[Senate Hearing 116-443]
[From the U.S. Government Publishing Office]
S. Hrg. 116-443
THE SEMIANNUAL MONETARY POLICY REPORT TO CONGRESS
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SIXTEENTH CONGRESS
SECOND SESSION
ON
OVERSIGHT ON THE MONETARY POLICY REPORT TO CONGRESS PURSU-
ANT TO THE FULL EMPLOYMENT AND BALANCED GROWTH ACT OF 1978
__________
JUNE 16, 2020
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available at: https://www.govinfo.gov/
__________
U.S. GOVERNMENT PUBLISHING OFFICE
44-517 PDF WASHINGTON : 2023
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
MIKE CRAPO, Idaho, Chairman
RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania JACK REED, Rhode Island
TIM SCOTT, South Carolina ROBERT MENENDEZ, New Jersey
BEN SASSE, Nebraska JON TESTER, Montana
TOM COTTON, Arkansas MARK R. WARNER, Virginia
MIKE ROUNDS, South Dakota ELIZABETH WARREN, Massachusetts
DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada
MARTHA McSALLY, Arizona DOUG JONES, Alabama
JERRY MORAN, Kansas TINA SMITH, Minnesota
KEVIN CRAMER, North Dakota KYRSTEN SINEMA, Arizona
Gregg Richard, Staff Director
Laura Swanson, Democratic Staff Director
Catherine Fuchs, Counsel
Brandon Beall, Professional Staff Member
Elisha Tuku, Chief Counsel
Corey Frayer, Democratic Professional Staff Member
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Charles J. Moffat, Hearing Clerk
Jim Crowell, Editor
(ii)
C O N T E N T S
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TUESDAY, JUNE 16, 2020
Page
Opening statement of Chairman Crapo.............................. 1
Prepared statement........................................... 48
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
Prepared statement....................................... 48
WITNESS
Jerome H. Powell, Chairman, Board of Governors of the Federal
Reserve System................................................. 5
Prepared statement........................................... 50
Responses to written questions of:
Senator Brown............................................ 53
Senator Toomey........................................... 56
Senator Scott............................................ 60
Senator Rounds........................................... 61
Senator Tillis........................................... 62
Senator Reed............................................. 62
Senator Menendez......................................... 62
Senator Warren........................................... 65
Senator Schatz........................................... 68
Senator Cortez Masto..................................... 69
Senator Jones............................................ 71
Senator Smith............................................ 76
Senator Sinema........................................... 76
Additional Material Supplied for the Record
Monetary Policy Report to the Congress dated June 12, 2020....... 78
Statement of the Credit Union National Association............... 140
(iii)
THE SEMIANNUAL MONETARY POLICY REPORT TO CONGRESS
----------
TUESDAY, JUNE 16, 2020
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10 a.m., remotely via WebEx, Hon. Mike
Crapo, Chairman of the Committee, presiding.
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman Crapo. This hearing will come to order. This
hearing is another remote hearing by video.
A few videoconferencing reminders, you are probably all
used to these. Once you start speaking, there will be a slight
delay before you are displayed on screen. To minimize the
background noise, please click the mute button until it is your
turn to speak or ask questions.
If there is a technology issue, we will move to the next
Senator until that is resolved, and again, I remind all
Senators that there is a 5-minute clock that still applies, and
it should be on your screen.
At 30 seconds remaining, I will gently tap the gavel. I
sometimes forget to do that, but I am going to try to do that
better today and try to remind you that your time is almost
expired.
To simplify the speaking order process, Senator Brown and I
have again agreed to go by seniority for this hearing.
Today Federal Reserve Chairman Jerome Powell will update
the Committee on monetary policy developments and the state of
the U.S. economy.
It has only been 4 months since the last Humphrey-Hawkins
hearing, but we are seeing a significantly different economy
today, one that has been racked by the physical and economic
impact of the COVID-19 pandemic and ensuing shutdowns.
Chairman Powell, you have stated that the Federal Reserve
is ``strongly committed to using our tools to do whatever we
can and for as long as it takes to provide some relief and
stability to ensure the recovery is as strong as possible.''
Additionally, the Fed has purchased more than $2 trillion
in Treasury and mortgage securities since the pandemic sparked
a massive flight for safe, cash-like assets in mid-March.
Because of this, the Fed's balance sheet has expanded to more
than $7 trillion.
Congress, the Administration, and regulatory agencies have
taken extreme actions to protect and stabilize the
infrastructure of our economic system.
The CARES Act has been central to that effort, and recent
statistics indicate our efforts are working. In fact, the
Bureau of Labor Statistics announced on June 5, encouraging
signs for jobs and the economy, that nonfarm payroll employment
rose by 2.5 million in May, and the unemployment rate declined
to 13.3 percent.
According to the report, these improvements in the labor
market reflected a limited resumption of economic activity that
had been curtailed in March and April due to the coronavirus
pandemic and efforts to contain it.
Title IV of the Act provided a $500 billion infusion into
the Exchange Stabilization Fund, up to $454 billion of which
can be used to support the Federal Reserve's emergency lending
facilities, such as the Main Street Lending facilities and the
Municipal Lending Facility.
The Fed has set up facilities funded both under and outside
of the CARES Act, and there is evidence that the mere
announcement of some of those facilities has had a positive and
stabilizing effect on markets, even before they have become
fully operational.
Although any positive effect of these facilities is
welcome, getting them fully operational ensures that they
achieve their full effect.
The Federal Reserve announced positive changes to the term
sheets of the Main Street facilities that will allow additional
smaller and medium-sized businesses to access the facilities
and announce that the facility is open for lender registration
and have encouraged lenders to start lending as soon as
possible. These are important first steps in the facilities
becoming fully operational.
In addition to emergency lending facilities, the Fed can
continue to right-size regulations to increase lending and
access to credit in the economy.
In response to a letter that I sent to the Federal banking
regulators on April 8, Vice Chairman Quarles noted that
``Congress should consider modifying section 171 of the Dodd-
Frank Act, the Collins Amendment, to allow regulators to
provide flexibility under Tier 1 leverage requirements as banks
respond to increased credit demand.''
There are also several proposed rules that the agencies
have been working on since before COVID-19, and I encourage the
agencies to finalize these rules as soon as possible, such as
the Volcker covered funds rule and the inter-affiliate margin
rule.
During this hearing, I look forward to hearing more on the
state of the economy, including its response to the CARES Act;
an update on the status of the 13(3) emergency lending
facilities; how the facilities have provided or stand to
provide necessary credit to households, businesses, States and
local governments; and additional regulatory and legislative
changes that can increase credit and liquidity in the
marketplace and further support the economy.
Chairman Powell, again, I thank you for joining us today.
Senator Brown.
OPENING STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman, for holding this
virtual hearing. Thanks to Chair Powell, for participating in
this hearing remotely to practice social distancing and to
prevent the potential spread of coronavirus. We know the virus
is still spreading. It is still taking the lives of hundreds of
Americans every single day.
Across the country, in big cities and small towns alike,
Americans are calling for their Government to respond to the
health and the economic impact of the pandemic. They are
outraged over the killings of Breonna Taylor, George Floyd,
Ahmaud Arbery, Rayshard Brooks, and so many other Black
Americans. They are demanding justice and an end to the
systemic racism that pervades every aspect of American society,
including our economy.
Your job and our job on this Committee is to oversee our
economic system, to be good stewards of our economy. That
requires seeing our economy as it actually is. You are not
overseeing some theoretical academic model of a perfect market.
The evils of racism have been woven into the fabric of our
Nation's history since its very beginning. Look at housing. We
see how it works, from Jim Crow to redlining to today's OCC
dismantling an important civil rights law. We cannot rely on
the market to sort itself out. It never has and it never will.
We know Black workers earn less than their White peers who
do the same jobs and have the same education levels. We know
Black families are far less likely to own their homes than
White families. We know Black students borrow more and pay more
for college. We know Black retirees have less money for
retirement and less wealth to pass on to their children.
Many, Mr. Chairman, including some members of the House and
Senate, suggest, both in their statements and in their
policies, that Black Americans are uneducated, do not work
hard, do not want to start businesses or buy homes or save or
invest. That is a false, racist narrative.
The real reason behind the disparities is that we have
centuries of systematic oppression that denies Black Americans
the opportunity to fully participate in our economy, and
whenever we try to fix it, the people who created or
perpetuated that system, people who have no problem intervening
in the market to save corporations and the White men who run
them say, ``Oh no, we cannot have Government meddling in the
economy.''
Let us be clear. Government has always intervened in the
economy. It has only been a question of who it is intervening
on behalf of. Corporations, the wealthy, the privileged, or the
people who make this country work? That contrast has probably
never been clearer than it is today.
Workers are the people who make this economy run. It is not
the CEOs and other to executives, but the people who stock our
shelves, deliver our packages, operate our subways and buses,
and care for our health. We have finally started calling these
workers, mostly women, disproportionately Black and brown
workers. We have finally started calling these workers what
they are: ``essential.''
But our companies and our Government have not started
treating them that way. Even before the pandemic, this economy
was not working for working Americans. Our essential workers
faced barriers to housing and health care. Wages were stagnant,
and wealth inequality continued to rise. Corporations making
record profits rewarded their executives with huge bonuses and
increased dividends and stock holdings, juiced by buybacks.
They were not using those record profits to pay their essential
workers what they are actually worth.
Now these same companies that have been lining the pockets
of their investors and executives, at the expense of their
workers, now want the Government to cushion the landing during
this crisis. And Congress asked the Treasury and the Federal
Reserve to serve as a life raft, to lend trillions of dollars
to support our economy during this unprecedented time.
But while Treasury and the Fed help financial markets and
corporations, you are not holding up the other end of the deal.
We asked you to make sure that working Americans remained
employed and safe. Big corporations are staying afloat. Just
look at the stock market, but the number of Americans out of a
job number into the tens of millions.
We saw how this played out in the 2008 financial crisis.
Government intervened to help banks and corporations. They were
all too happy to take the bailouts. No complaints of Government
handouts there. In fact, it was considered patriotic.
But millions of Americans were left behind, losing their
jobs, their homes, getting paid less. Many of us fought for
more help, more stimulus for the people who make the economy
work, and Wall Street and its allies in Washington called that
a bailout, Government meddling, market interference. History
repeats itself.
As COVID-19 spread across the country earlier this year,
many workers, mostly Black and brown, found themselves thrown
from one crisis into the next.
As it currently stands, with no steps taken to actually
ensure the money they are lending goes to workers, Treasury and
the Fed are only reinforcing the inequities between workers and
Wall Street and between Black and brown Americans and White
Americans.
Chair Powell, you said that Congress needs to do more to
help our State and local governments put money directly in
people's pockets, and I agree. Democrats have a plan to get
more help directly to working Americans, but Mitch McConnell is
in no rush to help people. He said he sees ``no urgency,'' his
words, ``no urgency.''
Leader McConnell and the Administration want to pretend
like we are not in the middle of a pandemic and an economic
recession. They want to force people back to work without real
safety protections at the same low wages, while they shield
their Wall Street friends from liability if any of their
workers get sick on the job.
We want people to go back to work too, of course, but they
want us to return to business as usual. We know what business
as usual means: Government intervention to put its thumb on the
scale for corporations and their wealthy shareholders and the
free market for everyone else. We cannot return to that
business as usual.
The economy and justice are not separate issues. The
Americans who protest across the country are demanding more
from their Government. They want an end to police violence that
take Black lives with impunity. They want to know their voices
are heard and their votes will not be suppressed. They want
economic security. They want a safe place to live. They want a
President who acts in his citizens' interest, not his own. They
want to again have faith in their Government.
Congress and the Fed can help restore some of that trust.
It is clear the White House is not going to. Both of us,
Congress and the Fed alike, must take action now to support the
workers who make this economy run. That means providing help
for immediate needs. It means addressing systemic racism and
economic injustice.
If we fail to act, it will hurt many people and will make
inequality worse. The Fed can make sure companies that get
bailed out keep paying their workers, that companies stop stock
buybacks and dividends on Wall Street, and actually adopt
policies that combat inequality rather than supercharge it.
The Fed cannot lend to big businesses and leave workers
behind like we saw during the last crisis. We need to be better
stewards of the economy.
Chair Powell, I thank you for your service and your
leadership. I would urge you to redouble your efforts to make
sure that you and the thousands of talented men and women who
work with you are dedicated to taking steps to ensure that this
economy works for all Americans.
Thank you.
Chairman Crapo. Thank you, Senator Brown.
Chairman Powell, we will now move to you. Your full
testimony is a part of the record, and you may begin.
STATEMENT OF JEROME H. POWELL, CHAIRMAN, BOARD OF GOVERNORS OF
THE FEDERAL RESERVE SYSTEM
Mr. Powell. Thank you.
Chairman Crapo, Ranking Member Brown, and other Members of
the Committee, thank you for the opportunity to present the
Federal Reserve's semiannual Monetary Policy Report.
Our country continues to face a difficult and challenging
time, as the pandemic is causing tremendous hardship here in
the United States and around the world. The coronavirus
outbreak is, first and foremost, a public health crisis. The
most important response has come from our health care workers,
and on behalf of the Federal Reserve, I want to express our
sincere gratitude to these dedicated individuals who put
themselves at risk, day after day, in service to others and to
our Nation.
Beginning in mid-March, economic activity fell at an
unprecedented speed in response to the outbreak of the virus
and the measures taken to control its spread. Even after the
unexpectedly positive May employment report, nearly 20 million
jobs have been lost on net since February, and the reported
unemployment rate has risen about 10 percentage points, to 13.3
percent. The decline in real GDP this quarter is likely to be
the most severe on record. The burden of the downturn has not
fallen equally on all Americans. Instead, those least able to
withstand the downturn have been affected most. As discussed in
the June Monetary Policy Report, low-income households have
experienced by far the sharpest drop in employment, while job
losses of African Americans, Hispanics, and women have been
greater than that of other groups. If not contained and
reversed, the downturn could further widen gaps in economic
well-being that the long expansion had made some progress in
closing.
Recently, some indicators have pointed to a stabilization
and in some areas a modest rebound in economic activity. With
an easing of restrictions on mobility and commerce and the
extension of Federal loans and grants, some businesses are
opening up, while stimulus checks and unemployment benefits are
supporting household incomes and spending. As a result,
employment moved higher in May. That said, the levels of output
and employment remain far below their prepandemic levels, and
significant uncertainty remains about the timing and strength
of the recovery. Much of that economic uncertainty comes from
uncertainty about the path of the disease and the effects of
measures to contain it. Until the public is confident that the
disease is contained, a full recovery is unlikely.
