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Senate Banking Committee Hearing with Federal Reserve Chairman Jerome Powell

Senate Committee on Banking, Housing, and Urban Affairs

“The Semiannual Monetary Policy Report to the Congress”

Tuesday, June 16, 2020

Key Topics & Takeaways

  • Economic Outlook: Powell said the country is in the beginning of a “bounceback,” noting that although large numbers of people will begin to return to work, certain parts of the economy, like service industries, will take more time to rebuild. Powell said that he expects to see unemployment decline as a function of lifting the shutdown and resuming economic activity, and encouraged Congress to consider what kind of help will be needed for people in industries that will be slower to recover.
  • Federal Reserve Liquidity Facilities: Powell explained that the Municipal Liquidity Facility is already operational and available to eligible entities. He continued that the Main Street Facility has opened for lender registration and the Fed has encouraged lenders who have completed that process to immediately begin making loans. Asked whether the Fed is considering establishing a liquidity facility specifically for mortgage servicers, Powell said the Fed does not see a need for such a facility at this time but is monitoring it closely, adding that commercial mortgage-backed securities are eligible assets for the Term Asset-Backed Securities Loan Facility (TALF).
  • CCAR: Powell replied that the Fed is currently working on the Comprehensive Capital Analysis and Review (CCAR) and the Dodd-Frank Act Stress Test (DFAST) and the June 25th announcement will include disclosure of the Fed’s COVID-19 analysis and stress capital buffer requirements. Rounds asked whether banks will have to resubmit their capital plans or conduct additional stress tests, to which Powell replied that the Fed is actively considering those issues now and the decision will be announced on the 25th.
  • Corporate Bond Market: Powell explained that the market reacted strongly to the announcement of the program to buy corporate bonds and the Fed should follow through on that action. He continued that the Fed is not increasing the dollar volume of its buying, but rather is shifting from ETFs toward another form of index. He said continued activity in this space will depend on the level of market function, and if market function continues to improve the Fed will slow or even stop purchases.

Witnesses

Opening Statements                   

Chairman Mike Crapo (R-Idaho)

In his opening statement, Crapo highlighted the CARES Act and other actions Congress has taken to protect and stabilize the economy. He pointed to evidence that Title 4 of the legislation, which provides $450 billion to the Federal Reserve’s (Fed) emergency lending facilities, has had a positive and stabilizing effect on the economy. Crapo encouraged federal agencies to finalize proposed rules such as the Volcker Covered Funds Rule and the Inter-Affiliate Margin Rule. In conclusion, Crapo said that he looks forward to discussing the state of the economy, the status of the 13(3) emergency lending facilities, as well as regulatory and legislative changes that can increase credit liquidity in the market place and further support the economy.

Ranking Member Sherrod Brown (D-Ohio)

In his opening statement, Brown stressed the importance of acknowledging that racial disparities in the economy are a result of systematic oppression. Brown called on the Fed to provide help for immediate needs in addressing systematic racism and economic injustice. Brown criticized the Fed for lending to banks and corporations but “leaving everyday Americans behind.”

Testimony

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

In his testimony, Powell acknowledged the unprecedented economic decline experienced in March due to the COVID-19 outbreak. He affirmed that recent events have exposed racial injustice in our country and reported that job losses have been greater for African Americans, Hispanics and women than for other groups. While employment increased in May, Powell warned that a full economic recovery is unlikely until the public is convinced that the coronavirus outbreak is contained. Powell stressed the importance of economic recovery by noting that long periods of unemployment can erode workers skills and future job prospects.

While consumer price inflation has dropped noticeably in recent months, Powell said that it should gradually move back up to the symmetric two percent objective over time, as indicators of long-term inflation expectations have remained fairly stable. In addressing the economic crisis, he said the Fed is committed to using its full range of tools to promote maximum employment, stable prices, and stability in the financial sector. Powell said he expects the Fed to maintain low interest rates until they are confident the economy has weathered recent events and is on track to achieve maximum employment and stability goals. To sustain smooth market function, Powell explained that the Fed will increase holdings in Treasury securities and agency mortgage-backed securities over the coming months at least at the current pace. To provide stability to the financial sector, he noted that the Fed established 11 credit and liquidity facilities which fall into two categories: 1) stabilizing short term funding markets and 2) providing more direct support for credit across the economy.

Powell noted that the tools being used by the Fed under 13(3) authority are reserved for times of emergency, and he committed to putting those tools away once the economy has recovered. To remain as transparent as possible, he said the Fed will disclose monthly the names and details of participants in each lending facility. Powell concluded by confirming the CARES Act was critical in enabling the Fed and Treasury Department to establish many of their lending programs and said that direct support can make a critical difference in limiting long lasting damage to the economy.

Question & Answer

CCAR

Rounds noted that the Comprehensive Capital Analysis and Review (CCAR) and the Dodd-Frank Act Stress Test (DFAST) will be released on June 25, asking for more details about this and whether it will include disclosure of the Fed’s COVID-19 analysis and stress capital buffer requirements. Powell replied that the Fed is currently working on this and it will include those elements. Rounds asked whether banks will have to resubmit their capital plans or conduct additional stress tests, to which Powell replied that the Fed is actively considering those issues now and the decision will be announced on the 25th.

