame. I am happy to work with international regulators to try to find common views,

Thank you.

but we're gonna do the right thing for the US economy. As you mentioned, we're out for public comment. I'll be very interested in the comments before we go final with a with a proposed final rule.

Uh, let me just say uh this is already off to a good start. But we're all staying around five minutes period. Thank you. Senator Reid, the floor is yours.

Thank you, Mr. Chairman. Uh, um, Chairman Walsh, uh, I wanna see if I put a cap on this discussion between Senator Warren and Senator Rounds. When will you disclose who brought your assets? When?

Um, I believe there's periodic requirements under the ethics laws and I'll fully comply with them. I think the next reporting requirement is at some point next quarter or so.

And you will fully disclose who you sold your assets to.

I'll fully comply with the, with the law and the ethics agreement.

Thank you. Uh, AI is making a huge impact on everything we do, uh, particularly the banking system, and uh, as you're aware, uh, an inter-agency governmental group, Commerce, Treasury, Energy, always, et cetera, has authorized the major banks, the eight major banks, to use mythos to evaluate their security. Uh, would you agree that's important for all financial institutions have access to these types of ai tools so that they could analyze their uh operations for cyber vulnerabilities

yes i think the broad financial system has new vulnerabilities with these new technologies i wouldn't wanna just isolate mythos though the other large language models have rival products the changes the efficient frontier has changed even in the last month But as these new models find their way more broadly, our banking system and frankly the Federal Reserve needs to do all we can to patch any vulnerabilities that we have.

Uh, what are you doing to uh ensure that these uh mid-sized and smaller banking institutions have access to whatever AI tool is appropriate as quickly as possible?

Yeah, so I I share the sentiment, Sen- Senator Reid. There is a " we are not the deciders as to who has access But I have not been shy in sharing my views with authorities across the government about the vulnerabilities and have been asking for access, not just for the Federal Reserve, but for other institutions, to a whole range of these new uh uh artificial intelligence models so that they can protect themselves. Uh, if you said to me what worries you over the course of the next several months, I wanna make sure that we're as protected as we can be from uh foreign actors that wanna do us harm.

Well, let me uh change the uh stay with AI, but change the focus a moment. Uh, recently uh Governor Waller and New York Fed President John Williams have warned that AI investments may be increasing inflation. And many economists have similar warnings. So, so are AI investments current drivers of inflation?

Um, this is one of the good family fights. Uh, let me s give my own view on it. which might be somewhat nuanced from from the way you just described it and some of my colleagues. Um, the shock of AI, the supply shock of AI has an effect on demand and supply. We see the effect on demand much more quickly. We see it in the capital investment I referenced. We see it in the prices of chips that are going up. We're inferring, which is just a fancy word for guessing, when the effects will happen on the supply side of the economy. I don't view a one time change in prices as necessarily being inflationary, because I think there's a supply response. In that way, this is different from a foreign conflict and what it might do, which tends to reduce the supply side of the economy. Will it increase measured prices over the course next twelve months? I suspect it will be. But whether that's inflationary or not, that's up to the Federal Reserve and we're gonna have something to say about that. Mm-hmm.

Okay. Now, uh, one of the interesting things about, uh, our economy, it's becoming more and more productive. But one of the disappointing things is that household pay is not rising, uh, relative to that productivity. And we're seeing, uh, less benefit from productivity gain. So, uh, what's driving this trend?

Yeah, it's a, it's a, it's a great question. I don't have a perfect answer to it. Like you, we think a lot about real take-home pay. The part that the Fed can do a lot about is the real part. Um, if inflation were lower, real take-home pay would be higher. That's just the arithmetic.

Mm-hmm.

Your other question's a broader one, which is what are we gonna see the productivity improvements lead to a surge in wages? Wages have moved up at a reasonable pace, but it's likely that as

In the last ten seconds, will AI eliminate jobs at a catastrophic rate?

So you're you're asking me to prejudge the task force. My shor short answer is over the long term, absolutely not. I believe that this is a long-term job creator. But will it be disruptive? And will some people have their jobs in jeopardy because of the t- new technologies, on that I can't offer any sort of guarantee or comfort.

Senator Britt. Thank you.

Thank you, Mr. Chairman. Um, Chair, thank you so much for being here with us today, certainly appreciate the opportunity to have a conversation and obviously, so early in your tenure, um, in in this new role. Uh, in this year's monetary policy report, one of the most encouraging themes is the increased and business investment that we're seeing across the country. In Alabama and many places we're seeing companies expand, uh, manufacturers grow, and communities will are benefiting from that investment. I believe that these are good signs and that they're also important for the future because they help us determine whether America remains the most competitive economy in the world. My question for you is, as you look at the economy, What data tells you that today's investments are laying the groundwork in the foundation for a stronger long-term growth and greater American competitiveness?

So it's a it's a great question, and thanks for highlighting the capital investment boom. This is what most countries are searching for.

Mm-hmm.

This is the this is the seed corn for the next group of job creation and productivity. To be honest, over the last dozen or so years, we have been waiting for the surge in business investment. I know in some academic accounting sense, this is leading to a surge in prices in the la in the next twelve months. I don't wanna sound dismissive of it, the surge in prices is real, but I'd sure rather the most successful companies in the world investing in property, plant and equipment than doing a share buyback.

Mm-hmm.

So I'm encouraged by it. Uh, the trend is our friend here, and this business capital investment is contributing massively to the GDP we've seen in the last twelve months. My colleagues know I'm not big for forward guidance, but I would guess that that trend continues. Um, what gives me optimism about it? Well, when the private sector deploys this amount of capital, they must see something shiny at the other end of that rainbow.

Mm.

They must see a very good return on investment. That's why they're taking this capital and they're putting it to work. I tend to think that private investment has a multiplier way higher than one. Um, I'll let you and others judge whether that's true of government spending too.

I'm I'm gonna go ahead and and switch gears, cuz I know we're on a tight time frame today, which I appreciate. Um, and I'm gonna follow up on a question that the chairman asked. I'd like to get you to kind of dig into this. Some banks are already approaching and crossing into new tailoring categories, and they're making staffing and compliance and long-term business decisions. based on thresholds that haven't been updated since two thousand and nineteen. At the same time, the Federal Reserve continues to rely on those categories and other regulatory frameworks. So my question is, how are you thinking about updating these tailoring frameworks when it comes to what banks can expect to see and and proposals in the future?

So it's a it's a great question, one I take seriously, to be candid with you and the chairman and the other members of the committee. monetary policy has distracted me a bit in the first seven weeks, but the Federal Reserve Chairman is supposed to be the chairman of uh monetary policy and payments and consumer affairs and supervision regulation. But I can tell you this, uh Vice Chairman Bowman has been working on these initiatives, she has briefed me about them, and broadly I'll step back and say modernizing our banking system streamlining regulations so that the rules that apply to the systemically important financial institutions are not one size fits all for every other. The secret to the American economy is we have a few thousand banks and other providers of credit who know their smaller markets bigger. I'd rather have that system than what most of our G-twenty peers have, where they have a half a dozen institutions implicitly backed by their government. I think reform is coming to supervision and regulation. I have my own ideas that might be as dramatic as I've already shared on monetary policy here. And I think the sooner we can get to the bottom of it, the better. If I could say one more thing, the reforms we've been putting in place over the last fifteen years coming out of Dodd-Frank, as we learned in the Silicon Valley Bank example and the first Republic example, they didn't work perfectly. My predecessors had very little choice, but then to do another overall bailout, we don't want that to happen again. So we wanna tailor the rules and the capital so they serve the best interests, of the US economy, which I'd describe as a system that is safe, sound, and competitive.