Moreover, the longer the downturn lasts, the greater the
potential for longer-term damage from permanent job loss and
business closures. Long periods of unemployment can erode
workers' skills and hurt their future job prospects. Persistent
unemployment can also negate the gains made by many
disadvantaged Americans during the long expansion and as
described to us at our Fed Listens events. The pandemic is
presenting acute risks to small businesses, as discussed in the
Monetary Policy Report at page 24. If a small- or medium-sized
business becomes insolvent because the economy recovers too
slowly, we lose more than just that business. These businesses
are the heart of our economy and often embody the work of
generations.
With weak demand and large price declines for some goods
and services such as apparel, gasoline, air travel, and hotels,
consumer price inflation has dropped noticeably in recent
months, but indicators of longer-term inflation expectations
have been fairly steady. As output stabilizes and the recovery
moves ahead, inflation should stabilize and then gradually move
back up over time closer to our symmetric 2 percent objective.
Inflation is nonetheless likely to remain below our objective
for some time.
The Fed's response to this extraordinary period is guided
by our mandate to promote maximum employment and stable prices
for the American people, along with our responsibilities to
promote the stability of the financial system. We are committed
to using our full range of tools to support the economy in this
challenging time.
In March, we quickly lowered the policy interest rate to
near zero, reflecting the effects of COVID-19 on economic
activity, employment, and inflation, and the heightened risks
to the outlook. We expect to maintain interest rates at this
level until we are confident that the economy has weathered
recent events and is on track to achieve our maximum employment
and price-stability goals.
We have also been taking broad and forceful actions to
support the flow of credit in the economy. Since March, we have
been purchasing sizable quantities of Treasury securities and
agency mortgage-backed securities in order to support the
smooth functioning of these markets, which are vital to the
flow of credit in the economy. As described in the Monetary
Policy Report, these purchases have helped restore orderly
market conditions and have fostered more accommodative
financial conditions. As market functioning has improved since
the strains experienced in March, we have gradually reduced the
pace of these purchases. To sustain smooth market functioning
and thereby foster the effective transmission of monetary
policy to broader financial conditions, we will increase our
holdings of Treasury securities and agency MBS coming months at
least at the current pace. We will closely monitor developments
and are prepared to adjust our plans as appropriate to support
our goals.
To provide stability to the financial system and support
the flow of credit to households, businesses, and State and
local governments, the Fed, with the approval of the Secretary
of the Treasury, established 11 credit and liquidity facilities
under section 13(3) of the Federal Reserve Act.
The report provides details on these facilities, which fall
into two broad categories: stabilizing short-term funding
markets and providing more direct support for credit across the
economy.
To help stabilize short-term funding markets, the Fed set
up the Commercial Paper Funding Facility and the Money Market
Liquidity Facility to stem outflows from prime money market
funds.
The Fed also established the Primary Dealer Credit
Facility, which provides loans against good collateral to
primary dealers that are critical intermediaries in short-term
funding markets.
To more directly support the flow of credit to households,
businesses, and State and local governments, we established a
number of facilities. To support the small business sector, we
established the Paycheck Protection Program Liquidity Facility
in order to bolster the effectiveness of the CARES Act Paycheck
Protection Program.
Our Main Street Lending Program, which has launched this
week, supports lending to both small- and mid-sized businesses.
The Term Asset-Backed Securities Loan Facility, or TALF,
supports lending to both businesses and consumers.
To support the employment and spending of investment-grade
businesses, we established two corporate credit facilities, and
to help U.S. State and local governments manage cash-flow
pressures and serve their communities, we set up the Municipal
Liquidity Facility.
The tools that we are using under Section 13(3) authority
are appropriately reserved for times of emergency. When this
crisis is behind us, we will put them away. In the June
Monetary Policy Report, we review the implications of these
tools for the Fed's balance sheet.
Many of these facilities have been supported by funding
from the CARES Act, and we will be disclosing on a monthly
basis, names and details of participants in each such facility;
amounts borrowed and interest rate charged; and overall costs,
revenues, and fees for each facility. We embrace our
responsibility to the American people to be as transparent as
possible, and we appreciate that the need for transparency is
heightened when we are called upon to use our emergency powers.
We recognize that our actions are only part of a broader
public-sector response. Congress' passage of the CARES Act was
critical in enabling the Fed and the Treasury Department to
establish many of the lending programs. The CARES Act and other
legislation provide direct help to people, businesses, and
communities. This direct support can make a critical difference
not just in helping families and businesses in a time of need
but also in limiting long-lasting damage to our economy.
I want to end by acknowledging the tragic events that have
again put a spotlight on the pain of racial injustice in this
country. The Fed serves the entire Nation. We operate in and
are part of many of the communities across the country where
Americans are grappling with and expressing themselves on
issues of racial equality. I speak for my colleagues throughout
the Federal Reserve System when I say there is no place at the
Fed for racism and there should be no place for it in our
society. Everyone deserves the opportunity to participate fully
in our society and in our economy.
We understand that our work touches communities, families,
and businesses across the Nation, and everything we do is in
service to our public mission. We are committed to using our
full range of tools to support the economy and to help assure
that the recovery from this difficult period will be as robust
as possible. Thank you.
Chairman Crapo. Thank you, Chairman Powell.
Last week, the Fed announced positive changes to increase
access of the Municipal Facility and the Main Street
Facilities, and yesterday the Federal Reserve announced that
the Main Street Lending Program opened for lender registration
and requested feedback on loan terms for nonprofit
organizations.
Can you provide me a timeline for when the Main Street
Facilities, the Municipal Facility, and the nonprofit loans
will be fully operational?
Mr. Powell. Sure. The Municipal Liquidity Facility is up
and operating. It is available to be approached by the eligible
municipal entitles, and so far, we have done one financing and
we are open to others. So that facility is fully open.
As you mentioned, Mr. Chairman, the Main Street Lending
Program opened for lender registration yesterday. We expect
that process to take a couple of days, and we encourage lenders
who have completed that process to begin immediately making
loans to eligible borrowers. And we expect and hope that will
happen.
Then I would say in a week or so, the Main Street Lending
Program itself will be available to purchase 95 percent
interest in those loans. So that is effectively up and running
now.
In terms of nonprofits, what we did, as you saw yesterday,
was to put out a proposal to include nonprofits in the Main
Street Facility, and we have asked for comment on it. There are
two facilities in the nonprofit part of Main Street that have
essentially the same terms as the for-profit part of Main
Street, but the requirements to be an eligible borrower are
different and are more tailored to the financial
characteristics of nonprofits, the ratio of liquid assets to
debt, the amount of liquidity on hand, the operating statistics
of the nonprofit.
So this is something we are very much looking forward to
getting feedback from the public on, and when we turn that
around, it will take some time to get it right, but I expect we
will move pretty expeditiously on it over the next month or so.
Chairman Crapo. All right. Thank you. I appreciate your
attention to these. Obviously, these are very critical, and I
hope to see them moving aggressively as quickly as possible.
I would like to turn to the economy itself right now. You
have made some comments in recent days. On June 10th, the Fed
released economic projections of the Federal Reserve Board
members and the Federal Reserve Bank presidents under their
individual assessments of the projected monetary policy.
Most of the Fed's economic projections forecast the
unemployment rate falling to around 9 or 10 percent later this
year from a high of 14.7 percent in April. Could you just
elaborate a bit on your projections for what the economic
outlook is right now, and could you take into consideration
whether there is a differential between the short-term outlook
versus the longer-term outlook and how you approach this?
Mr. Powell. Yeah. So I think it is--to me, anyway, it is
helpful to think of it in sort of three stages. The first stage
was the shutdown, and we have seen what that would produce,
which is very sharp declines in economic activity and very
large increases in unemployment. And that was Q2, and we may be
reaching a bottom on that now.
After that, it is reasonable to expect--and this does
assume, by the way--all of this assumes that the virus remains
reasonably well under control and does not experience an event
where the virus rises widely across the Nation. Let us just
assume that does not happen. OK. So the first part is the
shutdown.
The second part will be the bounce back, and you should see
during that period, the economy opening, stores opening, all
kinds of different economic entities opening, and people going
back to work. We are seeing apparently the beginning of that
with the employment report, and we would expect to see large
numbers of people during this period coming back to work during
this second period of--call it the ``bounce back'' or the
beginning of the recovery.
Then we think and I think most, if not all, forecasters
think that will leave us well short of where we were in
February, full employment with the economy really working
broadly across all of its areas, and the reason for that is
just that there are parts of the economy that will struggle to
return to their old ways of activity because they involve
getting people together closely in large groups. So it is going
to take some time to rebuild confidence and that kind of thing.
So those are the three stages I would see.
Right now, we seem to be in the beginning. We may be in the
beginning of that second stage, and I would say this morning's
retail sales number is more evidence that, first of all, the
legislation that you passed, both the PPP and the unemployment
insurance and the checks that were sent out, all of that is
supporting demand and reopening and economic activity,
including retail sales. We had quite a positive report this
morning on retail sales.
But I would say the path--the last thing I will say it is
all quite uncertain, but we appear to be entering that second
phase of the economy reopening and businesses reopening and
spending increasing.
Chairman Crapo. All right. Thank you. My time has expired.
Senator Brown.
Senator Brown. Thank you, Mr. Chairman.
Chair Powell, thank you for your comments at the end of
your remarks about racism. I appreciate that. I think we all
do.
A prominent Black economist and professor of economics at
Howard, William Spriggs, recently wrote a letter criticizing
how most economists treat race in their models and assumptions.
We provided that letter for you yesterday. Have you had a
chance to read it yet?
Mr. Powell. I did, yes.
Senator Brown.Good. Thank you.
Do you think in this letter, for those watching, he makes
the point that many economic outcomes are the direct result of
racism? Yet we hear from so many other economists and
policymakers that racial disparities and economic outcomes are
explained by other factors, education, for example, but we know
that Black Americans even with the same levels or better levels
of education as their White peers still make less money at the
same jobs.
Do you think Dr. Spriggs is correct that the U.S. has
failed to grapple with the fact that much of the economic
inequality is a direct result of institutional racism?
Mr. Powell. Let me say that Professor Spriggs, Bill
Spriggs, is a well-known scholar who has really built his
career around issues of economic justice. He is somebody who is
very well known and widely liked and admired here at the
Federal Reserve. we actually have a relationship that we highly
value with Howard University, their Economic Department.
So I will just say a couple things. First, the economics
discipline, like every other aspect of our society, does have a
troubled history when it comes to issues of race inequality,
and his letter, as I read it, really calls on the profession to
examine whether systemic racism is reflected in the empirical
work of economists. And it is particularly in an area called
``stratification economics,'' which he refers to, which is a
relatively new subfield in economics which focuses on the
failure of conventional economics to recognize and explain
persistent racial inequality. So that is really what the letter
is about.
I think it is thought-provoking, and I would just agree
that there is a lot of work left to do, both in the economics
profession on these issues and I hope recent events are pushing
all of us to try to do better.
Senator Brown. Thanks for that thoughtful response.
As Chair of the Federal Reserve, you lead the most
influential economic institution in the United States, of
course. Would you commit to us to a thoughtful and open-minded
study of how the Fed's policies, whether with regard to
monetary policy or the Fed's failure to regulate subprime
lending on the various assumptions underlying our systems
contribute to systematic racism in our country? Would you
commit to a thoughtful and open-ended and open-minded study of
doing that with us?
Mr. Powell. You know, I will take that away and think about
it and talk to my colleagues about it and come back to you.
Before we commit to a big study, I want to carefully think
about it.
As you know, as an institution, we are very focused on
diversity and inclusion, and we try to make that a very, very
high principle for us here at the Fed. And we do consider
racial disparities and things like that as a routine matter in
our work now.
Let me talk to my colleagues and come back to you on that.
Senator Brown. Well, one of the reasons I voted for your
confirmation for chair was that when you were--before you were
chair, but you were a Governor of the Fed, that you helped to
lead the way on dealing with issues of race. The Fed has a long
way to go. We all have a long way to go, but thank you for
that.
Let me talk about somebody else at the Fed, the president
of the Atlanta Fed, Raphael Bostic. As you know, the first and
amazingly still the only ever African American Federal Reserve
Bank president in the Fed's history of 10 decades. He recently
stated that many Americans endure the burden of unjust,
exploitative, and abusive treatment by institutions in this
country. He is calling for the Fed to help reduce social
inequities and bring about a more inclusive economy.
Would you say, Mr. Chairman, is the Fed one of the
institutions responsible for the unequal outcomes Black and
brown workers face in this country?
Mr. Powell. First, let me say I do recommend President
Bostic's message that he put up on the Atlanta Fed's website.
It is really excellent and very well said.
Are we responsible? I would sort of answer the question
this way. There is no doubt more that all of us can do to
address these issues, and this feels like a time when people
are going to be looking for ways to do more. And we certainly
are going to be doing that.
Senator Brown. So have you talked to Dr. Bostic about
whether he was suggesting the Fed now or is at some time
unjust, exploitative, or abusive to institutions? Have you had
these conversations personally with him?
Mr. Powell. I have not spoken to him since he published
that message. I did send him an email thanking him for it.
Senator Brown. Implicit in its comments and your response
is the Fed can do better, so thank you.
What are you doing to make sure the Fed's response does not
make the existing inequality in this country even worse?
Mr. Powell. What we learned during the last long expansion
is that a tight job market is probably the best single thing
that the Fed can do to support gains by all low- and moderate-
income communities and particularly for minority communities
who are heavily represented in these groups.
We saw in the last couple of years, before the coronavirus
arrived, that wage increases were the largest for people at the
low end of the income spectrum, and we also met with many, many
groups and people in low- and moderate-income communities as
part of our Fed Listens events, as part of our long-standing
meetings we have with people. What we heard over and over again
was ``This is the best labor market we have seen in our
lifetime. Please do not change what you are doing. This is
really working.''
So we are all highly motivated to get back to that.
Everything we are doing is to try to get the labor market back
to where it was in February of 2020. We want to get back to a
tight labor market.
We learned that inflation did not move up really noticeably
at all with almost 2 years of unemployment between 3.5 to 4
percent, and we learned that there were tremendous benefits to
those communities but also to the country, because we were
pulling people into the labor force. The labor force
participation rate was going up. That is what we can contribute
as well as all the other things we do.
