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HFSC CARES Act Hearing

House Financial Services Committee

Oversight of the Treasury Department’s and Federal Reserve’s Pandemic Response

Thursday, September 30, 2021

Witnesses

Opening Statements
Chairwoman Maxine Waters (D-Calif.)
In her opening statement, Waters discussed the failure of President Trump to tackle the pandemic and highlighted the Biden Administration’s implementation of the American Rescue Plan and current legislative efforts. She also discussed the Federal Reserve’s (Fed) emergency facilities and what she characterized as the facilities’ premature closure. She concluded by emphasizing Republicans’ responsibility for blocking extension of the debt ceiling.

Ranking Member Patrick McHenry (R-N.C.)
In his opening statement, McHenry railed against what he characterized as the incompetence of Democrats in control of Washington and tax-and-spend policies. He stated that Yellen and Powell instill confidence in our financial system. He added that Powell should keep his position at the Fed, pushed back against Sen. Elizabeth Warren’s (D-Mass.) characterization of Powell as dangerous, and said he was glad that Yellen is in her seat. He also agreed that the debt limit should be raised but blamed Democrats for failure to raise the debt ceiling.

Rep. Al Green (D-Texas)
In his opening statement, Green discussed the necessity of raising the debt ceiling and the bipartisanship involved in the CARES Act and other relief legislation, concluding with the need to work together to address the debt limit.

Testimony
Janet L. Yellen, Secretary, U.S. Department of the Treasury
In her testimony, Yellen said the Treasury is working to expedite the delivery of relief dollars not yet out the door, and mentioned the Emergency Rental Assistance Program (ERAP) as an example. She stated that much of the money remains bottlenecked at the state and local levels and urged states and localities to remove barriers that can speed distribution of rental assistance funds. Yellen also focused on the debt limit, saying it is imperative that Congress work swiftly to address it, otherwise, it would be the first time in history that America would default. She said our country would likely face a financial crisis and economic recession as a result.

Jerome H. Powell, Chair, Board of Governors of the Federal Reserve System
In his testimony, Powell said inflation is elevated and will likely remain so in the coming months before moderating. He added that as the economy continues to reopen and spending rebounds, the Fed is seeing upward pressure on prices due to supply bottlenecks in some sectors. Powell explained that the effects have been larger and longer lasting than anticipated but believes these effects will abate and expects inflation to drop back toward the longer-run two percent goal. He also mentioned that the Fed completed its sales of assets from the Secondary Market Corporate Credit Facility (SMCCF) on August 31st and wound down the facility rapidly and efficiently with no adverse impact on credit conditions. He said the Fed also closed the Protection Program Liquidity Facility to new lending and added that they are also managing the paydown of assets in other CARES Act facilities as they wind down over time. Powell concluded with clarifying that they have met the test for tapering but are far from meeting the test for full employment.

Question & Answer
Debt Limit
McHenry asked about the debt limit, and Yellen said the debt limit suspension expired on August 1st and Treasury began using extraordinary measures to remain under the debt ceiling but will run out of those measures on October 18th. McHenry asked Yellen if she cares if the limit is raised with Republican votes or just raised in general. Yellen said she believes it should be done on a bipartisan basis. Reps. Ted Budd (R-N.C.) and Bryan Steil (R-Wisc.) asked if there is a level of debt that is unsustainable in our economy. Yellen said the debt held by the public relative to GDP is around 105 percent, and that number is higher than most post-war periods but not a number that is fiscally irresponsible or unsustainable. She said she would judge whether the debt is sustainable by the real interest burden on the debt, and noted this year, that number has been negative.

Reps. Gregory Meeks (D-N.Y.), Ritchie Torres (D-N.Y.), Stephen Lynch (D-Mass.), Alma Adams (D-N.C.), and Nydia Velazquez (D-N.Y.) asked Yellen about the consequences of failing to raise the debt ceiling. Yellen said that failure to raise the ceiling would result in delayed Social Security payments, military paychecks, child tax credit, and other government payments, a drop in the stock market, higher interest payments on business, mortgage, credit card, and other loans, a financial crisis, and a recession. Powell agreed with Yellen’s assessment. Rep. Sean Casten (D-Ill.) asked Yellen if she would support eliminating the debt ceiling, and Yellen said yes.

IRS Bank Reporting Requirement Proposal
Rep. David Kustoff (R-Tenn.) asked about the IRS bank reporting requirement. Yellen said that Treasury proposed augmenting the resources of the IRS to hire qualified auditors, as well as augmenting the information flow so the IRS gets insight into opaque sources of income. She said both pieces together will address the $7 trillion tax gap. Kustoff raised concerns about privacy. Yellen said customers should not have privacy concerns because the banks already file Form 1099 to the IRS. She said they have asked for reports of aggregate inflows and outflows, not transaction level data. She added that it is not an invasion of privacy, and their goal is to make sure people cannot game the system by opening multiple accounts.

Rep. Trey Hollingsworth (R-Ind.) asked for clarity on the requirement and what is meant by gross inflow and outflow of an account. Yellen said the current proposal is limited to those two pieces of information. She said the IRS audit time is devoted to taxpayers who have relatively low incomes, and they know the tax gap derives from opaque sources of income and high-income individuals. She said the audit rates on individuals earning less than $400,000 would not increase. Hollingsworth said people are not worried about audit rates but the privacy aspect. Yellen said there is no transaction history being reported.