Sen. Thom Tillis (R-N.C.) expressed concern that increasing capital requirements could prevent banks from providing capital to help more families and small businesses recover from the pandemic. Powell said the Fed is in the middle of making those decisions and carefully reviews all information, noting that the Fed is conducting sensitivity analysis and is not looking to make capital requirements procyclical.

Inter-Affiliate Margin

Tillis asked for a timeline on inter-affiliate margin. Powell said action would come “soon.”

Federal Reserve Liquidity Facilities

Several committee members questioned Powell about the Fed’s liquidity facilities. Asked by Crapo for a timeline for the municipal and Main Street facilities to be operational, Powell explained that the Municipal Liquidity Facility is already operational and available to eligible entities. He continued that the Main Street Facility has opened for lender registration and the Fed has encouraged lenders who have completed that process to immediately begin making loans. Powell stated that the Fed recently issued a proposal to include nonprofits in the Main Street facility and is seeking public comment, noting that the borrower eligibility requirements would be tailored to the nonprofit sector. Sen. Jerry Moran (R-Kan.) expressed concern about EBITDA being a disqualifier for some businesses in the Main Street facility. Powell replied that the Fed is looking at last year’s EBITDA, though for certain industries they are looking at a better evaluation method.

Sen. Tom Cotton (R-Ark.) asked whether National Association of Insurance Commissioners (NAIC) rated debt will be brought into the Primary Market Corporate Credit Facility. Powell replied that rating from three additional firms are now permitted but acknowledged this still leaves out some companies without a rating, adding that the Fed is looking for a solution.

Sen. Mike Rounds (R-S.D.) asked whether the Fed is considering establishing a liquidity facility specifically for mortgage servicers. Powell said the Fed does not see a need for such a facility at this time but is monitoring it closely.

Sen. Martha McSally (R-Ariz.) asked whether the Fed is considering establishing a facility specifically for the real estate industry, to which Powell replied that any company that meets the financial requirements and are otherwise eligible, including real estate-related companies, can take part in the Fed’s other facilities, adding that commercial mortgage-backed securities are eligible assets for the Term Asset-Backed Securities Loan Facility (TALF).

Economic Outlook

Sens. Richard Shelby (R-Ala.), Jack Reed (D-R.I.), Jon Tester (D-Mont.), McSally and Crapo asked various questions about the Fed’s economic outlook and projections. Powell described the economic recovery in two stages: the shutdown, consisting of a sharp decline in economic activity and high unemployment, and a “bounceback” wherein the economy begins to reopen and people return to work. He said the country is in the beginning of that second stage, noting that although large numbers of people will begin to return to work, certain parts of the economy, like service industries, will take more time to rebuild. Powell continued that he expects to see unemployment decline as a function of lifting the shutdown and resuming economic activity, though he said there is a long road ahead. He encouraged Congress to consider what kind of help will be needed for people in industries that will be slower to recover.

Economic Disparities

Sens. Bob Menendez (D-N.J.), Doug Jones (D-Ala.), Tina Smith (D-Minn.), Chris Van Hollen (D-Md.) and Brown asked questions about racial economic disparities. Powell acknowledged that economics as a discipline has a “troubled history” in terms of race and equality and there is a lot of work left to do, saying the Fed will continue to think carefully about how to best focus on diversity and inclusion issues, adding that the Fed considers racial disparities as a routine matter throughout its work. Asked by Brown what the Fed is doing to ensure it does not make inequality worse, Powell responded that a tight job market is the single thing the Fed can do to support economic gains for all low- and moderate-income (LMI) communities, especially minority communities.

Corporate Bond Market

Sen. Pat Toomey (R-Pa.) asked whether the Fed needs to continue broad based corporate bond buying programs when the market is currently functioning smoothly and whether such continued bond purchasing will diminish price signals. Powell replied that the market reacted strongly to the announcement of such a program and the Fed should follow through on that action. He continued that the Fed is not increasing the dollar volume of its buying, but rather is shifting from ETFs toward another form of index. He said continued activity in this space will depend on the level of market function, and if market function continues to improve the Fed will slow or even stop purchases.

State and Local Government Funding

Sens. Catherine Cortez Masto (D-Nev.), Van Hollen, Menendez and Reed asked various questions about state and local government funding and its impact on the broader economy. Powell noted that state and local governments account for almost 13 percent of the labor force and tend to experience layoffs when revenue is down and costs are up, which can weigh on the broader economy.

CDFIs and MDIs

Sen. Mark Warner (D-Va.) asked if building capacity at CDFIs and MDIs could provide a significant response to the economic downturn by boosting access to credit for small minority-owned businesses. Powell responded that CDFIs and MDIs are very important and the Fed has strong relationships with those institutions to foster their success.

Treasury Yield Targets

Toomey and Tillis asked whether the Fed is considering adopting Treasury yield targets. Powell explained that the Federal Open Markets Committee (FOMC) was briefed on the historical and international uses of yield targets, but no decision has been made to use such a tool going forward.

Federal Reserve Balance Sheet

Sens. John Kennedy (R-La.), David Perdue (R-Ga.) and Shelby asked about the Fed’s balance sheet. Powell explained that the balance sheet was about $4 trillion in December and now stands at just over $7 trillion. He continued that he does not believe the current size of the balance sheet presents a threat to inflation or financial stability. He noted that as the economy grows the balance sheet will shrink.

For more information on this hearing, please click here.