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House Financial Services Committee Hearing for CARES Act Oversight

House Financial Services Committee

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

Tuesday, March 23, 2021

Witnesses

Opening Statements

Chairman Maxine Waters (D-Calif.)
In her opening statement, Waters said with the passage of the American Rescue Plan, help is arriving for millions of individuals, families, and small businesses. She said the legislation delivers much-needed relief in the form of additional direct payments, expanded child tax credits, emergency rental and homeowner assistance, unemployment assistance, support for small and minority owned businesses, as well as funding for other key programs. Waters argued that President Biden’s team is ensuring that the pandemic response and implementation of relief programs is efficient, effective, and a top priority. She congratulated Secretary Yellen on the historic nature of her appointment and commended her for her negotiation of an increase in special drawing rights at the G7, and commended Chair Powell for his work on strong capital requirements which she called the cornerstone of appropriate prudential bank regulation. Waters concluded that there is a long road ahead and that the Committee needs to ensure there is a sustained and equitable recovery.

Ranking Member Patrick McHenry (R-N.C.)
In his opening statement, McHenry said the country is in a different place than it was last March and that the economy is ready to safely open. He argued that Democrats still chose to muscle through their partisan spending package, which he argued was not targeted help. McHenry also questioned what will happen with the amount of liquidity in the financial markets. McHenry argued that increased taxes will impede growth, and that the central bank’s balance sheet has grown to levels unseen before. He argued that rehashing old, failed policies of 2009 will not build lasting growth or prosperity. He said that he believes it would be more productive to discuss the American Rescue Plan rather than the CARES Act. McHenry concluded by asking Yellen whether she, like her predecessor Secretary Mnuchin, would commit to providing key programmatic data to congressional committees to assist their oversight responsibilities, as well as commit to working with various oversight bodies with jurisdiction over the CARES Act.

Rep. Al Green (D-Texas)
In his opening statement, Green said that as funds from the CARES Act continue to flow, he is concerned about the mechanics of how these funds will reach their intended beneficiaries. He said he is looking forward to discussing the Emergency Capital Investment Program (ECIP) which provides capital investments and grants to strengthen Community Development Financial Institutions (CDFIs) and Minority Depository Institutions (MDIs). Greene further said he is looking forward to discussing the assistance to small businesses authorized in the American Rescue Plan through the State Small Business Credit Initiative (SSBCI), which provides funding to minority-owned businesses, noting his interest in how these two programs will benefit end-users.

Rep. Andy Barr (R-Ky.)
In his opening statement, Barr said last year there was bipartisan work on multiple bills that were temporary, targeted, and tied to COVID, arguing that this year’s bill was partisan and a “wish list” for Democrats’ pre-COVID priorities. Barr said he worries about the unintended consequences for mid- and long-term growth. He argued he feared the “toxic cocktail” of massive deficit spending; increased risk of inflation; higher long-term interest rates; unprecedented, accommodative monetary policy; the promise of growth destroying tax increases; and an avalanche of regulation. He concluded that he wants to enact pro-growth, market-oriented solutions to position the economy for the long term.

Testimony
The Honorable Janet L. Yellen, Secretary, U.S. Department of the Treasury
In her testimony, Yellen said the CARES Act and Consolidated Appropriations Act gave the government powerful tools to address the crisis, but such tools were not powerful enough. She argued that she is confident that the American Rescue Plan will allow people to reach the “other side” with the foundations of their lives still intact. Yellen said the speed and strength of the economy depends on how the Department of Treasury implements the legislation, adding that the Treasury Department is working on expediting relief to areas of greatest needed, particularly small businesses. Further, she said the Department is working with the Small Business Administration (SBA) to tweak how the Paycheck Protection Program (PPP) is implemented so that further rounds reach millions more micro-businesses and entrepreneurs, especially in rural and low-income areas. Yellen said the Treasury is building the capacity to support these communities over the longer-term, including through injecting money into CDFIs and MDIs, which she said can then lend that capital to help people buy homes and start businesses in places that the financial services sector traditionally has not served well. Yellen concluded that implementing these relief programs is more complicated than it sounds, but the Department of the Treasury is working closely with stakeholders to ensure the programs are efficient and effective.