We try to model diversity and inclusion. We try to model
those values, but we are very focused on maximum employment and
getting back there as fast as we can.
Senator Brown. Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Shelby.
Senator Shelby. Thank you, Chairman Crapo.
Chairman Powell? Chairman Powell?
Is he on?
Mr. Powell. Yes, I am on, Senator?
Senator Shelby. OK. I would like to pick up on what Senator
Crapo was into earlier, and that is the economy and how it is
going. I think you are spot on as far as a lot of it is
predicated on how we contain or the coronavirus is contained,
where it goes and so forth, because that is what is on people's
minds.
But a lot of people now are wanting to go back to work. I
see a little more activity. We saw the jobs report we all
referred to. Do you see in your models or your forecast, the
next month's jobs report being up or a little down or about the
same, or is it going to be progress all along, including the
third quarter? Have you got models on that?
Mr. Powell. Yes. I would start by saying that there is a
tremendous amount of volatility in the labor market reports
month to month. So they will move around even if the economy is
not really moving around. They will move around just because it
is a survey, and I think it is particularly difficult to
conduct a survey when you cannot really do it in person.
Senator Shelby. Absolutely.
Mr. Powell. But with that caveat, the answer to your
question really is that, yes, I think our expectation generally
and the expectation of other forecasters is that we will now
see unemployment decline and employment increase, and that is
just a function of lifting the social distancing measures, the
shutdown, and moving back in large parts of the economy to
reopened businesses and resumption of normal business
activities.
That should result in a significant amount of job gains and
an increase in activity from where we were at the beginning,
but it will leave us well short of where we were.
Senator Shelby. But it is all predicated on us containing
the coronavirus, it not coming back or at least that strong, is
it not?
Mr. Powell. Yes. I think the public wants to have
confidence----
Senator Shelby. Absolutely.
Mr. Powell.----to be able to return to these kinds of
activities. In fact, I think the return to investments that
create that confidence will be extremely high from an economic
standpoint.
Senator Shelby. I would like to now shift to the balance
sheet of the Fed. You have been on the Fed a number of years,
and you have been an investor in past life and so forth. Does
it bother you as the Fed Chairman to see that the balance sheet
has grown so fast?
I know these extraordinary times. We have got to have
extraordinary measures, but to de-leverage the balance sheet as
it is growing and probably continue to grow, it is going to be
a thing for the future. But it is going to be a real challenge
for somebody, is it not?
Mr. Powell. Well, so, first, I do not think that the
balance sheet at anything like its current size presents any
real threat to either inflation or to financial stability.
Senator Shelby. Currently.
Mr. Powell. Currently.
Our principle is we do not want the balance sheet to be any
bigger than it needs to be for us to do our job, to achieve
maximum employment and price stability. So I am not concerned
about the balance sheet and the plans I see for it going
forward at this point.
Over time, I think what we did learn--and I was here for
the whole last cycle of the balance sheet--first, the last QE
and then the decline in the balance sheet. I think it is just
something that has to be taken very carefully and very slowly.
And it is not something we are thinking about now. We are not
at all thinking about--what we are thinking about now is
providing the accommodation that this economy needs for as long
as it needs it. That is all we are thinking about.
When the time comes--what we did from 2014, as you will
recall, 2014 to 2017, we just froze the size of the balance
sheet, and as the economy grows, the balance sheet shrinks as a
percent of the economy. So that is a very passive way that--and
that did not cause any reaction in the market. I think there
have been market reactions when we try to actually shrink the
size of the balance sheet.
Senator Shelby. Thank you.
Mr. Powell. Thank you, Senator.
Chairman Crapo. Thank you.
Senator Reed.
Senator Reed. Thank you very much, Mr. Chairman, and thank
you, Chairman Powell, not only for your testimony, but for your
innovative and, I think, very thoughtful leadership and also
for your personal integrity and decency. So thank you very much
for that.
If State and local governments are not able to provide
essential services, what impact will this have on the economy,
and without additional resources from the Federal Government,
how will they be able to provide these adequate services?
Mr. Powell. So State and local governments do provide a lot
of the critical services that people rely on day to day,
police, fire, public safety, all of the things that they deal
with day to day that the Government does tend to provide for
the most part by State and local governments, and essentially,
all the States have a balanced budget requirement. So what you
see when revenues turn down and expenses turn up, as they have,
is you see layoffs.
State and local governments amount to something like 13
percent of the labor force. They are one of the largest
employers. So it can really weigh on the economy.
If the States are in tight financial straights, very tight,
what happens is, first of all, they will cut essential
services. Second, they will lay people off, and all of that
will weigh on the economy.
Senator Reed. So, essentially, that could be the biggest
drag on the economy going forward, the States being forced by
their constitutions to contract, literally. That is a view that
is a fair view?
Mr. Powell. It can be a drag, and in fact, it was after the
global financial crisis and during the Great Recession for a
number of years. It is pretty well documented now that it was a
drag on growth.
Senator Reed. Now, one of the other issues--and Senator
Brown has just echoed this--is that, looking at statistics, 14
percent of State and local employees are African American. That
is compared to 11.7 percent in the private workforce.
So, once again, we will see a situation institutionally,
maybe not intentionally, institutionally that probably the bulk
or a significant portion of this distress will be laid on the
shoulders of African American workers because they are the
State workers that will be laid off. Is that adequate or
accurate, I should say?
Mr. Powell. I do not know the exact number, but it is
certainly right. And, of course, we know that people who have
lost their jobs so far in the private sector come from parts of
the service industry that are directly affected by the
coronavirus, and they are heavily lower-income people.
Minorities are overrepresented. Women are overrepresented.
Senator Reed. Let me turn to the May jobs report. I mean,
it was encouraging, but did it represent a turning of the
corner, that the labor market is fine, that we are going to go
forward?
I think your previous comments suggested that is
encouraging news, but going forward, still significant
unemployment figures will be confronting us for years, perhaps.
Is that accurate?
Mr. Powell. Yes. Look, it was definitely, definitely good
news and maybe the biggest data surprise that anybody can
remember. People thought it would be. They were looking at the
claims data and other things.
But the larger context, though, as you point out, is
something like close to 25 million people have been displaced
in the workforce, either partially or through unemployment, and
so we have a long road ahead of us to get those people back to
work.
It is really a good thing that we are starting. We are
starting earlier than we thought. That is nothing but a
positive thing, but we just have to just acknowledge that it is
a lot of people.
As I mentioned earlier, there is a broad expectation that
we will see big numbers of people coming back this summer. We
certainly hope that turns out to be right, but also that those
people who work in those service industries that are going to
take longer to recover, there will be a lot of them. And they
will find it hard to get back to work as quickly as the others.
Senator Reed. One of my concerns in having served through
the Great Recession of 2008, '09, and '10, is that unemployment
rates will stay high and our unemployment extended benefits
will expire, and in fact, what happens, as you know, in
different areas of the country, they will lag. And so you could
have States that have very high unemployment rates.
The point of my comments are we do need, in your view, to
have extended unemployment benefits, much greater than the
present law allows, and also, would it make sense to index
those benefits to a certain unemployment rate so that we do not
find certain States or certain areas who are well behind and
they lose their benefits?
Mr. Powell. So I think there is going to be a large number
of people who will not be able to immediately go back to work
at their old job or even in their old industry. There will be a
significant group that is left over even after we get the
employment bounce, and the details of this are entirely a
matter of fiscal policy.
There are a lot of really interesting ideas bouncing around
about how to do that, but I do think they will be hard pressed
to find work. And they are going to need support. They will
have regular State unemployment insurance for a period. I would
be looking at what kind of support will they need. And also,
really, some of them are going to need to find new paths
through the economy. Are there ways we can help them do that?
Senator Reed. Thank you, Mr. Chairman.
Thank you, Chairman Crapo.
Chairman Crapo. Thank you.
Senator Toomey.
Senator Toomey. Thank you, Mr. Chairman.
Good morning, Chairman Powell. Thanks for joining us.
I do want to stress how encouraging the recent economic
data has been actually for a little while now. We had a
tremendous increase in personal income in the month of April,
which is not terribly surprising, but the May employment number
was very surprising and very encouraging. Retail sales today
was really good news.
So I am not for a minute suggesting that we are out of the
woods, but the anecdotal evidence has been very, very
encouraging. And I would just remind my colleagues, there is no
such thing as a free lunch, and we have authorized several
trillion dollars of Government spending in a variety of ways.
And much of it has not yet even been spent. So I think we
should be very, very careful in evaluating what is necessary
before we go forward.
Mr. Chairman, I want to talk about corporate bond buying
because when we put together the CARES Act, the concept of
funding SPVs so that they could go out and buy corporate bonds,
whether through ETFs or whether through a new Fed-created index
or directly, there were always two reasons for having this
capacity. One was to ensure the smooth functioning of the
markets, and for that, the mere existence of these programs has
been remarkably successful. We have seen record volumes of
corporate debt issuance. Clearly, the corporate bond market is
functioning and functioning very, very well.
The second possibility was to provide liquidity to a
company that is fundamentally solvent but facing a serious
liquidity problem because of the nature of the moment.
It seems to me that continuing broad-based corporate buying
of bonds now and including setting up yet a new index for doing
so does not serve either of those purposes. Those needs are
being met, and I worry that it starts to look at lot like
fiscal policy or it starts to look a lot like the goal is to
lower spreads, despite the fact that nominal rates are
incredibly low.
And it certainly seems to me that this kind of activity at
a time when the markets are already functioning smoothly and we
are not addressing individual borrower needs but rather making
these broad-based purchases, we run the risk that we diminish
price signals that we get from the corporate bond market, which
can be extremely important in enabling us to detect problems.
So I am wondering why we need to be continuing a broad-
based corporate bond buying program now, and what is the exit
strategy on this?
Mr. Powell. So I certainly hope it does not have those
negative effects you mentioned.
So this is something we said we would do at the beginning,
and you pointed out that markets reacted very strongly to the
announcement. That is because they believe that we will do what
we say we are going to do.
So one reason--I would not say it is the main reason. One
reason is, though, we feel that we need to follow through and
do what we said we were going to do so that----
Senator Toomey. Can I just--on that, my impression had
always been that it was a contingent thing, that this would be
there as needed and would be used as needed, but if it is not
needed, it is not clear to me that you have to use it anyway to
show that you are willing to use it. I do not think anybody
doubts your willingness to use it.
Mr. Powell. We are not actually increasing the dollar
volume of things we are buying. We are just shifting away from
ETFs toward this other form of index, and as we have said--and
if you look at the FAQs, frequently asked questions, we
published associated with this change, it is really going to
depend on the level of market function. If market function
continues to improve, then we are happy to slow or even stop
the purchases. If it goes the other way, we will increase the
purchases.
Senator Toomey. Is there a problem with market functioning
now in the corporate bond market?
Mr. Powell. Market function has improved really
substantially, and that is why you see very little demand; in
fact, so far, no demand at the primary market facility. We
originally thought that was where the demand would show up.
So it was out of an excess of caution to preserve these
gains for market functioning by following through, and I do not
see us as wanting to run through the bond market like an
elephant doing things and snuffing out price signals and things
like that. We want to be there--if things turn bad in the
economy or if things go in a negative direction, we want to
make sure that we are there.
Also, with the ETFs, remember it is a very small part of
the market. The actual bonds give us a better purchase, should
we need it. We clearly do not need it now.
Senator Toomey. That is my real point. I get the argument
for creating a broader index than a given ETF, but it is not
clear to me that that needs to be intervening actively in the
corporate bond market right now.
But let me move on to another issue. Last week, my
understanding is you suggested that the Fed might be
considering whether to adopt yield targets, which really
means--let us face it. That means yield caps. I wanted to
discuss that a little bit. I am very concerned about that.
First of all, the idea of manipulating Treasury yields to
keep them lower than they otherwise would be involves lots of
potential problems. It is clearly picking borrowers over
lenders. It creates problems for insurance funds and pension
funds, distorts price signaling, and I do not know how you
would get out of that.
So do you have any more thoughts on the idea of
establishing yield targets on the Treasury curve?
Mr. Powell. Sure. So this is something that we have never
done--actually, that is not true. We did it during--after World
War II and into the--during World War II and into the early
'50s. We have not done it in the modern era. A couple of
central banks--Bank of Japan, the Reserve Bank of Australia--
have done it. So it is a tool other central banks have chosen
to use now.
And what we did at the last meeting was just brief people
up on the history of it and really how it works so that people
understand the technology and that sort of thing.
We have made absolutely no decision to go forward on it, as
you have seen some of my colleagues have given speeches lately,
raising questions about it. So it is not a decision that we
have made.
The sense of it is that if the market--if rates were to
move up a lot for whatever reason and we wanted to keep them
low to keep monetary policy accommodative, you might think
about using it, not on the whole curve, but on some part of the
curve. And it is not a decision that we have made. It is sort
of an early stage thing we are evaluating.
Senator Toomey. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman.
The tragic deaths of George Floyd, Breonna Taylor, and
Rayshard Brooks have galvanized millions across the Nation to
stand up and peacefully march in protest against systemic
racism, inequality, and injustice that has plagued our country
since its founding. Minority communities have suffered systemic
racial, social, and economic indignity, also being
disproportionately impacted by the other crisis gripping our
Nation, which is the COVID-19 pandemic.
Chair Powell, will there be a long-term negative economic
impact if 40 percent of Black-owned small businesses
permanently shut their doors as a result of the coronavirus
pandemic?
Mr. Powell. Well, small businesses are under a lot of
pressure, and the answer to your question would be yes.
Certainly, those are important businesses in our communities.
Senator Menendez. Will there be a long-term negative
economic impact if 44 percent of Black households and 41
percent of Latino households are unable to make their next rent
payment and are evicted?
Mr. Powell. Evictions and foreclosures and things like that
can be very bad, not just for the individuals involved, but
they can--they are very bad for the individuals involved, but
also they can certainly weigh on economic activity as well.
Senator Menendez. Will there be a long-term negative
economic impact if African American and Hispanic families'
wealth, which is currently eight to 10 times smaller than the
medium net worth of White families, is further depleted?
Mr. Powell. I would say there would.
Senator Menendez. Considering the long-term economic
impacts of the racial disparities exacerbated by COVID-19
pandemic, what are the consequences of Congress failing to
account for these pernicious racial disparities in the next
COVID-19 relief bill? Would the economy be better off if
Congress took action to mitigate these inequalities in COVID
relief legislation?
