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SBC CARES Act Oversight Hearing

Senate Committee on Banking, Housing, and Urban Affairs

CARES Act Oversight of Treasury and the Federal Reserve

Tuesday, November 30, 2021

Witnesses

 

Opening Statements
Chairman Sherrod Brown (D-Ohio)
In his opening statement, Brown highlighted positive job numbers, admonished layoffs, cuts to hazard pay and benefits during the pandemic, corporate greed, and stock buybacks. He praised progress made through relief bills, the infrastructure bill, and House passage of the Build Back Better plan. He said that instead of doing Wall Street’s bidding, we need to support institutions like Minority Depository Institutions (MDI) and Community Development Financial Institutions (CDFI) that big banks ignore. Brown mentioned Fed Chair Jerome Powell’s renomination and Fed Board Member Lael Brainard’s Vice Chairmanship nomination to the Fed and that he will continue to work with them.

Ranking Member Pat Toomey (R-Penn.)
In his opening statement, Toomey expressed support for Powell’s renomination, decried Saule Omarova’s nomination, and highlighted the recent impacts of inflation and the Biden Administration and Congressional Democrats’ contribution to inflation. He then admonished the Build Back Better plan and characterized it as reckless spending.

Testimony
Janet L. Yellen, Secretary, U.S. Department of the Treasury
In her testimony, Yellen said December has the potential to be very consequential based on two decisions facing Congress– the debt limit and Build Back Better legislation. She said if we do not address the debt limit, we will eviscerate our current recovery, and Americans would suffer financial pain as critical payments, like Social Security checks and military paychecks, would not reach their bank accounts. Regarding Build Back Better (BBB) legislation, Yellen applauded the House for passing the bill and is hopeful that the Senate will soon follow. She said this legislation and its investments, they expect, will lead to a GDP increase over the long-term without increasing the national debt or deficit by a dollar. Yellen added that she believes the offsets in these bills will actually reduce annual deficits over time.

Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve System
In his testimony, Powell said many forecasters and the Fed expect that inflation will move down significantly over the next year as supply and demand imbalances abate. He explained that though difficult to predict the persistence of supply constraints, it now appears that factors pushing inflation upward will linger well into next year. He said the recent rise in COVID-19 cases and the emergence of the Omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation. Powell concluded that greater concerns about the virus could reduce people’s willingness to work in person, which would slow progress in the labor market and intensify supply-chain disruptions.

Question & Answer
Inflation
Toomey said inflation is above target and accelerating and asked how long inflation has to run above target before the Fed decides it is not transitory. Powell said the test they have articulated has clearly been met now. He said they need to redefine transitory in that they mean it will not have long term impacts. Sens. Mike Crapo (R-Idaho) and Tim Scott (R-S.C.) said the Administration is not taking inflation concerns seriously. Powell said the threat of persistently higher inflation has grown but the expectation remains that inflation will move back down over the next year.

Brown asked Powell if inflation has been caused by the pandemic and if inflation will end as the pandemic subsides. Powell said inflation will subside as the pandemic ends but that the risk of higher inflation has increased. Sen. Kyrsten Sinema (D-Ariz.) asked Yellen if the bipartisan infrastructure bill will reduce inflation. Yellen said the bill will raise the output of the economy, thereby lowering inflation pressures.

Build Back Better
Brown asked Yellen to explain how the BBB plan would bring costs down for Americans. Yellen said the plan would enable families to better afford childcare, pre-kindergarten, rent, food, and prescription drugs. Sen. Mike Rounds (R-S.D.) asked about the debt limit in the context of the BBB legislation. Yellen said we are on a sustainable debt path and President Biden was clear that the BBB should be fully financed. Yellen added that the CBO confirmed it will be paid for fully. Sen. Steve Daines (R-Mont.) said the CBO has not actually said it is fully paid for.

Debt Limit
Crapo asked what the current projection is for when Treasury will run out of cash. Yellen clarified that in her recent letter to Congress, she believes Treasury will be able to finance the U.S. government until December 15th and on that date, Treasury will invest funds from the infrastructure bill.

LIBOR Legislation
Sen. Thom Tillis (R-N.C.) asked if Congress needs to provide a solution for the LIBOR transfer, possibly requiring SOFR for legacy contracts but with optionality moving forward. Powell and Yellen said yes.

IRS Funding
Sen. Bill Hagerty (R-Tenn.) said he does not support increasing the audit authority of the IRS if the resources will be ill-managed, citing the ProPublica leak of information. Yellen said the IRS has been starved of resources and that the tax gap is massive, noting that over the next decade, tax collections will be $7 trillion below what is due.

Bank Reporting Requirement
Scott said if the goal is to get the IRS to catch tax thieves, the bank reporting requirement will just capture individuals making minimum wage, not millionaires and billionaires. Scott asked Yellen if she still supports the requirement, to which Yellen said she still supports the idea and has worked with Congress to narrow the scope of the reporting. She added that the low threshold was meant to make evasion difficult for those trying to open multiple accounts.

