SBC CARES Act Oversight of the Treasury and Federal Reserve: Supporting an Equitable Pandemic Recovery

Senate Committee on Banking, Housing and Urban Affairs

CARES Act Oversight of the Treasury and Federal Reserve: Supporting an Equitable Pandemic Recovery

Tuesday, September 28, 2021



Opening Statements
Chair Sherrod Brown (D-Ohio)

In his opening remarks, Brown highlighted how the federal government has stepped in during times of economic crisis. He touted job creation in President Biden’s first year of his first term and the quality of those jobs. Brown also spoke out against CEO bonuses and stock buybacks and the history of uneven job growth in past recoveries. He concluded by discussing the need to increase the debt limit and the hypocrisy of Republicans opposing a debt ceiling raise.


Ranking Member Pat Toomey (R-Penn.)

In his opening remarks, Toomey spoke out against the reconciliation bill and touted what he believed was a strong economy right before the COVID-19 pandemic, an economy strengthened by lightening regulatory burden, lowering taxes, and simplifying the tax code. He stated his concern with the Federal Reserve (Fed) wading into political areas like climate change and expressed concern for inflation higher than the Fed projected. Toomey concluded by opposing President Biden’s international tax plan and international tax provisions in the reconciliation bill.


Janet L. Yellen, Secretary, 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 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, Chairman, Board of Governors of the Federal Reserve System

In his testimony, Powell said inflation is elevated and will likely remain so in 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


Toomey said inflation now seems broader and more troubling as many input prices across all sectors are soaring. Powell said the supply side restrictions have not gotten better and, in some cases, have actually gotten worse. He also explained that the mismatch between supply and demand needs to abate before inflation comes down and believes that it will.

Sen. Richard Shelby (R-Ala.) said the connection between inflation and unemployment has weakened over the years and asked if the Phillips curve is still an accurate test for inflation. Powell said the connection has weakened, but the kind of inflation we have today is not related to unemployment or the Phillips curve.

Sen. John Kennedy (R-La.) asked Yellen if she still stands by her earlier prediction of two percent inflation for the end of this year. Yellen said inflation for the end of this year is going to be above two percent. She said monthly inflation rates have been tapering off and that her estimation for inflation by the end of the year is four percent.


Sen. Thom Tillis (R-N.C.) thanked Powell and Yellen for their support for a replacement framework for outstanding financial contracts tied to LIBOR and said he was pleased to see the legislation clear the House Financial Services Committee on a strong bipartisan basis. He added that he understands strong bipartisan action is needed in the Senate to affect a smooth transition and to provide certainty to capital markets and looks forward to working with his colleagues, namely Senator Jon Tester (D-Mont.), to make sure that Congress does act and provide for a smooth transition.


Debt Ceiling

Sens. Chris Van Hollen (D-Md.) and Brown asked Yellen and Powell what the impact would be of failing to raise the debt ceiling. Yellen stated that failure to raise the debt limit would result in default on our country’s obligations and would be disastrous for the economy, markets, and millions of families and workers jeopardized by delayed payments. Powell agreed with Yellen’s assessment. Tester asked if the debt limit has been expanded with money already spent. Yellen said yes, that the debt limit has nothing to do with paying for future programs, and that the issue is about paying past commitments. Sen. Mark Warner (D-Va.) asked if default would cause a lack of faith in the U.S. government’s ability to meet obligations, resulting in an interest rate spike that would cause additional interest payments on the U.S. national debt. Yellen confirmed Warner’s estimates, expounded on additional costs to everyday Americans, and called failure to raise the debt ceiling a self-inflicted, manufactured crisis. Warner asked if failing to raise the debt ceiling would undermine confidence in the U.S. dollar and give credibility to China’s efforts to make its currency equal to the U.S. dollar. Yellen said it would undermine the role and safety of the U.S. dollar but that China has a long way to go to challenge the U.S. dollar.

Sen. Mike Rounds (R-S.D.) asked when “enough is enough” when it comes to our deficit. Yellen said in thinking about a reasonable amount of debt, there are a number of metrics to look at for fiscal stability like the debt-to-GDP ratio or the real net interest cost of the debt. She said even if interest rates revert back up to normal levels, the interest cost, or the real burden, is projected to remain low.


Stepped-Up Basis
Shelby mentioned the Biden Administration’s proposal to eliminate stepped-up basis, arguing it would result in a costly tax increase for families and asked Yellen if she supports eliminating it for estate beneficiaries. Yellen said she supports elimination because a large share of wealthy individuals’ income is never taxed and that the wealthy are taxed very little because most of their income is in unrealized capital gains. She said the proposal has been carefully considered to not harm the prospects of family farms or small businesses as there are substantial provisions to protect them.


Capital Gains and Corporate Tax Rate
Sen. Tim Scott (R-S.C.) asked if increasing the capital gains tax or corporate rate tax will encourage more or less investment in the U.S. economy. Yellen said the likely impact on investment spending is very small. She said in 2017 when taxes were cut substantially, there was no surge in investment spending but actually stock buybacks, so the linkage between investment and corporate tax rate is very modest and mainly falls on excess profits.


Sen. Bill Hagerty (R-Tenn.) asked Yellen about the framework to pay for the $3.5 trillion package. Yellen said there was a list of ideas with support from the House, Senate, and White House on how revenue could be raised from increases in the corporate tax rate, reform of international provisions to reduce incentives to export jobs and profits abroad, raising the tax rate for the highest income individuals, a capital gains tax increase, and improving general tax compliance.


