House Financial Services Committee Hearing with Federal Reserve Chairman Jerome Powell

House Financial Services Committee

“Monetary Policy and the State of the Economy”

Wednesday, June 17, 2020

Key Topics & Takeaways

• Federal Reserve Liquidity Facilities: Powell explained that the Main Street Liquidity Facility will fill the gap between small companies covered by the Paycheck Protection Program (PPP) and larger companies who have access to corporate credit facilities. He continued that the facility is open for lenders to both register and begin making loans once the registration process is complete. Asked whether the Fed is considering including non-agency backed mortgaged and consumer installment loans in the Term Asset-Backed Securities Loan Facility (TALF), Powell replied they are considering it.
• Inter-affiliate Margin: Asked when the inter-affiliate margin would be finalized, Powell said it would be completed soon.
• Forbearance: Powell said the Fed is encouraging supervisors to motivate banks to work with their borrowers to provide forbearance.

Witnesses

• The Honorable Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve System

Opening Statements                   

Chairwoman Maxine Waters (D-Calif.)

In her opening statement, Waters noted that it is required by law that the Chair of the Federal Reserve (Fed) testify before Congress twice annually, but none have had to testify in a situation as bad as this pandemic. She stated that 25 million jobs were lost in April and the unemployment rate is higher than ever before, except for during the Great Depression. In addition, she stated that the overall GDP decline is expected to be the most severe on record and that the country is facing an eviction crisis. She concluded that the Fed has stepped up to rescue the economy, and that now the country needs more fiscal policy.

Ranking Member Patrick McHenry (R-N.C.)

In his opening statement, McHenry explained that the present circumstances are very different than in February when this committee last met. He explained that the Fed has been able to contain the current situation and will continue to do everything in its power to mitigate this crisis while adding that Fed action is not a permanent solution. He stated that Congress must be realistic about what the Fed can and cannot do. He continued that Congress, not the Fed, is responsible for fiscal actions which will be necessary to ensure the quality of the economy in the long run.

Rep. Emanuel Cleaver (D-Mo.)

In his opening statement, Cleaver said that a more inclusive economy with less racism and inequality will lead to more economic growth. He explained that there needs to be more economic justice through a minimum wage increase, spanned earned income tax credit, investment education, and the creation of a progressive tax code.

Rep. French Hill (R-Ark.)

In his opening statement, Hill commended the Fed’s quick actions during this crisis.

Testimony

The Honorable Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve System

In his testimony, Powell explained that beginning in mid-March, economic activity started to fall at an unprecedented rate in response to COVID-19, highlighting the fact that a net of 20 million jobs have been lost since February, causing unemployment rate to rise about 10 percent. He explained that the burden of the downturn has not fallen equally on all Americans, noting that people of color and lower income families have experienced the most job losses and that economic gaps will widen even more if this downturn continues. In addition, he talked about the uncertainty regarding the timing and strength of the recovery from the pandemic, saying that until the public is certain COVID-19 is contained, a full recovery is unlikely. Powell said that due to price declines for gas, clothing, airfare, as well as other goods and services, consumer price inflation has dropped but long-term inflation has remained steady. He explained the Fed’s response was mandated by their commitment to promote maximum employment and to promote the stability of the financial system. Powell stated that the Fed is committed to using all its tools to support the economy during this time. He noted that in March, the Fed lowered its policy interest rate to almost zero and expects it to remain at this number until the economy has made it through the crisis. In addition, he said that since March the Fed has been purchasing large amounts of Treasury securities and agency MBS to help credit flow, and the Fed is prepared to adjust plans if needed. Powell also noted that that the Fed established 11 credit and liquidity facilities under their authority outlined in the Federal Reserve Act.

Question & Answer

Congressional Next Steps

Waters asked Powell whether Congress should take “bold action” in its continued response to the current crisis. Powell replied that Congress’ fiscal support has helped facilitate positive changes and recovery, and that support should not be pulled back too quickly. He encouraged Congress to continue to find ways to support the unemployed and small businesses going forward.