Mr. Powell. Senator, I just would say fiscal policy is
really for you, and I do think what you have done so far has
been by far the largest of any fiscal response. And I think it
is really--you are starting to see that in some of the economic
numbers we are seeing.
Senator Menendez. Well, I appreciate that.
My point that I am driving at here is that we cannot ignore
the reality that when one segment of our society, African
Americans and Hispanics, disproportionately affected by COVID,
disproportionately affected in their income, disproportionately
affected in their business potential closures--you cannot have
that whole segment of the economy ultimately doing so worse
than everybody else and believe that the economy is going to do
well when you look at the population that they have.
So it certainly cries out for all of us--for the Fed, the
Congress--to be dealing with these realities, not just in terms
of justice, but in terms of the national interest as well.
Let me turn to another question. As our country navigates
this economic crisis that flows from the pandemic, I hope we
remember the lessons we have learned from past downturns. One
of the most obvious lessons we learned during the Great
Recession is that cuts to the State and local sector make
recessions deeper, delay economic recovery, and are completely
preventable if Congress provides relief.
Chair Powell, is it not true that according to the Federal
Reserve inflation adjusted data, State and local investments
continue to fall for a full 5 years after the recession
officially ended in June of 2009?
Mr. Powell. I do not know that number, but I would not
doubt it, Senator.
Senator Menendez. I can commend it to you because I looked
it up.
Is it not also true that Fed researchers found that State
and local austerity adopted after the Great Recession was a
drag on economic growth for 23 out of 26 quarters between 2008
and mid-2014, and that without that austerity, GDP would have
been roughly 3.5 percent larger by the end of 2015?
Mr. Powell. I know the finding. I cannot swear to those
numbers. I will take your word for it.
Senator Menendez. OK. Well, I commend them to you, and if
you could send me back an answer in writing, I would appreciate
it.
Did not State and local governments cut more than 750,000
jobs after the Great Recession?
Mr. Powell. Yes. And they did not hire. The other thing is
they did not do much hiring for quite a long time.
Senator Menendez. So that is exactly where we are at right
now. And given that current budget projections are far worse
than even during the Great Recession, is it not fair to say
that unless Congress provides Federal assistance to State and
local governments to stem the shortfalls that it will be
significantly worse than they were during the Great Recession?
Mr. Powell. I think there are already a million and a half
layoffs, most of which are at State and local governments.
Senator Menendez. Well, the Bureau of Labor Statistics
solicited nearly a million layoffs so far. Moody's Analytics
says that you need the $500 billion that Senator Cassidy and I
and along with other colleagues have recommended for State and
local governments. The absence of that, of any of that type of
assistance, it means 6 to 8 million more public service jobs.
And it would be the irony of the pandemic that those who we
need the most--police, firefighters, paramedics, health care
professionals--during the course of the pandemic and maybe a
rebound would be the ones who would lose their jobs. So I hope
that the Congress does respond.
Thank you very much.
Chairman Crapo. Thank you.
Senator Cotton.
Senator Cotton. Thank you, Mr. Chairman.
Thank you, Chairman Powell, for joining us today.
We spoke a couple of times last month about giving more
companies access to the Fed's primary market corporate credit
facility by allowing the Fed to purchase debt rated by the
National Association of Insurance Commissioners, or NAIC.
It is very expensive for a company to get rated as an
issuer by one of the public ratings firms like S&P and Moody's,
but at the moment, only companies that can afford that
expensive and sometimes cumbersome process can access the
primary market facility or indirectly access the secondary
market facility. But there are many companies that issue
investment-grade debt that has been rated by NAIC, and the Fed
could purchase debt rated 1 or 2 by NAIC without sacrificing in
credit quality.
Chairman Powell, in May when we spoke about this issue, you
had said that ``We,'' meaning you and Secretary Mnuchin, ``were
working on the problem.'' Can you give us an update on where
that work is and whether the Fed is going to allow NAIC-issued
debt to be bought using these credit facilities?
Mr. Powell. Sure. So we did open up the ratings to three
additional firms that had significant business in particular
sectors. So it is not just the three majors. It is three others
who were also considered majors for some purposes. But we
understand that does leave some companies that do not have a
rating. As we open these facilities that are just in the
process of opening, we are looking for an answer there.
NAIC, of course, is not an NRSRO, and it has not
traditionally been used in this way. So we are looking at some
options for what to do there. I wish I could tell you we had an
answer yet, but we are working on it.
Senator Cotton. So you have not opened it yet, but you have
not foreclosed the possibility of trying to find some solution
for this challenge?
Mr. Powell. No. We are still looking for a solution. Yes.
Senator Cotton. Any kind of timeframe that you can put on
that?
Mr. Powell. Well, we actually talked about it yesterday. So
we are working on it. I think soon, let us say.
Senator Cotton. I just want to stress again that there are
dozens of companies that had very strong balance sheets and
employ tens of thousands of people across all of our States who
for one reason or another choose not to go to a public rating
agency but are in many ways in the same position as a publicly
traded company who would use these facilities, and I really
hope that the Federal Reserve and the Treasury can find a way
to treat everyone in an equitable fashion and protect as many
of those jobs as possible as we try to open up our economy and
get back to something more like normal.
Mr. Chairman, I think I will yield back the balance of my
time now because I know we have a lot of people in the queue
for questions.
Chairman Crapo. Thank you, Senator Cotton.
Senator Tester.
Senator Tester. Well, thank you, Chairman Crapo and Ranking
Member Brown.
I want to thank you, Chairman Powell, for your good work. I
very much appreciate your steady hand at the wheel.
I want to step back a little bit. The unemployment rate
right now is 13.3 percent. I believe that is correct. Just nod
your head if it is.
Yes, that is good.
And refresh my memory. At the peak of the Great Recession
when folks were bouncing off the walls around here because of
the total worldwide financial meltdown, potentially, we were at
10.6 percent, right?
Mr. Powell. Something like that, yeah. It was in the 10.
Senator Tester. If you consider the fact that has been
pointed out several times during this hearing that the low-wage
workers are the ones that are really severely impacted--and I
think you pointed it out in your testimony. And since we have
got a lot of poverty in rural America, can you just give me a
quick assessment if the program that the Fed is doing is
working in the areas that it is really needed? And look, it is
needed across the country, of course, for the 13.3 percent, and
that may be a very conservative figure, by the way. And you
know that. But with unemployment where it is at, it is needed
everywhere, but are we getting it to rural America?
Mr. Powell. I like to think that we are, first, through our
support of the Paycheck Protection Program. Through the
Paycheck Protection Program Liquidity Facility, we have made
that easier for small banks to use because they can then
transfer their ownership interest in the loan fully to our
facility, and it is off their balance sheet. That gives them
balance sheet capacity, and it is gone. And they still get to
keep the economics. So that should help, and it should also
help borrowers because of that.
Also Main Street, Main Street is for larger companies, and
some of those will be in rural areas.
Senator Tester. So what about--in particular, the ones that
really got trashed in my State are restaurants, bars, workout
facilities, motels. Are we able to focus this money at any way
to, say, the hospitality industry, because that is what they
are, to really make sure that the money is going there? Because
those folks are really, really, really in tough shape. I mean,
tougher shape than--I mean, in agriculture, I can claim I have
had impacts by COVID, but it has been nothing compared to the
folks that are in the hospitality business.
Mr. Powell. And that is true across the country.
So if they have fewer than 500 employees, they would have
been eligible for the PPP program, and there is still money
left in that program, as I am sure you know.
In terms of what we do, any company that is eligible can
borrow. We set terms of broad eligibility, and we are looking
back to your financials the way they were prepandemic. So we
are looking at 2019 financials.
Senator Tester. Is there any way to do any oversight to
make a determination whether the people that actually have been
impacted are getting the money? I mean, I have been told by
several businesses, ``Hey, look, the money is there. I have not
really been impacted by COVID, but the money is there. And it
is literally free. I am going to go get it.''
Mr. Powell. So it is interesting. So we have not made any
Main Street loans. We are just starting to do that, but we will
certainly be looking carefully at what the population of loans
is.
Senator Tester. OK.
Mr. Powell. And we have not made any of the investment-
grade loans either because the market opened up wide open, and
lots and lots of companies borrowed, including the ones who had
become so-called ``fallen angels'' and dropped below investment
grade.
Senator Tester. So let me approach something else that--and
I know you do not concern yourself with debt as much in times
of economic slowdowns, as we are in today, especially as one
significant as this.
But when Obama left office, the debt was $19.9 trillion.
Three and a half years later into the Trump administration, we
are over $26 trillion. Can you tell me--and you have got to be
able to forecast this out a bit. Can you tell me what that
debt's impact is going to be on inflation and unemployment
moving forward?
Mr. Powell. It is hard to say very specifically what it
would be, but the United States Federal budget has been on an
unsustainable path for years now. That just means that the debt
is growing faster than the economy. So debt to GDP is rising.
That is, by definition, unsustainable.
And what really happens is, over time, future generations--
our kids and our grandkids--their tax dollars will be going to
servicing the debt that we incurred to buy the stuff we wanted
when we were in charge or when we were adults in America. And
every
generation is entitled to spend what it wants to spend on the
things it thinks it needs, but it really ought to pay for them
in some sense, rather than passing the bills on to the kids,
just in very simple terms. The longer-run issue is one of
generational equity.
The United States has a lot of fiscal and borrowing power.
We are the world's reserve currency. We have the world's best
economy, the most vibrant economy, the best institutions. So we
can borrow a lot, but I think we need to get back on a
sustainable path.
I will close up by saying, though, that the time to work on
that hard is when the economy is strong, unemployment is low,
there is growth. That is when you want to work on that. Those
concerns are always going to be there, but I would not
prioritize them at a time like this when the spending is--what
it is doing is it is giving us a better economy going forward,
which will really help service the debt.
Senator Tester. I agree with you, and just a statement, we
should have been prioritizing that before the economy collapsed
like 2017, '18, and '19 when we were borrowing a trillion
dollars.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Rounds.
Senator Rounds. Hey, good morning Mr. Chairman.
I want to go back a little bit. Earlier in the pandemic, I
joined in a letter with Senator Warner to the Treasury
regarding mortgage forbearance and liquidity that were concerns
for mortgage servicers.
Thankfully, the uptake on the forbearance programs has been
modest, though there is still some concern about an increase in
mortgage forbearances and a need for the Fed to establish a
liquidity facility for mortgage servicers if economic growth
stagnates in the coming months.
My question is, Do you foresee the need for a service or
liquidity facility in the near term, and what kind of warning
signs would you be looking out for to indicate that need, if
you have an interest?
Mr. Powell. So the housing regulators and the Treasury
really have the lead on that.
I would say we were more worried a couple of months ago
about stresses building up, just as you described, than we are
now. The stresses have moved down a little bit. Of course, we
will be monitoring that carefully, but as of right now, it does
not look like there is a need for such a facility.
Senator Rounds. Thank you.
The Fed has said that results of both the CCAR review and
the DFAST stress tests will be released on the 25th of June.
Considering the importance of understanding how the Fed views
the responses of banks to the COVID-19 pandemic, this is highly
anticipated. This is one that we are looking forward to, and I
think there is some anticipation with the release of that
information.
I have also been closely tracking the Fed's integration of
stress test results with nonstress capital requirements in the
stress capital buffer.
My question is, Can you tell us more about what the Fed
will be releasing on the 25th and whether or not that will
include a disclosure of the Fed's COVID analysis and stress
capital buffer requirements?
Mr. Powell. Yes, I believe it will, and of course, we are
just in the process. That is 9 days away. So we are working on
that now.
Senator Rounds. OK. And after the release of the CCAR and
the DFAST results on the 25th, what comes next? Will banks have
to resubmit their capital plans or conduct additional stress
tests? Is that the anticipated response that you are looking
at, or have you gotten that far yet?
Mr. Powell. Again, we are making that announcement on the
25th, and it is something we are actively, of course with it
being 9 days before that, we are actively engaged in
considering those issues right now.
Senator Rounds. OK. Let me run along just a little bit
different route here, Mr. Chairman.
Given the length of time that we will be in a low interest
rate environment, I think it is worth it for the Federal
Government to consider issuing some long-duration bonds with
maturities that are beyond the 10 or 30 years that is typical
for today.
In the past few years, the United Kingdom, Canada, and
Italy have sold 50-year bonds, and Austria, Belgium, and even
Ireland have sold some sovereign bonds with 100-year
maturities. Is this something the United States should
consider, and would the Fed consider buying ultra-long
Treasuries?
Mr. Powell. That is an issue that is squarely in the
province of the Treasury Secretary and his colleagues at
Treasury Department, and as you know, Secretary Mnuchin looked
very carefully at longer and longer maturities earlier in this
Administration. So, again, it is not something that the Fed
really plays a role in deciding.
Senator Rounds. Very good.
Thank you, Mr. Chairman. I will yield back.
Chairman Crapo. Thank you.
Senator Warner.
Senator Warner. Thank you, Mr. Chairman.
And it is good to see you, Chair Powell.
I do not know if you saw, but former Chairman of the Fed
Ben Bernanke and 130 other economists wrote the congressional
leadership today, released a letter pointing out one additional
need for stimulus, pointing out that we have got a $16 trillion
toll in our economy that needs to be dealt with.
Mr. Bernanke's letter also pointed out how enormously
damaging the COVID-19 crisis has been to communities of color.
I think we saw that as well. We all applauded the May
unemployment numbers, but as you well know them, unemployment
numbers for Black Americans actually still went up in May.
And if there is--again, I think a common point of evidence
is that the Great Recession indicated that a prolonged economic
downturn will seriously damage economic opportunities and
wealth accumulation for all Americans but, again, particularly
for families of color.
A subject that you and I have talked about, Chairman
Powell, a number of times is the important resource for these
communities that CDFIs and minority depository institutions
provide in that they provide patient, long-term investments in
these LMI, low- and moderate-income, disadvantaged
neighborhoods.
But as we look at MDIs and CDFIs, many of these
institutions are held back from boosting investment because of
lack of capital or limited access to liquidity and certain
other operational limitations. Would you agree, Mr. Chairman,
that building capacity at these institutions could provide a
significant response to the downturn by boosting access to
credit for so many of the small minority-owned businesses that
otherwise, I think, by third or fourth quarter, were going to
be in really tough shape?
Mr. Powell. So, as you suggest, I think the CDFIs and the
MDIs are very important in their communities, and we have
strong relationships with those institutions. And we do what we
can to foster their successful conduct of their business, and
we are heavily engaged with CDFIs and MDIs.