The Honorable Jerome Powell, Chair, Board of Governors of the Federal Reserve System
In his testimony, Powell said the economy has much improved due to swift, vigorous action, but the recovery is far from complete. He said there are several indicators of activity: spending on household goods is high but spending on services is still low; the housing sector has fully recovered; business investment and manufacturing production have picked up; and conditions in the labor market have improved. Powell said that the recovery has progressed more quickly than generally expected and looks to be strengthening due to fiscal and monetary policies which provided essential support to households, businesses, and communities. He said the Federal Reserve’s (Fed) response is guided by their mandate to promote maximum employment and stable prices. Powell argued that the Fed took broad, forceful actions including deploying both conventional and emergency lending tools to more directly support the flow of credit, which helped support businesses, non-profits, and state and local governments. Powell said these programs also helped restore the flow of credit from private lenders through normal channels. Powell concluded that the Fed’s public mission is to use its full range of tools to support the economy and help ensure that the recovery from this difficult period will be as robust as possible.

Question & Answer

Inflation Risks
Reps. Ann Wagner (R-Mo.) and McHenry asked if Congress should be worried about inflationary pressures after passing the $1.9 trillion package in addition to the introduction of a $3 trillion infrastructure bill. Powell said the Fed is committed to its price stability mandate. He said he expects inflation to move up over the course of this year as the economy reopens, saying we will likely see more consumer spending. He said although there may be some upward pressure on prices, it will be small and temporary, and the Fed plans to use all its tools to mitigate inflation as much as possible.

Barr asked if either Yellen or Powell intend to lengthen the maturity of government debt before interest rates rise as it relates to the trillion-dollar deficit. Yellen said the Treasury has been looking at this but has no current plans to do so.

Liquidity
Rep. Jim Himes (D-Conn.) was concerned by the flood of liquidity into the system during the pandemic, listing the high yield market, special purpose acquisition companies (SPACs), and equity markets as examples. Himes asked what risks are associated with the inevitable contraction of liquidity in the system. Yellen said that while asset valuations are elevated by historical metrics, there is also belief that the economy will be able to get back on track. She said an environment where asset prices are high, the most important thing for regulators is ensuring the financial sector is resilient and our markets work well. Powell said monetary policy is highly accommodative right now, and they are doing everything they can to monitor financial stability. Powell agreed that asset prices are high but said the banking system is highly capitalized and funding risk is relatively modest. Moving forward, Powell said they would start to taper asset purchases once they see substantial progress towards the goals of full employment and price stability.

Housing Assistance
Waters and McHenry asked what progress has been made in implementing renter assistance programs and what more can be done to address any confusion. Yellen said they have distributed money to state, local, and tribal grantees and are now focusing on providing those grantees with flexibility and policy guidance to address local needs. She said the Treasury is also developing outreach and technical assistance, issued Frequently Asked Questions (FAQs) and guidance around how the money needs to be used and plans to follow up and ensure the payments are going to eligible households.

Rep. Emanuel Cleaver (D-Mo.) asked how opportunity zone programs could be tweaked so the incentives help people in those zones. Yellen noted the importance of increasing affordable housing and how appropriately structured opportunity zones could contribute to that mission. Yellen mentioned a number of other tools that contribute to these goals such as the low-income housing tax credit and the Capital Magnet Fund which will facilitate investment in affordable housing construction.

Rep. Blaine Luetkemeyer (R-Mo.) asked what will happen if the extension and foreclosure moratorium is ended. Powell stated that commercial real estate is being monitored carefully and affirmed that concentration arises principally in smaller banks. Powell said that he did not have anything to provide but is aware of the issue and will move carefully when it is addressed.

Tax
Wagner asked a series of questions about the potential changes to tax policy, impacts on jobs and wages, and the effect of raising corporate taxes on consumers and small businesses. Yellen stated that she expects that changes to tax policy will be examined along with other programs to address longstanding problems including productivity and labor supply, infrastructure, and risks from climate change. Yellen said that a package consisting of investments in people and infrastructure will help to create jobs and changes to the tax structure will pay for those programs. Yellen noted that economists have studied corporate tax changes for a long time and the impact on consumers is unclear based on the studies.