Federal Reserve Liquidity Facilities

Reps. Bill Huizenga (R-Mich.), Scott Tipton (R-Colo.) and McHenry asked about the Main Street Liquidity Facility, to which Powell replied that it will fill the gap between small companies covered by the Paycheck Protection Program (PPP) and larger companies who have access to corporate credit facilities. He continued that the facility is open for lenders to both register and begin making loans once the registration process is complete. Rep. Ann Wagner (R-Mo.) asked why non-bank financial institutions are not eligible lenders for the Main Street facility. Powell said now that the facilities were set up quickly, but now that they are mostly established, the Fed will consider potential expansions and improvements.

Rep. Barry Loudermilk (R-Ga.) asked whether the Fed is considering including non-agency backed mortgaged and consumer installment loans in the Term Asset-Backed Securities Loan Facility (TALF), to which Powell replied they are considering it.

Rep. Michael San Nicolas (D-Guam) asked why territories were excluded from the Municipal Liquidity Facility. Powell said that none of the territories fit the solvency requirements of the law, and other programs are better suited for meeting the needs of the territories.

Yield Curve Control and Interest Rates

McHenry asked whether empirical evidence supports the need to use tools such as yield curve control and negative rates. Powell replied that the evidence is split on negative rates. He continued that although the Fed is closely examining the issue, he does not think it is appropriate for the U.S. economy at this time. He noted that yield curve control is something the Fed is educating itself on but has no current plan to utilize.

Rep. Carolyn Maloney (D-N.Y.) asked whether the Fed intends to maintain current interest rates until economic conditions dramatically improve. Powell said the Fed will keep rates where they are until the economy is well on its way to recovery.

Economic Disparities and Racial Justice

Reps. Emanuel Cleaver (D-Mo.), Juan Vargas (D-Calif.) and Al Lawson (D-Fla.) asked questions about economic disparities and systemic racial injustice. Powell noted the Fed does examine banks for compliance with fair lending laws and said that the Fed is committed to addressing economic injustice. Powell added that the service economy, whose workforce is disproportionately composed of minorities, was affected particularly badly by the pandemic, emphasizing that recovery efforts will hopefully decrease that unemployment gap.

State and Local Government Funding

Rep. Ed Perlmutter (D-Colo.) asked how failing to support state and local governments could impact overall economic recovery. Powell replied that state and local government employ roughly 13 million people, and low revenues and cost cutting often leads to layoffs. He added that it could also impact essential services, saying this and job losses would harm overall economic recovery. Rep. Cindy Axne (D-Iowa) asked if Congress should do more to support state and local governments, to which Powell responded that Congress should continue to help where they can.

Inter-affiliate Margin

Rep. Van Taylor (R-Texas) asked when the inter-affiliate margin would be finalized. Powell said it would be completed soon.

Forbearance

Rep. Blaine Luetkemeyer (R-Mo.) said that without forbearance for financial institutions, there may be credit shortages for rural and low-income communities, asking how regulators should provide such forbearance. Powell said the Fed is encouraging supervisors to motivate banks to work with their borrowers on this.

Federal Reserve Balance Sheet

Rep. Bryan Steil (R-Wis.) asked what economic indicators will guide the Fed in determining when to shrink its balance sheet. Powell explained that the balance sheet will shrink relative to the size of the economy. Asked by Rep. French Hill (R-Ark.) what a reasonable post-pandemic target would be for the balance sheet, Powell said that the size of the balance sheet will be driven by the public’s demand for the Fed’s liabilities, which tends to be relative to GDP.

Collateralized Loan Obligations

Reps. Roger Williams (R-Texas) and Steil asked about risks posed by collateralized loan obligations (CLOs). Powell said that there is much more transparency now about CLOs than there was during the 2008 financial crisis, and they are included in the Fed’s annual stress test. He said the Fed is monitoring the issue but is not currently concerned.

Economic Outlook

In response to a question from Rep. Dean Phillips (D-Minn.) about the outlook for the economy in the coming months, Powell said that the country is in the beginning of the recovery, and assuming the virus remains under control, companies should continue to reopen and workers should return to work. He noted that some industries, like service and tourism, will take longer to recover than others.

MBS Market

Hill noted there have been liquidity and spread issues in the mortgage-backed securities (MBS) market. Powell replied that the market is critical for financing the housing industry. He continued that there was not capacity to hold those securities, so the low rates put in place were not translating to borrowers, and therefore the Fed had to get involved to ensure market function.

For more information on this hearing, please click here.