Global Minimum Tax
Sen. Chris Van Hollen (D-Md.) asked Yellen to talk about her efforts to establish a 15 percent global minimum tax rate. Yellen discussed the trend of lower tax rates for multinational corporations and said the international tax agreement achieves the goal of leveling the playing field for countries to collect taxes on multinational corporations by stopping the race to the bottom.

Russia
Hagerty said he wants Treasury to have all the authority necessary to deter Russia from invading Ukraine. Yellen said they have authority to impose sanctions, and they are aware of the buildup. Hagerty asked what the Administration’s plan is to stop Putin’s aggressive posture in Ukraine. Yellen said they are having discussions on it.

Digital Assets
Brown asked if it is risky to let control over our money fall into the hands of technology companies. Yellen said stablecoins could improve payments systems but only if they are adequately regulated. She also highlighted a report discussing risks of digital assets and the need for a regulatory framework around digital assets that will protect consumers. Powell agreed with Yellen’s statement. Crapo asked when to expect the Fed’s discussion paper on digital currencies. Powell said in the next few weeks.

Toomey asked why the President’s Working Group on Financial Markets’ (PWG) recommendation is to require all stablecoins to be issued by depository institutions only, when stablecoins vary significantly. Yellen said they all have the potential to be used as a means of payment and the structure that they adhere to is that they have a stable value relative to a fiat currency, which is what depository institutions guarantee.

Bond Purchases and Tapering
Sen. Mark Warner (D-Va.) asked which factors influenced the Fed’s decision to taper bond purchases. Powell cited the strength of the economy and high inflation pressures. Sen. Jon Ossoff (D-Ga.) asked Powell what economic purpose continued Fed bond buying serves, and Sen. John Kennedy (R-La.) asked if the Fed is going to increase the pace of tapering. Powell said they have seen elevated inflation pressures but strong labor market data improvement, so they will consider wrapping up purchases a few months early. Ossoff also asked what the costs and benefits are of Fed bond buying. Powell responded that asset purchases work through the same channels as interest rate changes and that charges of inequality as a result of asset purchases do not hold up under scrutiny.

COVID Variants
Warner asked what COVID variant markers Powell will look at to influence Fed activity. Powell cited transmissibility, the ability of existing vaccines to address new variants, and the severity of the virus once it is contracted but said that those factors are not baked into the Fed’s decision making. Tillis asked when we will move away from markets and the Fed reacting to new COVID variants. Powell said effects on the economy will not be remotely comparable to what happened in March 2020 nor involve additional shutdowns. He said parts of the world will have this virus around for a long time.

Labor Force Participation
Sen. Jack Reed (D-R.I.) asked about the causes of the low labor participation rate and how to address it. Powell said the pandemic has cause reluctance to go back to work and that it is going to take longer to raise the labor force participation rate, which will likely lag behind the rest of the recovery. Sen. Bob Menendez (D-N.J.) asked Yellen if expanding access to childcare services would increase the labor force participation rate. Yellen said yes and cited a statement that BBB would increase labor force participation. Sen. Kevin Cramer (R-N.D.) cited the CBO’s estimate saying BBB would result in a net increase in deficit, and he expressed frustration that there seems to be no incentive for increased workforce participation.

Housing
Reed asked Yellen if she could look at and try to develop the rental assistance program guidelines to emphasize that funds can be used for homelessness. Yellen said Treasury would be happy to work with Reed on the issue and that the funds can be used for housing stability services to help the homeless find stable shelter. Sen. Jon Tester (D-Mont.) asked how we should address housing issues. Yellen cited the impact of the pandemic on housing and said that rental assistance funding is helping households but that those funds cannot solve longer run housing problems. She added that the BBB will address affordable housing production.

MDIs and CDFIs
Warner asked what can be done to shore up MDIs and CDFIs. Yellen said that the existing infusion of funds will help these institutions and that Treasury will work with Warner to find new ways to help them. Powell committed to the same.

Diversity
Menendez asked Powell what steps are being taken to consider diverse candidates for the open Fed president’s positions. Powell said the process will involve extensive outreach to different communities and that it is essential that diverse candidates be identified and given a chance at these positions. Menendez asked Yellen how she has empowered Janice Bowdler to diversify the Treasury Department. Yellen said she is empowered to look at and enhance internal hiring and review all of Treasury’s programs.

Climate Risk
Sen. Elizabeth Warren (D-Mass.) asked Powell if he would bring an issue before the Fed Board that he would disagree with the Vice Chair for Supervision over. Powell said that would be his general intent. She then asked if Powell would vote for new capital requirements around climate risk. He said he would have to see details.

Supply Chain
Sen. Catherin Cortez Masto (D-Nev.) asked Yellen where Biden’s initiatives to address supply chain disruptions have been successful. Yellen said the Administration created a task force to identify places where the White House could be effective and that Treasury is beginning to see progress at ports and in other areas. Sinema asked how much of the inflation we are seeing is attributable to supply chain disruptions. Yellen said much of the supply chain disruptions and labor supply issues are from the pandemic, causing inflation.

 

For more information on this hearing, please click here.
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