Wagner stated raising corporate tax rates will impact  small businesses and American households and asked why the Biden administration would propose tax policy that would hurt American families and small businesses. Yellen stated that the Biden administration will propose investments to the economy which will  need to be competitive and productive. Wagner followed up by asking if this is being proposed to offset the partisan stimulus package. Yellen explained that the American Rescue Plan was not funded with any increases in taxes, but a longer term plan that addresses critical issues in the economy would likely be accompanied by some revenue raisers.

Rep. Josh Gottheimer (D-N.J.) asked Yellen if she supports removing the state and local tax (SALT) cap. Yellen said she agrees the SALT cap resulted in disparate treatment and wants to work through all of the options to ensure inequities are addressed.

Rep. Barry Loudermilk (R-Ga.) said there are conflicting viewpoints on where the economy stands, arguing the American Rescue Plan means we are in a crisis, but a potential tax increase would mean we are well off. Yellen said right now, the economy is in crisis and the American Rescue Plan provides necessary funding. She said there have not been tax increases to finance it, but when the economy is strong again Biden is likely to propose tax rate changes that will help decrease offshoring incentives and increase investments in our people, research and development, and climate change.

Anti-Money Laundering
Rep. Roger Williams (R-Texas) asked for a status update on implementing the Anti-Money Laundering Act of 2020. Yellen stated that timely and effective implementation of the legislation is a top priority at the Financial Crimes Enforcement Network (FinCEN) and that efforts are underway.

American Rescue Plan
Reps. David Scott (D-Ga.) and Green stressed that they want to get funds to end users as soon as possible, adding that not everyone can get their payments electronically. Green spoke specifically about funds within the State Small Business Credit Initiative, but both members asked when Congress can expect the distribution of funds and the release of further American Rescue Plan guidance. Yellen said the Treasury has to issue guidance within 60 days and is working quickly to provide clarity on the purpose of funds.

Looking towards recovery, Rep. Carolyn Maloney (D-N.Y.) asked what can be done to help this generation of workers get back into the labor force, specifically minorities and women who were forced to stop working and continue to face depressed wages. Yellen said in the short term, the American Rescue Plan contains support for minorities and women, as well as child tax credit increases and money to support schools opening promptly. For the longer term, Yellen said they hope to address some factors that have resulted in low wages and a low participation rate for women in a jobs package sometime soon.

Climate Change Risks
Rep. Bill Posey (R-Fla.) asked about the purpose of stress tests if they have no regulatory impact. Yellen said it should be called a scenario analysis rather than stress test, and the purpose is for financial institutions to better understand and manage the risks of climate change. Powell said many large financial institutions are already doing these tests voluntarily to understand what risks are involved at an early stage and regulators all have a responsibility to start this process now.

Reps. Frank Lucas (R-Okla.) and Barr said hypothetical climate risk scenarios seem highly speculative and create immediate, real risks of driving investment allocation away from fossil fuels or discouraging banks from doing business with certain sectors. Barr asked the witnesses how they plan to account for disruptions in the energy labor market. Powell stated that the Fed does not tell banks what legal businesses they can lend to, and that climate change work is in the early stages of understanding risks to regulated financial institutions, but that banks will manage that risk over time. Yellen stated that climate change is a top priority of the Biden administration, agreed that financial regulators should be assessing risks to financial institutions through stress testing, and that investors need disclosure of risk. Yellen said that there is no plan to regulate what lending or investments can be done.

Rep. Juan Vargas (D-Calif.) asked what long-term investments must be looked at regarding climate change. Yellen stated that climate change poses severe risks to the well-being of humanity, further noting that a global problem demands a global solution. Yellen said that climate change is a top priority of the Biden administration, signified by detailed plans to combat climate change, re-entry into the Paris Agreement, and the intent to create a plan to invest in sustainable infrastructure and new green jobs. Yellen stated that financial regulators are evaluating the risks of climate change to businesses and financial institutions and that she hopes to facilitate this through the Financial Stability Oversight Committee (FSOC). Yellen argued there should be a focus on information and disclosure of risks to help investors make more informed decisions. Powell stated that the Fed has a role to supervise banks and some other institutions to understand and carefully manage emerging climate change risks, specifically through the stress tests. Powell said that the Fed is trying to get a basic understanding of how financial systems can be resilient.

