House Oversight and Reform Federal Reserve Hearing
House Oversight and Reform Subcommittee on the Coronavirus Crisis
Lessons Learned: The Federal Reserve’s Response to The Coronavirus Pandemic
Tuesday, June 22, 2021
Witnesses
- Chairman Jerome H. Powell, Federal Reserve
Opening Statements
Chairman James E. Clyburn (D-S.C.)
In his opening statement, Clyburn stated that the hearing will cover the economic response to COVID-19, the current state of the recovery, and the steps the committee must take to ensure a strong, sustainable, and equitable future. He highlighted the Federal Reserve’s (Fed) report on the economic wellbeing of U.S. households in 2020 showing the economic hardship suffered by black and brown households over the past year suffered more economic hardships last year. He stated that the American Rescue Plan (ARP) has accelerated the pandemic recovery and that the dramatic ramp up in vaccination has enabled us to open up the economy sooner than might have been expected. He also mentioned that ARP has been a financial lifeline for American families. He highlighted the addition of 1.6 million jobs to the economy over the last four months and the significant drop in new unemployment insurance claims. He referenced Powell’s prediction that Congress’s aggressive actions to provide fiscal relief are accelerating the return to full employment and that Congress must make investments to improve the future. He concluded by emphasizing that the economy still has 7.6 million fewer jobs than before the pandemic with minority groups unemployed at disproportionately higher rates and his belief that the American Jobs Plan and American Families Plan will provide the investments we need to create a strong, sustainable, and equitable recovery.
Ranking Member Steve Scalise (R-La.)
In his opening statement, Scalise reiterated his concern that the House Democrats have yet to hold a hearing on the origin of COVID-19 and criticized President Biden’s economic plan for driving up inflation and for spending billions on non-COVID related expenses. He said that extending the pandemic unemployment insurance and giving up the intellectual property rights for the vaccines are not beneficial for the U.S. and added that heightened prices, scarce housing, and the great dislocation between unemployed workers and vacant jobs are a sign of a fragile economy caused by Democrats’ fiscal policy. He concluded by urging Congress to not adopt a large fiscal spending plan.
Testimony
Chairman Jerome H. Powell, Federal Reserve
In his testimony, Powell said mass vaccinations along with unprecedented monetary and fiscal policies have provided strong support for the recovery of the U.S. economy. He said real GDP is on track to post its fastest rate of increase in decades as household spending and business investment bounce back. Powell emphasized that despite unemployment going down, lower-wage workers are still bearing the consequences of a weakened service industry. He said the recent increase in inflation was caused by the rebound in spending as the economy continues to reopen and limited supply to meet demand increases. He said these factors are transitory and expects inflation to drop back toward the Fed’s long-run goal. Powell also explained the importance of the Municipal Liquidity Facility which allowed local governments to issue almost $380 billion of bonds in the private market, and added the Fed will continue to analyze the facilities’ efficacy.
Question & Answer
Inflation
Rep. Carolyn B. Maloney (D-S.C.) asked Powell how much he attributes the recent rise in inflation to artificially low prices and other effects, like supply bottlenecks, from early in the pandemic. Powell said that the pandemic’s effect on inflation have been larger and more persistent than expected. He stated that the rise in inflation has come from reopening the economy, seen through the influx of used cars and trucks, airplane tickets, and hotels. He explained that these rates would stop going up and will begin to decline until they ultimately resolve themselves. He concluded that he does not think inflation speaks to a broad tightening of the economy over time. Maloney also expressed concerns with relying on traditional inflation statistics, which she stated are currently unreliable in setting monetary policy. Powell said that data in the labor market is in an unusual setting as the economy reopens.
Reps. Mark E. Green (R-Tenn.), Mariannette Miller-Meeks (R-Iowa), and Scalise asked Powell if the U.S. inflation rate will be transitory and if a five percent inflation is acceptable. Powell said five percent is not acceptable and that he expects the inflation rate to be transitory with areas most affected by the reopening of the economy experiencing inflation. He also emphasized the Fed’s commitment to maintaining price stability.
Rep. Bill Foster (D-Ill.) asked about the longer-term effects of inflation. Powell said it is difficult to predict at this point but that jobs will come back to the U.S.
