Senators Push Fed Chairman for Answers on Slow Wage Growth

WASHINGTON — The chairman of the Federal Reserve, Jerome Powell, told a Senate panel Tuesday that the economy is humming and the financial system is safe, but cautioned that trade policy has cast an uncertain shadow over the United States.

In the first of two days of semiannual testimony on Capitol Hill, Powell fielded repeated questions from lawmakers about why inflation-adjusted wages continue to grow slowly despite a tight labor market. Powell acknowledged the disparity between low unemployment and weak wage gains but offered no quick fix, telling the Banking Committee that while wage growth has increased slightly over the past few years, it continues to lag the gains Americans enjoyed in the years before the financial crisis.

Pressed repeatedly by Democrats about what the Fed could do to accelerate wage growth, Powell said a strong economy and low unemployment would ultimately lift wages. He said a range of factors outside the Fed’s control have contributed to middle-class wage stagnation over the past three decades, including a slowdown in advancements in educational attainment in the U.S. workforce.

He offered a mixed assessment of whether the new tax law has stimulated the U.S. economy, agreeing with a Republican senator’s assessment that the mere anticipation of tax cuts increased growth last year but telling a Democratic senator that it was too soon to say if the law had begun to lift wages.

“I think it would be early to look for a bill that was signed into law less than a year ago to be affecting much of anything,” Powell said.

At a time when inflation has finally begun to rise — and by some measures, to run above the Fed’s 2 percent target — Powell faced almost no questioning or criticism about price increases, and no pushback on the central bank’s plans to continue raising interest rates gradually. He offered no hint that the Fed was rethinking plans to return rates to historically normal levels, keeping with the Monetary Policy Report that Fed officials sent to Congress last week.

He was mostly pressed on economic policy matters, particularly trade. Powell largely avoided expressing concern over the tariffs that President Donald Trump has levied on imports from China, the European Union and other trading partners, but said that “countries that have gone in a protectionist direction have done worse” historically than countries that have opened themselves to trade.

Powell said it was possible Trump’s strategy would end up liberalizing trade, by forcing other nations to reduce tariffs levied on U.S. exports. He also said the opposite was possible, and that growth and wages could be dampened by an escalating trade war.

“We don’t see it in the numbers yet,” Powell said, “but we’ve seen a rising chorus of concern.”

Several Democrats criticized Powell’s approach to financial regulation, including questioning why the Fed is loosening the Volcker Rule to allow large banks to engage in more risky trading at a time of soaring profits for the financial industry. As he often does, Powell said he favored tailoring regulations to reduce their burdens on business while maintaining effectiveness. “Financial stability, I don’t worry about that too much,” he said.

The only sustained moments of conflict in the hearing came when Powell was questioned by Sen. Elizabeth Warren, D-Mass., a prominent critic of Wall Street, who pressed the chairman on the results of the Fed’s recent stress tests for large banks.

Morgan Stanley, Goldman Sachs Group Inc. and State Street all received “conditional” approval to return money to shareholders following the tests after the Fed exams found weakness in their capital levels during a severe economic downturn. The companies were forced to freeze their payouts at last year’s levels, but did not fail the tests.

“The Fed looked the other way,” she said. “The Fed let these banks off with a conditional non-objection. It looks like, to me, the Fed is heading in the wrong direction here.”

Powell said the Fed had not changed policy governing stress tests nor treated banks differently than it has in years past. Earlier in the hearing, he told the committee that this year’s round of tests was “by a margin, the most stringent stress test we’ve done yet.”

On policy issues, Powell urged the federal government to move away from its outsize role in supporting the housing market.

“It’s really important for the longer run that we get the housing finance system off the government’s balance sheet,” he said. The comments caused a dip in Fannie and Freddie’s stock prices.