Senator Warner. Well, I think if we could really lean in
and be creative at this moment in time and if we could provide
these institutions with the proper resources, they could not
only be an important component of fighting the economic
inequality--but, again, I appreciate you making your comments
about racism at the end of your opening comments--but also
about seeing the kind of economic renewal that we so
desperately need in this part of America.
Now, I have been working on a proposal with Senator Booker
and a number of other of my colleagues that would provide
direct private and public money in the CDFIs and MDIs as part
of a longer-term strategy to rebuild the LMI communities and
foster economic growth.
And while the direct equity infusions we are talking about
would be more a Treasury-directed investment, we are also
looking at a TALF-like facility that would have a Fed role, not
to have loans forgiven, but a TALF-like facility where there
would still be investment from Treasury. There would still be
retention of some of the obligations from these institutions,
but by helping to clean up the balance sheet of some of these
entities, that would dramatically increase liquidity, which,
again, if we could do equity and then also clean up some of the
balance sheets, I think there would be enormous value here. And
I think this is completely consistent with the Fed's mission to
achieve maximum stable employment.
And that maximum stable employment is obviously a mandate
that extends to all communities, and as so many of my
colleagues and you have acknowledged, the persistent economic
disparities that we have in our country, this has to be dealt
with.
The protests on the street are about criminal justice, but
they are about long-term chronic economic disparity.
So I would just ask you, Mr. Chairman, as we roll out this
plan, that you and the Fed within the bounds of your authority
would really lean in. Let us stretch, expand the envelope a
little bit, because I think we really have an opportunity and
obligation to make sure that these institutions are better able
to be part of a recovery.
If you would make a quick comment on that, I would
appreciate it.
Mr. Powell. I would be happy to take a look at that.
As you know and as we have discussed on other occasions,
13(3) facilities are supposed to be programs of broad
eligibility. We do not tend to target particular beneficiaries
but rather broad institutions, and anyone who meets the sort of
requirements can take part in the facility.
But subject to that, I am very happy to take a look at this
idea.
Senator Warner. And I just again--I know my time is up, but
I just point out when we have got 40 percent of Americans who
are making less than $40,000 a year, out of work
disproportionately in LMI communities, I think that is a broad-
based problem that the country has to address.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Perdue.
[No response.]
Chairman Crapo. Is Senator Perdue with us?
We will move on, until he gets back, then to Senator
Tillis.
Senator Tillis. Thank you, Mr. Chairman. Can you hear me?
Chairman Crapo. Yes.
Senator Tillis. And thank you, Chairman Powell, for being
here.
I just heard an echo. I think I have corrected it.
I am kind of curious. I know that Vice Chair Quarles, while
back, talked about adding additional elements to CCAR stress
testing, and some of that, I am sure is just a natural
evolution of what you are learning about, what works and what
does not work within CCAR.
But I have heard more recently that they are going to add
on another layer that is specifically focused on the
circumstances we found ourselves with, with COVID-19.
And one of the concerns that I have with that is, number
one, I think that the banking institutions with about twice as
much capital as they had after the financial crisis, that we
could arrive at a point with the results of these stress test
to where we are actually going to increase their capital
requirements, and that seems to me to be at odds with us
relying on the banks, to get out there help families and
businesses, provide capital and support financial
intermediation.
So a part of what I am asking is if we are going down this
path, are we working with the banks to really think through the
cost benefit of this particular additional regimen added to the
stress testing, and are we potentially at risk of increasing
capital requirements at the worst possible time?
Mr. Powell. Senator, as I mentioned, we are just in the
middle of making those decisions and carefully reviewing all
the materials. So I am just going to have to say I hear your
comment loud and clear, and this is probably a discussion for
us to have after we make the announcement we are going to make
on the 25th.
As we mentioned publicly, we are doing sensitivity
analyses, which seems like the right thing to do.
And you are also right that we are not looking to have our
capital requirements be procyclical, but in terms of the actual
results of the test and things like that and what we are doing,
I think I should just leave it at that.
Senator Tillis. OK. Thank you.
And by the way, on looking forward to future announcements,
like Chairman Crapo, I am looking forward to a future
announcement on Inter-Affiliate Margin. I understand that the
regulators are on board. Do we have any idea of when we would
expect action on that? I have been expecting it. I understand
that it is imminent. Do you have any read on when we are going
to see that?
Mr. Powell. Soon. That is all I know is that it is soon. I
wish I could be more specific, but that is what I have been
told is soon.
Senator Tillis. Well, to be fair, I know that that cuts
across several lanes, but it has been soon since about
September of last year. So I hope it is getting to be sooner.
Mr. Powell. Yes, Senator. I do too.
Senator Tillis. I have another question, and thank you. I
know you agree.
I think it was last week, Mr. Chairman, that you said the
FOMC is not even thinking about raising rates. I think you went
on to say that they are likely to stay at zero between now and
through 2022. That feels like forward guidance, that that
policy is anchored in a calendar rather than FOMC goals.
So I am curious--and I think it was in that setting that
you did not make any mention of yield curve control, and I was
curious. Was that just not right for that particular
discussion, or do you believe there is not a place for yield
curve control in this dialogue?
Mr. Powell. So I did say that we are not only not thinking
about raising rates; we are not thinking about thinking about
raising rates. That is what I said.
I did not mention the end of '22. What that came out of,
Senator, was the Summary of Economic Projections showed that,
overwhelmingly, Federal Open Market Committee members did not
see the likelihood under the current expected path of raising
rates, at least through the end of '22.
And I did not mention yield curve. I talked about yield
curve control in the press conference, but I would just echo
what I said earlier to Senator Toomey, which was this was a
briefing on the historical use of yield curve control by the
United States actually during World War II and then after,
which led to the Fed-Treasury Accord, and also on some current
usage by the Bank of Japan and the Reserve Bank of Australia.
It really was just to acquaint the Committee with what it is
and why some other central banks have used it.
We have not made any decision to go forward on that. It
just was a--it is a tool. The same way we have looked at
negative rates,
repeatedly, we look at negative rates. In the case of negative
rates, we have pretty much decided that it is not something we
think is attractive for us here in the United States.
And yield curve control was more just let us educate
everyone on what it is and then decide whether we think it
might, under some circumstances, be useful.
Senator Tillis. Thank you.
Mr. Chair, the only thing, I am going to submit maybe a
question for the record about what financial policy we should
be pursuing for what I consider to be the donut hole. Travel,
leisure, hotels that were first into the crisis, they are going
to be the last out. I do not believe the Treasury has the
authority that it needs to come up with a facility for them,
but I think it is critically important.
Thank you, Chairman Powell.
Thank you, Chair Crapo.
Chairman Crapo. Thank you.
Senator Warren.
Senator Warren. Thank you, Mr. Chairman, and thank you,
Chairman Powell, for being here with us today.
We are facing an economic crisis that has devastated
millions of families and small businesses across this country.
Two weeks ago, many people celebrated the latest job
numbers, which showed a dip in the overall unemployment rate,
but we are not going to be able to build a successful recovery
if we do not understand the scope of the problem.
So I wanted to dig into the numbers just a little bit
today. Chairman Powell, are jobs coming back at the same rate
for both Black and White Americans?
Mr. Powell. Are they coming back at the same rate? No.
Actually, I think the answer to that is no. I would want to
check that, but I believe that the Black unemployment rate did
not come down as much as the White unemployment rate.
Senator Warren. In fact, Chairman Powell, you might want to
look at the numbers.
Mr. Powell. It ticked up, actually.
Senator Warren. I was going to say, as I understand it,
White unemployment fell to 12.4 percent, while Black
unemployment actually rose----
Mr. Powell. It ticked up----
Senator Warren.----16.8 percent. Is that right, Mr.
Chairman?
Mr. Powell. You know, the tenths numbers, I would have
known that the day after the report, but yes. In principle,
that is right.
Senator Warren. But we are right on the direction; that is,
it came down----
Mr. Powell. Absolutely.
Senator Warren.----for White Americans and it went up
slightly for Black Americans.
Mr. Powell. That is correct in the May report.
Senator Warren. Yeah.
So back in March, Congress passed a temporary expansion of
the unemployment insurance program. Now we are only a few weeks
out from that help just running out. Some people in Congress
want to let that help expire. They are saying mission
accomplished.
So, Mr. Chairman, you noted that the unemployment rate is
higher for Black Americans, and now we have just said it is
actually increasing. If Congress lets unemployment insurance
benefits expire, which families are going to find it hardest to
pay their bills, to make rent, or to afford groceries?
Mr. Powell. Well, the unemployed, which consists of people
who have lost their jobs lately here are--minorities are well
overrepresented in that group, as are women.
Senator Warren. So let me just ask, Mr. Chairman. This
crisis has been hard on millions and millions of Americans, and
I know you have been thinking a lot about this issue. So I just
want to ask you directly. Is it accurate to say that our
economy is healthy when there are serious racial gaps in how
Americans are doing?
Mr. Powell. I think that is a longer-run weakness in our
economy. Even when our economy is healthy, we have longer-run
issues, and that is one that has been with us for a very long
time.
Senator Warren. So I take it that you would describe this
as not a healthy economy?
Mr. Powell. That is not a healthy feature of our economy,
now or ever.
Senator Warren. Oh. Thank you, Mr. Chairman. I appreciate
your focusing on this issue.
This crisis has hit communities of color the hardest. They
have faced the biggest decline in employment, and they have
faced the largest proportion of deaths from COVID-19.
The minute jobs start recovering for White Americans, we
cannot just say that the problem is fixed and start cutting off
help for people who are out of work.
Senate Republicans are eager to let this help expire, when
we still have more than 20 million people out of work, and the
unemployment rate is going up for Black Americans.
Inequality is not something that happens on its own. It is
the result of policy choices, who we decide to help and whose
pain matters. Congress can help those who need it most by
reauthorizing expanded unemployment and by doing it now.
Thank you very much, Mr. Chairman. I appreciate your being
here today.
Chairman Crapo. Thank you.
Senator McSally.
Senator McSally. Thank you, Mr. Chairman, and thanks,
Chairman Powell, for your testimony today.
I would like to talk about real estate. Back in Arizona, we
are seeing the economy is starting to recover somewhat, but
there is concern for businesses in every sector, with revenues
down, rents not being paid, then mortgages not being paid, and
this really crosses many sectors.
And in the 2008 crisis, Arizona really was hurt deeply in
this area, and I am very concerned and monitoring what is
happening in this sector.
So since real estate pretty much goes across many
industries, you mentioned you were monitoring this, but you are
not as concerned as before. Could you elaborate on that? And is
there any discussion or consideration about a real estate-
focused facility in order to be able to help out in this area?
Mr. Powell. So I would say that like other companies, real
estate-related companies are eligible to take part in our
facilities.
I would also point to the fact that commercial mortgage-
backed securities are eligible assets for the Term Asset Loan
Facility.
So we open up these facilities to companies, and any
company from any industry that meets the financial requirements
of the facility and is otherwise eligible can take part. We do
not target facilities toward individual industries so much.
Senator McSally. OK. But you mentioned earlier, I think, in
response to Senator Rounds that you were kind of monitoring
this element of the economy, and you had some concerns a few
months ago but less concerns now. Could you elaborate a little
bit more on that?
Mr. Powell. Yeah. I was talking about residential mortgages
there.
Senator McSally. OK.
Mr. Powell. When forbearance happened in the CARES Act and
the mortgage servicers were looking at very large liquidity
requirements, the question was are they going to be able to
address that problem--and so steps were taken by the housing
regulators, and then there was a heavy wave of refinancing with
lower mortgage rates. So those concerns that we had a couple of
months ago have sort of been alleviated a little bit, I would
say.
We are still monitoring the situation carefully. That is
very much about residential mortgage-backed securities,
residential lending.
Senator McSally. Thanks for that clarification.
To follow up on what Senator Tillis touched on at the very
end, in Arizona, the travel, the lodging, tourism, all that has
been really hit hard from this. I am really concerned about
their slow recovery. So what are you seeing in this sector in
unemployment and consumer spending, and is there anything
within your agency's authority to help this, or are you going
to go back to just the overall facilities or anything? This is
a very specific sector that has been hit hard with lack of
tourism and travel.
Mr. Powell. Yeah, very, very hard. It is airlines, any kind
of travel. It is hotels. Obviously, really, it is any business
that depends on getting people together in tight groups and
either feeding them or flying them around or putting them in
rooms and things like that. All of those companies--bars,
restaurants to retail, they are all really feeling this.
Senator McSally. Yes.
Mr. Powell. And there is no question about it, and by the
way, that is where a lot of the layoffs are, in those service
industry companies.
And so what we have done is we have created these
facilities, and they look back to the financial performance of
the potential borrower before the pandemic. So if you were in
reasonable financial shape before the pandemic, then in
principle, you can be an eligible borrower. We are not going to
look at what happened to you because of the pandemic, and that
is really the way we have approached that.
Senator McSally. Great. Thanks.
OK. On a different note, on page 6 of the Federal Reserve's
Monetary Policy Report, there is a graph that shows
unemployment rates among several demographics. So it includes
African American, Hispanic, White, and Asian.
We have 22 Native American Tribes in Arizona that have
been, in many cases, very hard hit by the pandemic. It is about
300,000 individuals. It is a pretty significant percent of
Arizona.
Is your agency tracking any data specifically on Native
Americans, and if so, what are you finding? And if not, will
you commit to helping with this important community that needs
help right now as well?
Mr. Powell. So we do keep very good track of all that, and
particularly, the Federal Reserve Bank of Minneapolis has a
real
specialty in that area. And we will be happy to work with you
on that. It is something--I do not have the numbers on the tip
of my tongue, but it is very much a focus for us.
Senator McSally. OK, great. Thank you.
And just to wrap up, Chairman Powell, what is your level of
optimism? Arizonans are struggling. They are getting back to
work safely. We are still having to manage this pandemic. What
is your level of optimism of the recovery going forward?
Mr. Powell. I would just say long run, do not sell the U.S.
economy short. Long run, I am confident that we will have a
full recovery. I am confident of that.
The fact is we have had the largest economic shock in
living memory, and the economy is going to recover from that.
But we just have to be a little patient with it. You will see
people moving back. I think over the coming months, a lot of
people will come back to work, but there will be a number of
people who--a significant number of people who do not go back
to work because they are in those industries that we talked
about, and that is where there will be less employment.