Supplementary Leverage Ratio (SLR)
Rounds mentioned the SLR exclusion instituted during the pandemic and asked Powell if he thinks this move was successful and may be continued in the future. Powell said they are looking at modifications but need to be careful to ensure there is no reduction to overall “binding-ness” of capital requirements for the larger institutions. Powell said with all the liquidity in the system, it could again become the binding constraint which would not be good from a safety and soundness standpoint.


IRS Bank Account Reporting Requirement
Sen. Cynthia Lummis (R-Wyo.) mentioned the IRS bank reporting requirement on customer data of accounts over $600 and said there are huge privacy concerns for this and that people will find alternatives to traditional banks. Lummis asked Yellen if she is aware how unnecessary a burden the requirement presents. Yellen said Lummis misunderstands the proposal and that banks already report to the IRS. She said the proposal is not to provide detailed transaction data to the IRS but to provide easily ascertained information on aggregate inflows and outflows during a year.


Hagerty expressed concerns about the ability to keep this information confidential and asked what will be done to protect taxpayer data. Yellen said protecting taxpayer information is the highest priority of the IRS. She added that they do not know for certain that the ProPublica leaked information came from the IRS, but they are looking to invest in and modernize the agency to protect data.


IRS Tax Return Backlog
Rounds asked Yellen if she has discussed the IRS’s plan to address the tax return backlog and prevent this in the future. She said that Treasury is trying to add more resources to the IRS, she has discussed plans with the Commissioner, and she will get Rounds more details quickly.


Renewable Energy
Sen. Steve Daines (R-Mont.) asked how Biden’s tax hikes and aims to shutdown fossil fuel production would not force the U.S. into a state of dependence on others for energy. Yellen said climate change is an existential threat that must be addressed and that with Biden’s proposed clean electricity plan to shift towards renewables, storage technologies can be deployed to address risks like the sun not shining or wind not blowing.


Central Bank Digital Currency
Toomey asked Powell how important it is to have Congressional authorization for a digital dollar. Powell said it would be ideal if the digital dollar were a product of broad consultation.


Pillar One

Toomey asked Yellen if Pillar One requires a treaty and Senate ratification to be implemented. Yellen said that is one way to implement it and said that regardless, Congress has to authorize the transfer of taxing rights that are in Pillar One.


Fed Interest Rates

Brown asked why the Fed would take away economic support by raising interest rates just when workers are getting back on their feet. Powell said that the Fed is buying securities and increasing accommodation and that the Fed would continue to add accommodation into next year. He added that the test for raising interest rates is higher and requires a strong labor market.


Child Tax Credit and Childcare

Sens. Raphael Warnock (D-Ga.), Van Hollen, and Brown asked Yellen about the benefits of the expanded child tax credit and whether to make it permanent. Yellen explained how the credit helps parents take care of their children, stated that the expansion should be made permanent, and added that parents are using the child tax credit payments to pay for basic needs like food and clothing and that those payments allow parents to take jobs. Sen. Tina Smith (D-Minn.) asked Yellen to explain why the childcare sector cannot raise wages. Yellen said that parents are unable to borrow to cover childcare costs at a moment in their lives when they cannot afford to do so, preventing childcare workers from receiving high enough wages.



Brown asked if the Fed Board would be a better institution with a black woman on the Board. Powell stated that everyone’s voice should be heard at the table, including black women. Yellen also agreed, adding that diversity is extremely important. Sen. Bob Menendez (D-N.J.) asked about diversity in the workforce and what the Fed and Treasury are doing to improve diversity. Powell stated that focus on diversity starts from the top and includes a focus on diversity in hiring. Yellen said that diversity is a high priority at Treasury and specified ways that Treasury has tried to increase diversity.


State and Local Funding

Tester asked Yellen about issues with disbursing state and local relief funding from the American Rescue Plan, including possible restrictions from Treasury and the use of two tranches of funding. Yellen said there are no restrictions on Montana’s use of Treasury funds and that states do not require Treasury’s approval to use the funds. Yellen further responded to Tester’s questions on the timeline and predictability of the state and local payments.


Financial Deregulation
Sen. Elizabeth Warren (D-Mass.) mentioned the Archegos collapse and asked Powell if he regretted weakening stress testing, the Volcker Rule, or liquidity requirements. Powell said the Fed did not weaken stress tests, that capital levels are at multi-decade highs, that the Volcker Rule as implemented was unworkable, and that he did not see evidence that changes to liquidity were bad but is willing to take another look. Warren called Powell a dangerous man and said she would oppose his re-nomination.


Risks to the Financial System

Sen. Jon Ossoff (D-Ga.) asked what, aside from the pandemic, the most significant systemic risks are to the financial system. Powell stated that cyber risks are greatest, and Yellen stated that shadow banking threats have emerged, especially since the start of the pandemic.


Supply Chain

Ossoff asked Powell to what extent difficulties in shipping markets are contributing to bottlenecks, to which Powell highlighted transportation and supply chain issues encountered by retailers. Ossoff asked if Yellen has been in meetings about using government resources to solve shipping bottlenecks. Yellen stated that the National Economic Council (NEC) is looking closely at that issue. Sen. Catherin Cortez Masto (D-Nev.) asked about the supply chain and if there is a timeframe for the NEC to give answers to address supply chain issues. Yellen said the Council is bringing together industry leaders and experts to see what can be worked out.


Fed Bank President Investing

Warnock asked about the recent Fed resignations and what actions Powell has taken to ensure the impartiality of the Fed. Powell stated that the Fed must keep the public’s trust and that he ordered Fed staff to review the Fed’s trading and disclosure practices.