Government Debt
Green asked if the U.S. government will be able to pay back its debt as interest rates increase toward five percent. Powell said he has no doubt that the U.S. government can pay back its debt in the foreseeable future but agreed that the debt level is on an unsustainable path. He added that the government needs to pay back its debt, but it must wait until the economy recovers.
Miller-Meeks stated that the U.S. government debt is projected to reach 600 percent of annual GDP by the end of the century and asked Powell if he agrees with this conclusion. Powell said he does but that debt growth has outpaced GDP growth for a long time and that the government will have time to bring down this debt once the economy is no longer in a fragile state.
Labor Market
Rep. Raja Krishnamoorthi (D-Ill.) asked how the pandemic and recovery has impacted the lower- and middle-income labor communities. Powell said that the pandemic hit the service industry very hard and affected minority groups at disproportionately higher rates.
Krishnamoorthi described efforts by educational systems working with different levels of government around the country to match people with jobs in the post pandemic nature. Powell said that this concept works well and hoped it would be used more in the future.
Rep. Jim Jordan (R-Ohio) asked why job numbers are low if the U.S. economy is at maximum employment and how long this trend will last. Powell said that the U.S. economy is digging out of a deep hole, and while progress has been made, there is more to be done. He stated temporary factors weighing on job creation, including unemployment and the lower net job creation, and attributed the lower net job creation to people getting hired, quitting, and retiring at higher rates. Powell said that federal unemployment will run out soon if Democrats do not renew it and added a prediction for strong job creation in the fall.
Scalise asked Powell if the economy can reach the pre-pandemic level if the labor shortage continues. Powell said he expects job creation and labor supply to increase over this year, boosting the economy.
Miller-Meeks asked if the government should incentivize workers to work and bring in low-skilled workers from other countries due to the labor shortage. Powell listed several factors that are affecting the labor market which he expects to subside this year: the fear of catching the virus at work; schools not reopening, which prevents parents from working; and unemployment insurances allowing people to take longer to find better employment.
Infrastructure
Rep. Jamie Raskin (D-Md.) asked if investing in infrastructure will increase the capacity to contribute to economic growth, citing that 30 million Americans live in areas with inadequate broadband. Powell said that investments in infrastructure and people will certainly improve productivity and that increasing broadband will support business growth.
Economy
Clyburn asked why economic equity is necessary to successfully fulfill the Fed’s core mandate of price stability and maximum employment. Powell said that the Fed can focus on the employment mandate and achieving it, which will include an inclusive measure examining unemployment and employment for all groups.
Scalise asked Powell if the pre-pandemic economy was strong and if the unemployment was at an all-time low. Powell said the economy was strong and unemployment rate was the lowest in decades. Scalise followed up by asking Powell if the pre-pandemic economy helped minorities. Powell said yes and that it shows the benefit of a prolonged economic expansion since low unemployment figures for minorities only started showing in the 2-3 years prior to the pandemic.
Federal Reserve Response
Maloney asked what most important adjustments the Fed could make to the mainstream lending program to make it more effective. Powell stated that the program is effective because it made a few thousand loans. He also provided an assessment of the municipal loan liquidity facility, which he believed successfully measured how lending took place and showed that backstops can be more effective than direct loans.
Central Bank Digital Currency
Foster asked Powell if the Fed is working internationally to try to get secure identification keys digitized as part of their negotiations with central bank digital currencies. Powell stated that the keys are a part of the discussion.
International
Green asked Powell if the China and Russia financial alliance dumping the USD on the global foreign exchange market should be a concern to the U.S. Powell replied he cannot answer that, and noted the USD is the global reserve currency, which he does not foresee changing anytime soon.
Public Health
Krishnamoorthi asked how the U.S. economy is being impacted by other countries’ populations not getting vaccinated. Powell said that the U.S. needs to support broad vaccination efforts around the world because no one is safe until everyone is safe.
Foster asked if the U.S. return on investment on vaccines has yielded the highest return on vaccine investment to date. Powell provided no number but agreed that the return is high. Foster also asked if the U.S. return on investment on vaccines to help with trade partners has yielded the highest return on vaccine investment to date and stated that a concrete number is needed to display the U.S.’s accomplishment. Powell agreed that the return is high and said he will formulate a number later.
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