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, February 23, 2021

Witnesses

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

Opening Statements                   

Chairman Sherrod Brown (D-Ohio)

In his opening statement, Brown said that “we are facing two crises,” a public health and an economic crisis, adding that “we can’t solve one without solving the other.” He noted that constituents in Ohio are worried about doing too little, not about doing too much in battling COVID-19. Brown outlined that experts have said we need to get recourses to those who need them and that economists have said the economy could spiral without strong fiscal support. Brown shared his support for President Biden’s American Rescue Plan. He referenced how stagnant workers’ wages and the growing wealth and income gaps are the “result of choices made by corporations and their allies in Washington.” Brown called for more investment in infrastructure, saying the nation’s central bank is a vital player. Brown argued that the Federal Reserve (Fed) could ensure that banks use capital to invest in their workers and communities, that financial institutions consider the risks of climate change, that all people have access to bank accounts and their own money, that the financial system addresses systemic racism, and that workers are “the central focus of our economy.”

Ranking Member Pat Toomey (R-Pa.)

In his opening statement, Toomey said that about a year ago the economy “was in dire straits” and commended the “bold and decisive action” taken by Congress and the Federal Reserve, noting that Congress has passed nearly $4 trillion in relief via bipartisan legislation. He said that partly due to these actions, the economy is rebounding, unemployment rates are lowering, and that the average household is in a better position, but noted that “some groups have been hit harder than others.” Toomey argued that it is not necessary to hastily pass another nearly $2 trillion fiscal stimulus and cautioned Congress and the Federal Reserve from unnecessarily contributing to current dynamics of the economy. Toomey pointed out that the cost of fiscal spending funded by government debt is a burden for future generations. Toomey noted that the Federal Reserve cannot overstep its authority and that it must be held accountable. He argued that although they are noble causes, “addressing issues such as climate change or racial inequality are simply not in the purview of the Federal Reserve.”

Testimony

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

In his testimony, Powell noted the Federal Reserve’s commitment to Congress’s goals of maximum employment and price stability. Powell first reviewed the current economic situation and stated that the economy’s path depends on the course of COVID-19 and the measures to control it, noting an uneven and uncertain path to economic recovery. He said that spending on services is low, but spending on goods, business investments, and manufacturing picked up and that the housing industry has recovered. Powell argued that the fiscal and monetary actions taken have contributed to recovery in economic activity. Powell stated that while there is progress in the labor market, millions of Americans are still unemployed and “economic downturn has not fallen equally on all Americans.” He noted the impact on inflation, and that while some areas have rebounded, some areas are soft, stating that “inflation remains below our two percent longer-run objective.” In his discussion of monetary policy, Powell explained the Federal Open Market Committee’s (FOMC) public review of monetary policy strategy, tools, and communications practices was to identify improvements that could be made, and the FOMC adopted a revised Statement on Longer-Run Goals and Monetary Policy Strategy. He said that the two percent longer-run inflation goal remains, but that changes were made to the employment goal and policy decisions. Powell stated that the new framework is implemented by policy tools, and “we expect that it will be appropriate to maintain the current accommodative target range of the federal funds rate until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to two percent and is on track to moderately exceed two percent for some time.” Powell said that the Federal Reserve is committed to using all of its tools to support the economy and ensure a robust recovery.

Question & Answer

Economic Recovery

Throughout the hearing, Powell fielded a number of questions about the state of the economy and post-pandemic recovery. In response to a question from Sen. Richard Shelby (R-Ala.), Powell said he thinks the balance sheet will continue to provide the support the economy needs and over time the growth of it will slow. Asked by Sen. Jon Tester (D-Mont.) whether the tools the Fed has deployed have been sufficient, Powell said they have, and fiscal policy has made a difference as well. Sen. Mark Warner (D-Va.) asked how Powell thinks the overall financial system has responded to the crisis, to which Powell replied that the large financial institutions at the heart of the system were resilient, continued to lend, and have seen high levels of capital and liquidity.