Huizenga noted the issues surrounding the definition of materiality, asking about the Fed’s involvement in the Network for Greening the Financial System (NGFS) and how materiality can be measured and quantified. Powell stated that they are trying to understand the nature of the risks, not measure or quantify the risks.

LIBOR Transition
Rep. Brad Sherman (D-Calif.) mentioned a previous statement by Powell that federal legislation is necessary to address legacy London Inter-bank Offered Rate (LIBOR) contracts so that they can continue to function after the LIBOR index is no longer published, asking Yellen if she agrees that Congress needs to act to provide for a smooth transition. Yellen said she agrees there are certain legacy contracts where the transition could be difficult without legislation. She said these are contracts that do not provide for a workable fallback rate, and believes Congress needs to provide legislation for the LIBOR transition.

Digital Currency
Rep. Bill Foster (D-Ill.) asked for thoughts on the idea of adopting a digital dollar system. Yellen said we need to be very careful about the use of digital currencies for illicit finance because it is harder to control. Powell said for the future they are beginning to think carefully about this digital dollar concept. Yellen said this is worth exploring as this system could help allocate funds more rapidly to Americans. Foster said this kind of system would require an authentication component and an ID system that can operate internationally. Powell said they are looking at all technological and design issues but do not think a system that relies on completely private governance, like that of the Chinese, would be viable. Sherman applauded Powell for saying the Fed will not proceed with creating a new central bank digital currency without the support of Congress.

Special Drawing Rights (SDR)
Rep. French Hill (R-Ark.) said China, Russia, Iran, Syria, Venezuela, and Myanmar are all subject to Treasury’s Office of Foreign Assets Control (OFAC) sanctions programs, and that Treasury is considering sending funds to these countries through International Monetary Fund (IMF) SDR allocation, even though China is committing genocide. Hill asked if “no strings attached” liquidity for China counters our national interest. Yellen said it is important to channel resources to countries that need it and try to prevent them from taking deflationary actions that would impede recovery. Hill asked for confirmation that China will not receive funds through the SDR allocation. Yellen said SDR allocation should be used to reduce poverty and address real needs, but China will receive resources if allocation goes through. She said China is expected to use SDR resources in beneficial ways. Hill asked if Yellen would commit to limiting SDR allocation access. Yellen said they are working with the IMF to craft rules that will support transparency and limit uses for some of those countries of concern.

Beneficial Ownership
Maloney mentioned her Corporate Transparency Act and asked if Yellen would commit to making beneficial ownership a top priority. Yellen said she completely supports this important piece of legislation and Treasury is actively working to implement it quickly with new hiring and database collection plans.

Supplementary Leverage Ratio (SLR)
Lucas asked if Powell could provide comment on whether the exclusion of treasuries from reserves over the past year helped improve U.S. treasury market conditions and banks’ ability to provide credit. Powell stated that the treasury market experienced significant dysfunction during the height of the crisis, and the Fed bought U.S. treasuries to restore function and enacted the exclusion. Powell explained that it is hard to say what effect it had and how helpful it was, as the exclusion was done relatively late when market function had recovered.

Lucas asked about a timeline for potential SLR modifications. Powell stated that they expect to put something out for comment soon, and that it will be a transparent public process. Powell explained that because of the increase in reserves and treasuries, the leverage ratio is becoming the binding constraint from a capital standpoint, which was not the Fed’s intent. Powell noted that the Fed likes risk-based capital to be binding because it forces banks to carefully manage risks.

Current Expected Credit Losses (CECL)
Luetkemeyer asked for information on the Fed’s review of CECL data and if it would consider revising the current approach. Powell stated that they are continuing to look at CECL, but that there is not any information to provide on that data. Luetkemeyer expressed that Powell agreed to having it deferred, that it must be reviewed if not gotten rid of, and that delay is in the best interest. Luetkemeyer noted that there is Fed data from the third quarter of 2020 showing that 51 percent of commercial real estate debt is held by banks and cited additional Federal Deposit Insurance Corporation (FDIC) data.

For more information on this hearing, please click here.