So those people are going to need help going forward to get
back to work, but over time, we will get back. And I just think
it is--as most forecasters believe, it is going to take some
time to get all the way back to where we were. Will we get
there? Absolutely.
Senator McSally. Great. Thank you.
Thank you, Mr. Chairman.
Thank you.
Senator Schatz.
Senator Schatz. Thank you, Chairman Crapo, and thank you,
Chairman Powell, for all the work you are doing.
I want to go back to the letter that Senator Warner
referred to from Chairman Ben Bernanke and Janet Yellen and
many other economists that say, quote, that the fiscal stimulus
from Congress, the next stimulus, quote, must be large
commensurate with the nearly $16 trillion nominal output gap
our economy faces over the next decade, according to the CBO
estimates.
Without asking you to commit to a specific dollar amount,
let me frame the question this way: Is there a bigger risk for
our economy that we provide too little support or that we do
too much?
Mr. Powell. First, I saw the headline. I have not seen the
letter. I do not know what is in the letter that the former
Chairs Bernanke and Yellen wrote.
So I would say this. The shock that we received, the
economy received, is the largest in living memory, and the
fiscal response was the largest. And the Fed response was the
largest.
So 14 percent of GDP, $3 trillion in these programs, it is
a great deal, and the question we all will have to answer over
time is, Is it enough? And I would say there is a reasonable
probability that more will be needed, both from you and from
the Fed.
And I would also say, though, that the things that you have
already passed are really having a very positive effect now,
and we should see a lot more of that going forward.
Senator Schatz. In light of that, are you starting to
reconsider? Is the Fed starting to reconsider its understanding
of the relationship between deficits, inflation, and growth?
Mr. Powell. Are we reconsidering it? I do not think this
has really changed thinking on that. The thing about inflation
is that there has been sort of downward pressure on inflation
around the world for a couple of decades, so with big deficits
the models would have called for higher inflation, and they
would have called for higher interest rates. We do not see
either of those things. So I think we are not working on the
hypothesis that higher inflation is a likely outcome.
Of course, we know what to do if there is higher inflation,
but really, at least in the near term and as far as we can see,
what we see is a short run on inflation.
Senator Schatz. Thank you.
In your modeling, what assumptions are you making about
COVID rates over the next several months?
Mr. Powell. We look at different scenarios. We look at a
wide range of different scenarios. So we model a scenario where
there is a second wave, and we model a scenario where--kind of
a baseline scenario, which is that essentially COVID rates come
down over time. And there may be regional outbreaks and that
kind of thing, but we do not have a sort of second wave at the
national level. We look at different scenarios.
Senator Schatz. Can we drill down on that? We can take this
offline, and I will issue a question for the record. But it
seems to me that the data changes day by day, and one of the
things that you said in earlier testimony was that a lot
depends on COVID rates.
I mean, we can tweak fiscal and monetary policy, but a lot
of this does depend on what is happening with the virus. And I
would like to understand what are your inputs----
Mr. Powell. Sure.
Senator Schatz.----just as we consider our fiscal policy.
And, finally, I wrote you a letter asking you to suspend
dividends, and you said you are conducting sensitivity analysis
of current conditions to decide whether to suspend dividends.
And I am wondering why you are conducting an analysis only of
current conditions and not testing whether banks can handle a
serious adverse scenario going forward since that is quite
likely.
Mr. Powell. That is exactly what we are doing. That
question is one that is at the heart of our stress testing,
which is about
future highly stressful scenarios, and so that is precisely
what we are in the middle of doing.
Senator Schatz. And what is your timeframe for a decision
on the suspension or not of dividends?
Mr. Powell. So we will be announcing the results of the
stress tests on the 25th of June.
Senator Schatz. Thank you.
Mr. Powell. Thank you.
Chairman Crapo. Thank you.
Is Senator Kennedy back with us?
[No response.]
Chairman Crapo. Senator Moran? Are you with us, Senator
Moran?
[No response.]
Chairman Crapo. Senator Cramer.
Senator Cramer. Hi, Mr. Chairman. Thank you. I am happy to
step in. And Chairman Powell, thank you for being with us
today.
You and I in the past have talked a couple of times about
my concerns about BlackRock having such a central role in
facilitating the financial support of businesses that are
approved as part of the CARES Act, and specifically, the
concerns I had raised, of course, were relevant to the
potential of investment in the energy industry, particularly
the oil and gas industry, of my State of North Dakota and what
seems to me to be an excessive standard that they have applied
in terms of climate and whatnot. And that is just one factor,
and you and I have had a good discussion. You have, of course,
assured me of their limited role in all of that.
However, in recent days or weeks, I have become even more
concerned about that standard, their standard of climate
investment, with a different standard for foreign investment,
particularly Chinese companies and companies that do not meet
the same enforcement demands, that do not have the same
accountability and transparency, particularly with the PCAOB
for the public companies.
And it is an issue that caused Senator McSally and I to
send a letter yesterday to the CEO, Larry Fink, to get a better
understanding of their strategy as a company in light of what
appears to be what I think, again, is a double standard in the
way they treat investment of Chinese companies versus
Americans.
And so in light of the deference that BlackRock appears to
provide the Chinese Communist Party as well as the radical
environmentalist active investors, should I be concerned about
their role in the CARES Act? And can you give me some
assurances that this part of BlackRock will not impact the
public's funds and the public's interest in keeping our--
particularly oil and gas industry vibrant and the important
national security that they provide?
Mr. Powell. Senator, I would say there is no reason for you
to be concerned. They play an administrative role. We set all
the policy decisions, and our facilities lend only to U.S.
companies. So they are just our agent in this, and they bring
particular skills that we do not have and that they do have.
And so that is really what this is about.
Senator Cramer. Well, I appreciate that assurance. I am
sure they are listening as well, and I hope that the regulators
are paying attention.
We have obviously a lot of work to do as well on our side
to make sure that we create a standard that protects America's
investment in those same companies. So I appreciate, again,
your assurances.
With that, I will yield the rest of my time, Mr. Chairman.
Senator Kennedy. Mr. Chairman, this is John Kennedy. I am
on now.
Chairman Crapo. Thank you, John. We are going to go to
Senator Van Hollen next, and then you will be next after that.
Senator Kennedy. Thank you, sir.
Chairman Crapo. Senator Van Hollen.
[No response.]
Chairman Crapo. If he is not on, then we will go to Senator
Cortez Masto and then to you, Senator Kennedy.
Senator Kennedy. Yes, sir.
Senator Cortez Masto. Thank you. Thank you, Mr. Chairman.
Chairman Powell, it is great to see you again. Thank you
for all of your good work, and I really appreciate your quick
and thoughtful actions by the Fed Reserve to respond to the
COVID-19 pandemic that has, as we have seen, infected more than
a million Americans and taken the lives of more than 90,000
people.
I also agree with you that Congress and the President must
continue to act. Our work is not done. We have to continue to
invest in our families and businesses and our local
governments.
So let me talk to you. I am from Nevada, and I think we
have had this conversation before. But let me give you the
statistics that I know you are aware of because you deal with
it all the time.
The travel industry, which includes hospitality,
restaurants, entertainment, attractions, conventions, and more
has been one of the hardest hit. You said that already today,
and I know we have had this conversation.
Travel is our Nation's seventh largest industry in terms of
employment for this crisis. Nearly 4 in 10 of all job losses
caused by this crisis have been in the travel industry, and
more than 8 million workers are unemployed. The travel
industry's unemployment rate is 51 percent, which is twice the
national unemployment rate during the Great Depression. In sum,
this is nine times worse than the economic impacts following 9/
11.
In Nevada, 25 percent of our workforce is employed in the
hospitality and entertainment industry. We have had more than
400,000 people file for unemployment. We are at 28 percent
unemployment. Nevada has the highest percentage of unemployment
in the country, and the ability of people to go back to work is
limited. Travel spending is forecast to decline by half a
trillion dollars in 2020.
So I have heard you address this issue, but let me ask you.
Is there more that the Federal Reserve can do within its
existing authority to help the travel, tourism, and hospitality
sectors? What else can be done? What else should we be thinking
about? Because we are the last, going to be the last to come
out and spring back in this economy.
Mr. Powell. Yes. So, obviously, Nevada is ground zero for
this really with its entertainment, its travel. It is all the
things that are--restaurants, bars--it is all the things that
are most directly hit, many of them anyway.
So what we can do, other than to support the economy in a
general manner, our 13(3) three facilities, that is the tool
that we have. So any Nevada company that meets the eligibility
requirements for our facilities is welcome to borrow, and that
is really the tool that we have.
As I like to say, we do lending, not spending. We can lend
to solvent borrowers who can service a loan, and the servicing
requirements are not terribly strict.
We look back to last year's pre-pandemic financials to see
if you are qualified. We do not look at the--we are not going
to disqualify companies because they have been affected by the
pandemic. So that is really what we have to offer.
Senator Cortez Masto. And I have heard this before, and I
am just curious because this is something I am hearing also in
my State. Could the Federal Reserve take a stake in a company
to mitigate potential solvency problems?
Mr. Powell. No, we cannot do that.
Senator Cortez Masto. OK. Thank you. That helps clarify.
Let me ask you this. We also know that Government job loss
has totaled about 1.5 million in the past 2 months, and there
are more on the way. The National Governors Association
requested $500 billion in aid to State and local government.
They sent it to Congress requesting that aid, and without aid
to State, what levels of unemployment would the Fed predict?
Mr. Powell. I do not have a specific projection, but
States, effectively all States, have a balanced budget
requirement. So what they do when they see revenues drop and
costs rise, which is what we are seeing now--what they do is
they lay people off. They cut essential services, and both of
those things can weigh on economic activity in addition to the
human cost of those things.
And we do not play a role in advising Congress on specific
fiscal policy, but I do think that State and local governments
are major employers and they provide essential services. And
that is certainly an area that is worthy of your interest.
Senator Cortez Masto. I know my time is running out. Let me
ask you this one final question, and the rest I will submit for
the record. But would the Fed consider making changes to the
Municipal Liquidity Facility that make it more like a grant and
provide, that would be able then to provide more assistance to
local governments?
Mr. Powell. You went out for a second there, but on the
Municipal Liquidity Facility, we have repeatedly made
adjustments.
If you have a specific adjustment in mind, I missed it.
Senator Cortez Masto. Yeah. Turn it into a grant. Can you
turn it more----
Mr. Powell. We cannot do that. No, we cannot make grants.
Senator Cortez Masto. You cannot.
Mr. Powell. That is one thing we cannot do. We can only
lend. The law is extremely clear on that.
It is you who can make the grants. It is Congress that can
do that, as you did with the PPP program.
Senator Cortez Masto. And if Congress were to go down that
route, would you have concerns about that?
Mr. Powell. If Congress wants to make grants, that is
entirely Congress' business.
Senator Cortez Masto. OK. Thank you very much.
Chairman Crapo. Thank you.
Senator Kennedy? You need to unmute, Senator Kennedy.
Senator Kennedy. OK.
Chairman Crapo. There you go. We have got you.
Senator Kennedy. You got me? OK.
Mr. Chairman--both Mr. Chairmen, I apologize for being
late, but I was in another hearing. And if these questions have
been asked and answered, if you could just give me short
answers, I would appreciate it, because I do not want to
belabor this.
When will the Main Street Lending Program be ready, Mr.
Chairman?
Mr. Powell. It is open now for lenders to register, and
once they are registered, they can start making loans. And we
encourage them to do so.
Senator Kennedy. OK.
Mr. Powell. And then the facility within a week or so will
be open to receive those loans.
Senator Kennedy. In terms of demonstrating credit
worthiness, have you made a decision about using rating
agencies other than the big three or four?
Mr. Powell. Yes, we have, Senator. We have looked carefully
at all of the rating agencies, the NRSROs. We have admitted
three additional ones. The criterion really was that they have
a record of significant experience and usage in the private
sector so that investors rely on them, and the answer is there
were three in different areas who had that, so we added them.
Senator Kennedy. Have you made a decision about the minimum
amount of the loan?
Mr. Powell. We have. We have lowered--in Main Street, we
lowered it to $250,000. Yes. And we are carrying that over into
the nonprofit part of Main Street.
Senator Kennedy. OK. I think that is a positive
development.
How big is the Federal Reserve balance sheet right now, Mr.
Chairman?
Mr. Powell. Just a touch over $7 trillion, I believe.
Senator Kennedy. How big was it at the end of December?
Mr. Powell. Low 4's, low 4 trillions.
Senator Kennedy. OK. How long do you think it will take to
reduce the size of that balance sheet to something, some amount
that is not other worldly?
Mr. Powell. That is an interesting standard.
I think when the time comes and the crisis is over and we
are not purchasing assets at this kind of pace, what we will do
probably--and that will be some time out, but what we will do
is we will--what we did in 2014 to '17 that really worked is we
just stopped. We just froze the size of the balance sheet, and
as the economy grows, the balance sheet shrinks as a percentage
of the economy. And that was a very peaceful period during
which people were not worried about the size of the balance
sheet, but it declined from 25 percent to 17 percent or
something like that.
Senator Kennedy. OK.
Mr. Powell. That is some years away, but this is probably
the way we would start.
Senator Kennedy. Chairman Crapo, I cannot see the clock.
How much time do I have left?
Chairman Crapo. You have 2 minutes.
Senator Kennedy. OK.
Mr. Chairman, none of us can predict the future, of course,
and our economy is estimated to take a real hit this year, as
you well know. The intelligence unit of The Economist says that
we are going to have a GDP drop this year of about 4 percent,
but they are projecting Europe is going to be even worse. They
are projecting about 9 percent for Great Britain, 9 percent for
France, I think 6 percent for Germany. Can we recover if the
European Union, one of our biggest trading partners, takes much
longer for themselves to recover?
Mr. Powell. So a weak global economy, a weak European
economy will certainly weigh on U.S. activity. They are a great
area for exports and trade of all kinds, and also Europeans
come here and spend a lot of money on tourism. Being here in
Washington, we see that all the time. So, yes, weakness around
the globe actually does hurt the U.S. economy.
Senator Kennedy. OK. Thank you, Mr. Chairman. I want to
yield back my time since I went way over at the last hearing.
Chairman Crapo. You are a gentleman and a scholar.
Senator Van Hollen, are you here?
[No response.]
Chairman Crapo. How about Senator Jones?
Senator Jones. Thank you, Mr. Chairman. Thank you very
much.