Rep. John Rose (R-Tenn.) asked if there is any allowance in the proposal to defray the cost banks and financial institutions would incur from the added reporting expense. Yellen said it was not in the Administration’s proposal, but they would be glad to work with Congress to defray any expense.

Rep. William Timmons (R-S.C.) also asked about the bank reporting requirement and how it has changed since the initial proposal. Yellen said a few additional pieces of information were contemplated for businesses but not anymore. She added that this will help the IRS focus their compliance efforts less on low-income individuals and more on those not paying their taxes. Timmons mentioned underbanked individuals and privacy concerns, arguing that making it more difficult for people to trust the banking system is moving in the wrong direction.

Emergency Rental Assistance Program
Reps. Joyce Beatty (D-Ohio), Velazquez, and Waters asked about rental assistance, and Yellen discussed the challenges and improvements for implementing the Emergency Rental Assistance Program. Yellen highlighted procurement and authorization challenges, adding that Treasury has received feedback on guidance. Velazquez asked about the use of excess first round housing assistance funds, and Yellen discussed the Treasury’s objective of maximizing the number of eligible households served and identifying localities that need excess funds and using reallocating funds in the same state if possible.

Rep. Ann Wagner (R-Mo.) said 83 percent of the funds under the emergency rental assistance programs remain unspent, arguing it is taking too long to distribute funds. Yellen said the programs have been extended, and Treasury has been doing everything it can to work with states and localities.

Inflation
Wagner, Budd, and Steil asked about potentially seeing more sustained high inflation. Powell said inflation will remain elevated until supply bottlenecks are resolved, which they have no control over, but said some relief will likely be seen within the first half of next year. Meeks asked Powell how the Fed will manage the tradeoffs of controlling prices and ensuring full employment and how the Fed plans to resolve that tension. Powell said inflation is almost always low when unemployment is high, that the U.S. is far from full employment, that we should keep accommodative policy in place, and that the Fed expects inflation to come down.

Corporate Tax Rate
Rep. Alexander Mooney (R-W.V.) asked how the reconciliation package will be fully paid for. Yellen said they have many revenue raising proposals. Mooney asked why we should have a higher corporate tax rate than China as part of a pay-for in the reconciliation bill. Yellen said our companies are the most competitive in the world, our effective tax rate is among the lowest in the world, and we can afford to take the corporate tax rate up without negatively impacting firms’ performance. She added that this proposal is in the context of an international agreement to establish global minimum tax rates.

Central Bank Digital Currency (CBDC)
Budd mentioned Powell’s comments on a CBDC and asked if the intent is to ban or limit the use of cryptocurrencies. Powell said he meant stablecoins are similar to money market funds and bank deposits, so it would be appropriate that they be regulated.

Diversity
Beatty asked for Powell’s comments about diversity at the Fed and replacements for the two recent Fed resignations. Powell guaranteed that the Fed would find and give a fair shot to candidates for the two Fed openings. Beatty asked Yellen about putting Harriet Tubman on the twenty-dollar bill, and Yellen said it is very important for our notes to reflect the legacy of our country and that Tubman should be on the twenty-dollar bill. She also discussed the complexity and lead time in the process of designing new bills. Adams asked Powell and Yellen what they are doing at the Fed and Treasury to hire more black and brown women at all levels. Yellen said that Treasury has an active program at all levels to recruit a diverse workforce and leadership. Powell said that the Fed works hard to recruit diverse talent to the Board and provide opportunities to diverse candidates for careers at the Fed.

Climate Risk
Lawson asked Powell what tools the Fed has to assess climate related risk. Powell emphasized scenario analysis, institutions understanding risk and its development over time, and the Fed’s efforts to develop scenario analysis. Casten asked Yellen for an update on Treasury’s response to President Biden’s Executive Order (EO) on climate financial risk. Yellen said Treasury is on track to complete its report in response to the EO by late October or early November.

Workforce Participation
Casten asked what is driving the reduction in workforce participation and how to increase workforce participation. Powell said that the reduction is driven largely by caretakers and retirees, that the dip for caretakers should abate overtime, and that we should see a big chunk of retirees reenter the workforce. Rep. Cindy Axne (D-Iowa) asked if we should invest in policies like childcare to increase workforce participation. Yellen said yes and that addressing the pandemic to get children back to school would free up parents to rejoin the workforce.

Small Business
Rep. Al Lawson (D-Fla.) and Velazquez asked Yellen about outreach for the State Small Business Credit Initiative, ensuring applications are submitted on a timely basis, and when Treasury will release guidance on the Initiative. Yellen said Treasury is following up with each state regarding the application notice and outlined other ways Treasury is conducting outreach. She added that Treasury is in the process of implementation and will make sure that it reaches underserved areas and communities of color.

Coronavirus State and Local Fiscal Recovery Fund
Rose asked when to expect updated guidance on the fund and if increased flexibility will be included. Yellen said they have tried to provide flexibility with the interim final rule in place, and they are working to produce a final rule later this year.

Supply Chain
Axne asked about price increases, semiconductor shortage issues, and if the economy should pull back or expand on its current capacity. Yellen confirmed the shortage and its effect on car sales. Powell said it is a fiscal policy issue and that improvements to the supply chain may fix that issue over time.

Economic Recovery
Adams asked Yellen if the economy is strong enough to handle the withdrawal of relief efforts. Yellen said the U.S. is outperforming other countries in economic recovery but that there will be economic drag next year. She concluded that the recovery would continue and that private sector spending will be sufficient to take the baton on economic recovery.

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