House Financial Services Committee Hearing with Federal Reserve Chairman Jerome Powell

House Financial Services Committee

Monetary Policy and the State of the Economy

Wednesday, February 24, 2021

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 said the economy is still in crisis. She noted that the committee has advanced legislation to implement Biden’s American Rescue plan and that the full House of Representatives will review the legislation this week. Waters argued that the country needs the Federal Reserve (Fed) to adapt and to stand ready to use all tools at its disposal to ensure an equitable and swift recovery and that it is long overdue for the Fed to reconsider its normal operating procedures and use its authority to tackle racial wage and employment gaps. Waters further stated the Fed needs to put a stop to deregulation and be attentive to inequality as it oversees the economic recovery.

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

In his opening statement, McHenry said the Fed was the fastest acting entity in the federal response to COVID-19 and thanked Powell for his foresight and leadership, as well as Powell’s commitment to protect the independence of the Fed. McHenry made the distinction between monetary policy, which is under the purview of the Fed, and fiscal policy, which is under the purview of Congress. He stated that the economy is on the mend and many of the current issues, such as schools not re-opening and the high costs of childcare, cannot be fixed by either the Fed or Congress but rather are under the scope of state governors. McHenry further argued that money alone cannot fix these issues, and money needs to be supplemented by vaccines, testing, treatment, and data-driven public health decisions. He pushed for targeted and temporary relief directly related to COVID-19. McHenry concluded that the focus should be on addressing the uneven recovery and finding innovative solutions that support employment for Americans and bringing back those who completely left the labor market. He further emphasized regulatory flexibility and flexibility for financial markets to ensure a less “choppy” recovery.

Rep. Jim Himes (D-Conn.)

In his opening statement, Himes noted that during the 2008 financial crisis, the Fed took extraordinary actions including the use of emergency lending powers to rescue the financial sector. He argued that similar emergency intervention should be engaged by the Fed now. He argued that the United States is not “out of the woods” yet and that fiscal policy will be heavily deployed. Hines concluded by asking Powell to expand on not merely where the economy stands now, but where we go from here.

Rep. French Hill (R-Ark.)

In his opening statement, Hill thanked Powell for his monetary policy actions during 2020 and also commended Congress and the executive branch for their fiscal policy response. He concluded by asking Powell to discuss how the United States safely opens and provides jobs to those seeking employment as we continue to vaccinate Americans and open businesses, and as state and local governments realize they have tax revenues far in excess than anticipated.

Testimony

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

In his testimony, Powell discussed the current economic situation, stating that the recovery has not fallen equally on all Americans and has been particularly minimal for low-wage earners, African Americans, Hispanics and other minorities. He highlighted the Federal Open Market Committee’s (FOMC) first ever public review of monetary policy strategies, tools, and communication practices. The purpose of such review, Powell said, was to identify improvements to policy frameworks that can enhance the Fed’s ability to achieve its maximum employment and price stability objectives. Powell testified that the Fed’s goal seeks to achieve average two percent inflation over time, meaning that after periods of less than two percent inflation, the Fed will enact appropriate monetary policy to achieve inflation above two percent for a period of time. In doing so, Powell argued, this will keep longer-run inflation expectations well anchored at the two percent goal, which will enhance the Fed’s ability to achieve both its employment and inflation goals. He further noted that the Fed expects it will be appropriate to maintain the current accommodative target range of the federal funds’ rate until the labor market has achieved maximum employment and inflation has reached two percent and is on track to exceed two percent for some time. The Fed, Powell said, will continue to increase holdings of Treasury securities and agency mortgage-backed securities at least at their current pace until substantial progress has been made toward the Fed’s goals. Powell concluded that the Fed is committed to using its full range of tools to support the economy and help ensure recovery is as robust as possible.

Question & Answer

Economic Recovery

Throughout the hearing, a number of members including Reps. Barry Loudermilk (R-Ga.), Frank Lucas (R-Okla.), Bill Huizenga (R-Mich.), McHenry and Waters asked questions about the state of the economy and its recovery from the impacts of the pandemic. Powell said that growth estimates will depend on getting the pandemic under control, but there is reason for optimism for the second half of the year. He noted that the Fed will continue to purchase assets at at least the current pace until there is substantial progress towards its goals. In response to a question from Lucas about the strength of the banking sector, Powell affirmed that banks are strong and have been able to continue lending throughout the crisis. Asked by Rep. Joyce Beatty (D-Ohio) what areas Congress should focus on, Powell noted that not all jobs will come back, saying Congress should look to serve those workers that will need training and support as they try to find new work.