And, Chairman Powell, thank you again for being with us,
and thank you for all that you--your service and all that you
and the Fed have done over the last few months. It has been
really extraordinary.
And I want to echo my appreciation for your comments about
the systemic racism that we see in America.
Today on the floor, by the way, you may have some interest.
Five of my colleagues, three Republicans and three Democrats,
at three o'clock today will be reading Dr. King's letter from a
Birmingham jail in its entirety, and I believe his message of
1963 is as important today as it was then.
And I know we focused a lot on the data and how it has
affected minorities in this country, particularly our Black
population. Latest data showing the Black unemployment rate at
just under 17 percent, Hispanic unemployment rate at almost 19
percent, while the White unemployment rate hovering around 14.
Bloomberg has reported that the African American-owned
businesses declined by 41 percent from February to April,
representing 440,000 businesses, a stark contrast to the 17
percent drop we have seen for White owners.
CNBC declared that we have a housing apocalypse coming
before us. Alabama Legal Services, who does so much for the
poor and needy in Alabama, particularly within housing, has
said that the avalanche of evictions is here and foreclosures
are not far behind.
So I want to focus my questions really on our minority
communities and underserved communities instead of the overall
economy. What downside risk do minority communities see if
unemployment benefits are not extended?
Mr. Powell. So minorities are substantially overrepresented
in the unemployed, particularly the unemployed since something
like 25 million people have had their employment disrupted as a
consequence of the pandemic. And in that group, minorities are
very much overrepresented. So all measures that help that
group, help them. And all measures that do not help them make
life tougher for them.
Senator Jones. So measures that we can keep people on the
payroll, make sure that they have--and I know this has been a
concern from folks that there is no incentive to stay off the
payroll, but some transition to where we can provide incentives
to get back on payrolls, to get back to work, you would favor
that, I assume?
Mr. Powell. We do not take position on particular aspects
of fiscal policy, but I would say this. There is going to be a
lot of people going back to work in the coming months, but
there are going to be a lot of people who cannot because if
they work in Nevada, for example, as we were just discussing,
in the travel and entertainment industry, those are not going
to be jobs--so it is going to be a while.
I think some form of support for those people going
forward, in my view, is likely to be appropriate. During the
Great Recession, I think employment--unemployment assistance
was reauthorized on a number of occasions, and it just is not
only can they not go back to their old job, but there are no
jobs in that industry. And it is just really tough for them, at
least for a period of time, to give them support, and balance
that with incentives to get back to work.
Senator Jones. Thank you.
Similar question with regard to the minority communities,
with regard to businesses. Minority business owners face
enormous risk as it is even before this pandemic started.
So the same question, what are the downside risks for our
minority businesses if overall business aid is not extended by
Congress?
Mr. Powell. I think we--as I mentioned during my opening
remarks, the small businesses of America, that is where the
jobs are created on net, and we do not want to--business people
going in and out of business all the time, but what you do not
want is a wave of avoidable insolvencies, which really will
weigh on the economy for years. And that is all the more so
true of minority businesses because of the important role they
play in our economy and in their communities.
Senator Jones. All right. And, finally, again, focusing on
minority communities, if renters and homeowners are not helped
with extended eviction moratoriums, what effect will that have
on our minority communities in America?
Mr. Powell. So evictions and foreclosures and things like
that have well-documented negative impacts on people's lives. I
think during a pandemic, which is still ongoing, it is
particularly important because you wind up sleeping in somebody
else's basement or in a shelter or something when that happens.
So it is not a good time for people to be--there are ways to
avoid that, keep people in their homes while the economy
recovers and while the pandemic is dealt with. I think those
are things well worth looking at.
Senator Jones. Great. Thank you, Chairman Powell, and thank
you, Chairman Crapo.
Chairman Crapo. Thank you.
Senator Perdue.
Senator Perdue. Thank you, Mr. Chairman.
And, Chairman Powell, thank you for being here again. Seems
like you were just here. Oh, you were. And thank you for your
leadership. I think what the Fed has done to provide liquidity
has been absolutely historic and has helped us avoid a major
meltdown.
I have got a question, just simply to follow up on a
question I asked you the last time you were here about the
balance sheet. Treasury debt has increased about $2.9 trillion,
and a lot of that is just in the last few months, mostly due to
the CARES Act. And I am concerned about who is buying it and
how we are financing it.
For example, in the month of April, the Treasury issued
$1.4 trillion of new debt. $430 billion was absorbed by the
domestic market only, and the foreign markets held pretty
steady. But the balance of that was taken up by the Fed, as I
understand it.
And so I do not know how long we can do that, and the
question is, are we not effectively--hate to use the term, but
I do not know a better one--monetizing the debt? I mean, at
this current pace, will demand ever catch up, or are we going
to have to think about a rebalancing at this point?
Mr. Powell. That is certainly not our intention. The very
high level of both Treasury and MBS purchases that we effected
in March and April was really because the markets had stopped
working, and the Treasury market is the most important
financial market in the world. And the primary dealers and the
banks' balance sheets were full, and everybody wanted--they
wanted very short-term cash or Treasury obligations. So they
did not want Treasury bonds. There were no buyers, and it was
just--it was a very difficult situation, and so we went in and
we bought a lot.
It was not in any way about meeting Treasury's supply, and
it continues not to be. We really do not think about that.
Also, U.S. Treasuries debt is an attractive asset around
the world. There is a lot of demand for our paper.
But, really, it was about market function. It does actually
have a positive effect on financial conditions too because you
are taking long-duration assets out of people's hands and they
buy other things. So it has positive effects at this time, and
those are good too.
Senator Perdue. If demand for that paper from the Treasury
does not come back, though, in coming months, what is the
longer-term implication for interest rates? I know you are
reticent to give any forecasts on interest rates, which I
understand, but just give us a tone about the impact or
correlation there.
Mr. Powell. Yeah. I mean, there seems to be plenty of
demand for our paper.
I would not want to speculate about what interest rates
might do, but we are the world's reserve currency. And
particularly in times of stress, people want to own U.S.
Treasury obligations, and so that has been the way that is for
a long time now.
Even if some of the problems--as in the last crisis, a lot
of the problems originated here. Notwithstanding that, people
wanted the U.S. Treasury, and that is because we have the
strongest economy and the best institutions, most liquid
markets.
Senator Perdue. I have one last question. I will yield my
time back. You have been very gracious with your candor and
your time today.
I have heard a conversation here in this hearing about
labor, and I hear all over my State right now. Our State was
one of the first ones to reopen, and one of the inhibitors to
supplying the demand that I think is out there--and I think we
are proving that--is getting people to come back into the
workforce.
And so we know that the premium on the unemployment
structure is creating a disincentive, and I want to make sure
that we protect the people that need to be protected. But how
do we incent, in your opinion, the people that need to come
back to the jobs that are sitting there? I mean, we have a
number of--in Georgia anyway, a number of job openings that
just are going unfilled because people are not coming back yet.
Mr. Powell. I know that is something you are going to be
considering as the Enhanced Unemployment Insurance Program runs
out at the end of July. I would not presume to tell you what
the Fed thinks you should do, because it is really not our
role.
I do think you will want to continue support for workers in
some form. I think there are going to be an awful lot of
unemployed people for some time, even though, again, we have 25
million newly unemployed or partially unemployed people. And
even if we start putting people back to work really fast, which
may happen here, there is still going to be plenty of people
who just--who do not have jobs, and they may not have them for
a while because there are no jobs in travel, and accommodation,
at various places.
I know there are a lot of interesting ideas being thrown
around out there, but I think something will likely wind up
being appropriate there.
Senator Perdue. Thank you, Mr. Chairman.
Thank you, Chairman Crapo.
Chairman Crapo. Thank you.
Senator Smith.
Senator Smith. Thank you, Mr. Chair, and thank you, Chair
Powell, for being with us today. It is nice to see you again.
So we are more than 3 months into the economic crisis that
was caused by coronavirus and more than 2 months through the
passage of the CARES Act which provides urgent and emergency
support for families and for businesses and for health care
systems.
And I think we all know as--and you have acknowledged
yourself in your opening statement that COVID is not the great
equalizer. In fact, it hits hardest those who are already
struggling because they do not have a safe, affordable place to
live; because of lack of access to health care; because of low
wages and chronic poverty; and especially, I think, the
generational impacts on Black and brown and indigenous people
for the systemic racism that limits their freedom and their
opportunities and even their lives.
So I think that in this moment, it is essential that
Congress takes up this challenge and fulfills the promise of
America for equal--for racial and economic justice, and I want
to just have a chance to talk with you a little bit about this
because I think there is a rising narrative. We hear from some,
including the President, that things are improving, we need to
reopen the economy, and before we know it, we can all get back
to normal.
But what I am so worried about is that we are burying our
heads in the sand when it comes to, one, the virus' continuing
spread, but also that we are looking away from the disparate
impacts that COVID is having and that, in fact, if we are not
careful, if we do not change the way we are doing things, we
will not get back to normal. We will get back to a worse
normal, a normal that exacerbates these inequities.
So let me just focus, if I can, on the question of housing
and rental housing, in particular, because this is something
that I see bad trends on in Minnesota.
The Star Tribune, my hometown newspaper, recently published
an article analyzing what is happening with rent collections in
the Twin Cities, and it found that 95 percent of Class A
apartment buildings--so the expensive ones where the people who
have a lot of money can live--95 percent of those renters are
making their rent payments. But only about 88 percent of
renters in the affordable apartment buildings, the older ones,
are able to make their rent payments.
So I think we can see that--of course, it always helps if
you have more money. We are seeing the impact of this on low-
income people, and also, I think we are probably seeing the
impact of Extended Unemployment Insurance and other help that
we have provided to make that 88 percent number not be even
higher.
So let me ask you, Chair Powell, about this. I know you do
not want to comment on specific proposals, but what would be
the impact on the housing market, especially the rental market,
if Congress does not provide some sort of long-term rental
assistance to people? What would be the impact of that, do you
think?
Mr. Powell. Well, I think if people, for example, get
evicted or foreclosed upon and things like that, even their
ability to get back in the labor market becomes very
challenged.
And just from a human--there is a sort of a moral issue and
also a economic issue at this particular time because of the
likelihood that we will have a fairly large population of
people who are not able to go back to their old jobs or even to
find a new job in their old industry.
So I just think those are things worth considering as you
think about what support to provide.
Senator Smith. Yes.
And, Chair Powell, would you expect that if that were to
happen, that would also put incredible pressure on the
landlords, sometimes public-private partnerships that own these
affordable housing units, because they then lose their revenue
stream in order to keep those buildings up and running? Would
you agree with that?
Mr. Powell. Yes. You could see pressure on the ownership as
well.
Senator Smith. And would you see also that given--like this
is, I think, sort of a stunning statistic for my home State.
Only 25 percent of Black families in Minnesota own their own
home. The number is 76 percent of White families.
So would you agree that if we did see a surge of evictions,
if eviction forbearance, for example, expires--we do not take
additional action--that this would end up exacerbating the
racial inequities that we see in our economy right now?
Mr. Powell. Yes, it would, and I think this pandemic, the
way it hits our economy, the way it hits the service economy
particularly, has been a real inequality increaser for the
reasons we discussed earlier.
Those are the people--people losing their jobs are, to a
large extent, service economy employees with relatively low
wages and relatively high percentages of minorities and also
women.
Senator Smith. Yes.
Mr. Powell. That is who is bearing the brunt of this.
Senator Smith. Right.
Well, I think this makes the case for why it is important
that we continue to really send rental eviction forbearance,
but also, it makes the case, I think, for why the bill that
Senator Brown and many others of us are working on to provide
$100 billion in emergency rental assistance so that these
families do not have to lose their housing, therefore, making
it so much more difficult for us to recover and also
exacerbating these fundamental and systemic inequities that we
see in our economy overall.
Thank you, Chair Powell.
Chairman Crapo. Thank you.
Senator Moran.
Senator Moran. Mr. Chairman, thank you. Mr. Chairman, thank
you. I appreciate that you are putting your intellect and
expertise so diligently to work to repair our economy. I very
much appreciate what you are doing, Mr. Powell.
Let me tell you that I am concerned. We think PPP--I think
PPP worked pretty well for our smallest employers. It has been
my hope that Main Street Lending Program will be a similar kind
of solution for larger companies in Kansas.
It does not really matter if you have lost your job,
whether you work for a company that employs 9,000 people or
employs 900. You are still out of a job, and we have a lot of
work to do in that regard.
But, Chairman, I am really concerned, genuinely concerned
that we may see Main Street Lending Program not have a material
impact in helping small- and medium-sized businesses in Kansas
and across the country, and the end result of that is certainly
a failure to recover quickly, continuing unemployment, but
perhaps a result in which larger companies that have been able
to raise cash in recent weeks will consolidate their market
share at the expense of those smaller businesses that were
unable to do so in the commercial market.
So I have a lot of hope for the Main Street program, and I
need to be assured that it is going to accomplish what it needs
to accomplish.
But I think the Main Street program is essentially saying
that it will stand by a syndicate partner for a fairly narrow
class of credit agreements. But as far as I can tell, banks do
not need help in syndicating profitable loans, and neither do
they want any part of even 5 percent of unprofitable loans.
So to me, it appears there is little in the program that
actually incentivize banks to originate these loans for new
customers. So I am nervous, especially because if we have to
make changes to it, the changes come so late, months from now.
It will be too late for many of my constituent businesses who
employ lots of people in Kansas.
Can you give me your thoughts concerning my concerns and
try to reassure me that my concerns are unfounded?
Mr. Powell. Sure.
So you do put your finger on some the challenges with
approaching the very broad, diverse Main Street space, which
has different appetites for credit. It is a heavily bank-
dominated financing
sector of the economy or a series of sectors of the economy,
and that means bank credit agreements, which are all
individually negotiated. It is not like the bond market where
there is quite a lot of standardization.
So it is a challenge, and we really had no choice but to go
through the banking system to meet those borrowers. Where they
borrow is through banks, and also, we cannot do due diligence
on literally millions of companies. We are not set up to do
that; whereas, the banking system is exactly set up to do that.
So that is what we are doing, and the banks do have
incentives. They get to serve their customers a little better.
They also get a generous origination fee. So we feel there is
substantial interest on the part of bankers for this.
It is also the case, though, as it was with other
facilities that the amount of financial stress overall in the
aggregate--I know there are companies that do not fit this, but
is lower than it was in March and April. So we realized there
are still plenty of companies out there.