In response to questions from Sens. Bob Menendez (D-N.J.) and Brown about inequality, Powell agreed that much of the burden of the pandemic has fallen on low- and moderate-income (LMI) communities, noting that tools to address aiding specific groups are fiscal in nature and the main thing the Fed can do is to continue to support the economy overall.

Menendez also asked about the effect of the pandemic on the housing market. Powell noted that eviction disrupts lives in a way that can be hard to recover from, saying the single best thing the Fed can do is to speed up the recovery so it will be robust and complete as soon as possible.

Asked by Sen. Cynthia Lummis (R-Wyo.) whether a central counterparty for clearing treasuries is needed, Powell said that the Fed is thinking about the structure of the treasury market and central clearing is something to consider.

Inflation

Sens. Tim Scott (R-S.C.), Mike Rounds (R-S.D.), Kyrsten Sinema (D-Ariz.), Bill Hagerty (R-Tenn.) and Warner asked various questions about the possibility for and impact of inflation. Powell said the expectation is that inflation will be volatile over the next year due to increased spending as the economy reopens, but he does not expect it to be large or persistent. He said if inflation does become a problem, the Fed has the tools it needs to address it.

Sens. Pat Toomey (R-Pa.) asked about inflation and corresponding bond yield, and what it would imply for the bond buying program. Powell said the program will continue at least at the current pace until there has been substantial progress towards set goals.

Supplemental Leverage Ratio

Sens. Steve Daines (R-Mont.), Hagerty and Rounds asked questions pertaining to the temporary exclusion of the supplemental leverage ratio, asking whether it will be extended past the current March 31 expiration. Powell said the Fed has not yet made a decision but is currently considering the issue and will announce a decision soon. In response to a question from Brown about tying the payment of dividends to the exclusion, Powell said he could not commit to connecting that decision to the payment of dividends.

Commercial Mortgage-Backed Securities

Sen. Jerry Moran (R-Kan.) asked Powell for his thoughts on the commercial real estate market and its implications for commercial mortgage-backed securities. Powell said that some parts of the commercial real estate market are under real pressure, saying those changes may be temporary or more long-lasting. He said there is exposure to the banking system, and it is significant in the mortgage-backed securities market, particularly in the hotel space. He noted the Fed is watching this closely. Sen. Thom Tillis (R-N.C.) asked if there are any proactive steps that can be taken to address this. Powell said the Fed’s tools are not appropriate for addressing this situation unless they become extremely broad, and that is not expected.

Systemic Risk

Sen. Jon Ossoff (D-Ga.) asked what Powell considers the most significant systemic threat to national or global financial stability. Powell replied that bringing the pandemic to a real, decisive end will take much risk off the table. He added that issues like low growth, inflation, low productivity, and an aging population also threaten stability in various ways in advanced economies.

Asset Bubbles

Sens. Toomey, Daines, Tillis, Ossoff and Hagerty expressed concerns about asset bubbles. Powell said elevated asset prices could be caused by a number of factors including fiscal stimulus, monetary policy, a reopening economy, and expectations of higher corporate profits. He said it is important for movements in asset prices to not disrupt the broader financial system, noting that banks are highly capitalized and the Fed has the capacity to monitor the markets effectively.

Climate Risk

Sen. Tina Smith (D-Mn.) asked whether climate risk disclosures should be standardized. Powell said that disclosure is an issue for the Securities and Exchange Commission, but his view is that it is appropriate right now to allow some differences in disclosures to persist, and in the long run move towards a more standardized approach.

Digital Currencies

Hagerty asked whether the Fed should develop a digital dollar. Powell said that the Fed is looking very carefully at that question. He noted that there are significant technical and policy questions involved, and the Fed is committed to consulting broadly and transparently with the public and all interested constituencies, saying the Fed needs to avoid developing something that is destabilizing or draws funds away from the banking system.

For more information on this hearing, please click here.