Reps. Steve Stivers (R-Ohio) and Huizenga expressed concerns about an uneven recovery and more acute impacts affecting certain sectors of the economy. Powell acknowledged that the losses and damage are concentrated in certain areas like hospitality and tourism, but a number of other sectors are also short of where they would be if not for the pandemic. He noted that some businesses under a lot of pressure may have trouble getting funding from the banking industry.

Rep. Ed Perlmutter (D-Colo.) asked Powell if he see any bubbles of concern, to which Powell replied that while some asset prices are elevated, they are only one pillar of the financial stability framework.

Rep. Sylvia Garcia (D-Texas) asked about the municipal bond market and how the country can avoid disruptions in that market as well as further public sector job losses. Powell said that the municipal bond market has continued to function well even after the Municipal Liquidity Facility closed, saying access to financing is available.

Reps. Nikema Williams (D-Ga.), Rashida Tlaib (D-Mich.), Nydia Velazquez (D-N.Y.), Stivers and Waters expressed concerns about an uneven economic recovery and questioned Powell about to address racial disparities. Powell explained that the Fed’s tools lift the entire economy and are not targeted to specific groups, but the data shows that high levels of employment and labor force participation benefits those lower on the economic spectrum, particularly racial minorities and women. Regarding the racial gap in homeownership raised by Stivers, Powell said that the Fed’s principal role in addressing this is in its work to minimize lending discrimination.

Inflation

Reps. Ann Wagner (R-Mo.), Jim Himes (D-Conn.), Andy Barr (R-Ky.) and Huizenga asked questions pertaining to the potential for inflation and how the Fed will address it. Powell said he does expect some inflation due to base effects and a surge in spending as the economy reopens, but noted he does not expect this to be large or persistent. He said if, however, inflation is large or persistent, the Fed has tools to address this. He said inflation dynamics evolve over time, not overnight, saying the Fed has data that will tell it when to taper asset purchases and being to raise interest rates.

Supplemental Leverage Ratio

Reps. Ted Budd (R-N.C.), Hill, Wagner and Perlmutter asked about the temporary exclusion of certain assets from the supplemental leverage ratio. Powell said the Fed is considering whether it should be extended beyond the March 31 expiration and will announce a decision soon.

LIBOR

Rep. Brad Sherman noted that LIBOR will publish until June 2023, highlighting his legislative proposal to address the $2 trillion in existing contracts without fallback language. He asked if it is necessary to pass federal legislation to ensure a smooth transition from LIBOR. Powell responded that federal legislation will be necessary and will be the best solution.

Community Reinvestment Act

Reps. Emanuel Cleaver (D-Mo.), Velazquez and Loudermilk asked about the Community Reinvestment Act (CRA) and the Fed’s work to reform its rules. Powell said this is an opportunity to harmonize reform rulemakings with the OCC and FDIC, saying the agencies are engaging in this process, saying he wants the law to be as effective as it can be. He noted the importance of considering the ways banking has changed, particularly the use of online banking and other digital tools.

Climate Risk

In response to a question from Velazquez about the role of financial institutions in tackling climate change, Powell said that climate change is a very important issue, but the role of the Fed is not to set climate policy but rather to carry out its mandate in supervising that financial institutions are accounting for risk, including climate change.

Rep Blaine Luetkemeyer (R-Mo.) expressed concern about “weaponizing” the regulatory system to hurt business not aligned with a certain “climate agenda.” Powell said that climate stress scenarios are separate from stress tests. Barr expressed similar concerns about the inclusion of climate risks in stress tests; Powell explained that the purpose is to supervise for resiliency to all risks, including climate.

Digital Currencies

McHenry, Stivers and Budd all questioned Powell about the development of a digital currency. McHenry raised specific concerns about national security and privacy. Powell assured the committee that the Fed will engage actively with the public on this issue in order to explore challenging technical and policy questions. He noted that the Fed may need legislative authorization to take action. Powell said that it is important for the Fed to be mindful to not undermine existing market and financial systems.

Diversity & Inclusion

Cleaver and Beatty questioned Powell about diversity and inclusion issues at the Fed. Powell said “we are not where we want to be” on this issue, but he is working hard to strengthen the Fed’s workforce diversity through aggressive recruiting and work to foster an interest in economics.

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