So the Main Street Facility is now open to lenders. The
lenders are registering. They can make loans right away, and
within a week or two, those loans will be bought by the
facility itself--or 95 percent interest in them will be bought.
The banks will be left with 5 percent. They get to keep their
origination fee, and we will know a lot more about the level of
demand.
It is not just joining an existing syndicate. We do have a
new loan facility, and so we are open. We have three different
facilities, and we are opening one soon for nonprofits.
And as we have been since the very beginning, we are very
open to learning and adapting. We have made repeated changes to
these facilities to try to make them better, better structured
to achieve their goals, and we will continue to do that.
Senator Moran. Chairman Powell, I appreciate your optimism,
and I am reluctant to be the pessimist. And I hope that you are
correct. Is there a Plan B, or that is something would just
work out as we react to the markets, the demand?
Mr. Powell. So I think for all these facilities, we will be
watching, and if we are hearing about companies for whom a loan
is the right answer, who do not for some reason qualify for the
Main Street Loan Facilities and should, then we will be
adapting to that. We will certainly be adapting.
Senator Moran. Let me raise one other topic. I cannot see,
Chairman Crapo, the clock. So the next time, we need a bigger
square for me to at least read.
Chairman Crapo. The clock has expired, so be quick.
Senator Moran. Yes, sir.
EBIDTA, earnings before interest taxes, depreciation, and
amortization. That is a component of the Main Street program. I
am worried that there will be industries and businesses in
which that is a detriment and perhaps disqualifying for them.
I particularly raise this in the hotel industry where it
would be more advantageous to them to be able to rely on their
2019 net earnings. I am interested in your thoughts in that
regard.
And then I am also worried about--the indication by
Treasury and Fed is that we will operate under the CARES
philosophy, of the spirit and purpose of CARES--I did not say
that right--that we will operate in the Main Street program
under the spirit of CARES, which is, I guess, a pretty
uncertain term. And I am looking--I think our businesses are
looking for more certainty as to the nature of how this program
is going to work.
Can you help alleviate businesses' concerns, the
uncertainty that surrounds, and any thoughts about EBIDTA?
Mr. Powell. Sure.
Chairman Crapo. And if you could be brief on this answer,
please, Mr. Chairman.
Mr. Powell. I will. Thank you, Mr. Chairman.
In terms of EBITDA, we are looking at last year's EBIDTA.
We do appreciate that for some industries, there may be a
better way to approach that, and we are looking at that
particularly, for example, an asset-based approach. So that is
something that we are looking at.
Our big focus has been on getting the facility open,
frankly. That has been the main focus for now, and we are
looking at past pre-pandemic earnings, in any case. We are not
taking into account the effects of the pandemic for that
purpose.
Senator Moran. Thank you, Chairman Powell.
Mr. Powell. Thank you.
Chairman Crapo. Thank you.
Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman and Ranking
Member Brown, and welcome, Chairman Powell.
I am a little late to the hearing. I was just on the floor
of the Senate calling for us to take up the Justice in Policing
Act and address, in an urgent way, issues of systemic racism. I
am glad you made the statement you did in your opening remarks.
I want to ask you about a statement made by Raphael Bostic,
the president of the Atlanta Fed, where he wrote on Friday,
quote, Systemic racism is a yoke that drags on the American
economy, and that a commitment to an inclusive society also
means a commitment to an inclusive economy. Do you agree with
that statement?
Mr. Powell. I do, absolutely.
Senator Van Hollen. And it is urgent that we use all the
tools at our disposal to address that issue.
I saw President Trump celebrating the other day that the
unemployment rate in May ended up around 15 percent. It is
nothing really to celebrate, but in that same unemployment
report and data, we actually saw Black Americans' unemployment
rate go up compared to the previous month, did we not?
Mr. Powell. We did, and over the longer term, we see
African American unemployment running at approximately two
times White unemployment. And that is a feature of all
different parts of the business cycle.
Senator Van Hollen. And also these ingrained issues in all
aspects of our society from schools to financial systems.
Let me ask you this. I saw that Wall Street has responded
favorably to some of the most recent actions that the Fed just
took. When it comes to helping those people who are most hurt
economically by this downturn--and you have spoken about them,
the fact that 40 percent of individuals with incomes under
$40,000 found themselves out of a job.
When it comes to those individuals who are hardest hit,
would you agree that a fiscal policy is probably a more
effective tool in addressing those issues than the instruments
that the Fed has at its disposal?
Mr. Powell. In the short and medium term, yes, fiscal
policy. In the long term, maximum employment is a great thing.
What we had the last couple of years, a 50-year low in
unemployment was really making a difference in those
communities, and we were very pleased to see that we were
hearing that from people in those communities. But for now,
fiscal policy is critical.
Senator Van Hollen. Right. But in the short term--and, of
course, a lot of those gains were erased in a very short time,
and our goal has to be, does it not, to try to get back to
where we were as soon as possible and then start improving
again? Would you agree that that should be the goal?
Mr. Powell. Very much so. Absolutely. It certainly is for
us.
Senator Van Hollen. And do you agree with the letter? I am
not sure what your testimony is as to whether or not you saw a
letter, but we have a letter we received this morning from Ben
Bernanke, Janet Yellen, and over 120 other very respected
economists about the urgent need to take more fiscal action.
Given what you just said about the short term and fiscal
policy as a tool, do you agree with their statements that we
need to do more?
Mr. Powell. So I saw the headline, saw the first two
sentences of the story. I have not had a chance to read the--it
went across the tape just before I walked in here. So I will
look at it.
In fiscal policy, what I would say is we are not in a
position of giving you advice, and you have reacted. Congress
has done the most it has ever done--14 percent of GDP, $3
trillion. We have done the most we have ever done.
As this plays out, it is likely that there will be a group
that struggles to regain employment. Because they were working
in those industries that are so strongly affected, it is likely
that they will need help, and they may need help from the Fed,
and they may need help from you too.
Senator Van Hollen. Well, I take it from your previous
response that especially when it comes to short-term downturns
that fiscal policy is the most effective instrument to deal
with the short-term impacts.
We have lost 1.5 million jobs, State and local government
levels, over the last 2 months. That is a drag on the economy,
is it not?
Mr. Powell. Yes, it is. It is one of the largest employers.
State and local governments are one of the largest employers. I
think 13 million people.
Senator Van Hollen. So should not all of us, using the
tools at our disposal, try to stop the continued loss of jobs
at the State and local level?
Mr. Powell. So we did discuss this earlier, and I would say
it is certainly an area where I would be looking if I were you.
State and local governments provide those critical
services, and they have balanced budget requirements. So the
layoffs come very quickly when unemployment--sorry--when
revenues go down and expenses go up, and that is going to weigh
on the economy. So----
Senator Van Hollen. And are you aware of the fact that in
many cases, State and local governments are making their fiscal
decisions as of July 1st as to whether or not to cut back on
their budgets and lay people off?
Mr. Powell. Yes, and more.
Senator Van Hollen. Mr. Chairman, just in closing, it would
seem to me, given all those facts, that Congress would be
negligent in leaving town before the 4th of July for the 4th of
July break without providing this additional relief to State
and local government employees but to others, also.
So thank you. Thank you to both Chairman and to Ranking
Member Brown.
Chairman Crapo. Thank you.
And do we have Senator Sinema on now?
Senator Sinema. Yes, Mr. Chairman. I am here.
Chairman Crapo. Go ahead.
Senator Sinema. Well, thank you, Mr. Chairman, and thank
you to Chairman Powell for joining us again today. We
appreciate it.
Chairman Powell, immediate economic stabilization, as we
saw with the PPP program and other coronavirus relief funds,
will continue to be necessary as we shield the economy from the
worst effects of this pandemic and work to save lives.
Disease experts and other health officials warn of a
harsher second wave of the virus in the fall.
I recently urged the Administration to implement a national
testing and infection tracking strategy to help stop the spread
of coronavirus and protect Arizonans from future waves.
Would you agree that a robust infection tracking regime
that enables U.S. businesses to reopen and operate safely would
have a positive effect on economic growth?
Mr. Powell. I absolutely would.
I think anything that enhances the public's confidence and
ability to become ever more confident that it is safe to go out
and take part in the economy will have very high returns for
the economy.
Senator Sinema. Well, thank you.
The Federal Reserve projects the U.S. economic output will
decrease by 6.5 percent at the end of this year, compared to
2019. Does this projection assume a potential second wave of
coronavirus and the accompanying economic impacts?
Mr. Powell. That number is actually just--I should say that
is just the median of the 17 projections by the 17 participants
in the FOMC. So it is not an official projection of the Fed or
anything like that.
And it will be based on different assumptions made by
different people. Each of the 17 will have probably made a
somewhat different assumption.
I would think the answer to your question, though, largely
will be no. Largely, that is not a number in our--my colleagues
will not principally have assumed that there will be a
substantial second wave.
Senator Sinema. Oh, that is concerning.
Congress will need to find the best path forward as we
navigate an unprecedented and evolving pandemic. Arizonans and
Americans count on our leaders to follow the science and the
facts to protect public health and rebuild our economy.
Businesses and families will need immediate economic relief if
case counts worsen and further restrictions are warranted.
Would you agree, given the possibility of several future
waves of the virus, that identifying nimble, flexible economic
stabilizers to quickly make impacted businesses and families
stable would be beneficial for our economic growth?
Mr. Powell. So I think the question of automatic
stabilizers is a classic fiscal policy question and one that
you and your colleagues will have to sort out.
I do think that--I think that the response that Congress
has made so far, particularly in the PPP program, the checks
and the enhanced unemployment insurance, has made a big
difference in where the economy is now.
Senator Sinema. Thanks.
And, finally, I want to briefly discuss relief to State and
local governments. I appreciate your efforts to provide our
State and local governments greater access to the Municipal
Liquidity Facility, and I would encourage you to take further
action to allow smaller Arizona cities, towns, and counties to
access this financing.
Economic studies show that the 2008 recession was
significantly prolonged due to shortfalls in State and local
government funding. Do you agree with that analysis, and would
you agree that addressing State and local funding shortfalls
would have a meaningful effect on the overall economic outlook?
Mr. Powell. So we do know--or the research does show that
in the aftermath of the global financial crisis during what we
call the ``Great Recession'' that State and local governments
did weigh on economic activity. There were a lot of layoffs and
not much hiring, and I think State and local governments had an
even higher percentage of the labor force back then.
In terms of what Congress should do, I do think that that
is an area that is worth some attention because of what we
discussed.
Senator Sinema. Thank you, Mr. Chairman, and thank you to
Ranking Member Brown. I look forward to working together on a
path to recovery, and, Mr. Chairman, I yield back.
Chairman Crapo. Thank you, Senator Sinema.
Senator Brown has asked for one more question, and then we
will conclude our questioning.
Senator Brown.
Senator Brown. Thank you, Mr. Chairman, always for your
indulgence. One question and then a brief comment.
Thank you, Chair Powell. I know your fiscal policy is not
within your province, as you say many times, but I have been
impressed by your thoughtful answers, particularly on State and
local government assistance and on preventing evictions on
rental assistance. And those are such important issues.
My question is pretty simple: Will Congress make inequality
worse if we are not as thoughtful as you have been in our
fiscal response?
Mr. Powell. That is a hard form of the question.
I think this whole episode with the pandemic is very tough
on low- and moderate-income communities, and again, I think
Congress has done a lot compared to other downturns here. And
it is having a real effect, and I think there may well be a
need to do more and for us as well.
Senator Brown. Thank you. And I have heard your public
statements. I appreciate that.
I would just add Mr. Chairman, I am going to join--Senator
Jones mentioned reading one of the most extraordinary pieces of
writing in American history. I am joining him with, I believe,
four other Senators. There will be three in each party, maybe
four in each party, and to read from Dr. King's letter from the
Birmingham jail. He reminds us that we always make excuses to
wait to address racism. I know there is a lot going on, but
what we do now matters.
I want you to take that seriously. I think you do. I
appreciate, as I said, your thoughtful comments. We cannot
ignore how our institutions and our policies--and the Fed is
central to that--have contributed to inequality in this
country.
And my question about your working with us on this is a
serious one. I appreciated your saying you talked to other Fed
Governors about that. I hope you will lead the Fed, as I hope
Congress will step up as well, to address this most basic of
American problems.
So, Mr. Chairman, Chairman Crapo, thank you, and, Chair
Powell, Thank you.
Mr. Powell. Thank you.
Chairman Crapo. Thank you, Senator Brown.
And that does conclude today's testimony, the testimony and
the questioning.
Chairman Powell, I would like to join with those who have
commended you on the service that you and our Federal Reserve
has given to the country in dealing with this pandemic and
appreciate you being here with us today as well.
We look forward to continuing to work with you as you
implement the various 13(3) facilities and the other responses
that fall within your purview to this crisis, and once again,
thank you for taking of your time to give us your wisdom today
in the hearing.
For Senators who wish to submit questions for the record,
those questions are due on Tuesday, June 23rd.
I ask that, Chairman Powell, you respond to those questions
as quickly as you can.
This hearing is adjourned.
[Whereupon, at 12:29 p.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
Today, Federal Reserve Chairman Jerome Powell will update the
Committee on monetary policy developments and the state of the U.S.
economy.
It has only been 4 months since the last Humphrey-Hawkins hearing,
but we are seeing a significantly different economy today; one that has
been racked by the physical and economic impact of the COVID-19
pandemic and ensuing shutdowns.
Chairman Powell, you have stated that the Federal Reserve is `` . .
. strongly committed to using our tools to do whatever we can and for
as long as it takes to provide some relief and stability, to ensure the
recovery is as strong as possible.'
Additionally, the Fed has purchased more than $2 trillion in
Treasury and mortgage securities since the pandemic sparked a massive
flight for safe, cash-like assets in mid-March.
Because of this, the Fed's balance sheet has expanded to more than
7 trillion dollars.
Congress, the Administration and regulatory agencies have taken
extreme actions to protect and stabilize the infrastructure of our
economic system.
The CARES Act has been central to that effort, and recent
statistics indicate our efforts are working.
In fact, the Bureau of Labor Statistics announced on June 5
encouraging signs for jobs and the economy, that nonfarm payroll
employment rose by 2.5 million in May, and the unemployment rate
declined to 13.3 percent.
According to the report, these ``improvements in the labor market
reflected a limited resumption of economic activity that had been
curtailed in March and April due to the coronavirus (COVID-19) pandemic
and efforts to contain it.''
Title IV of the Act provided a $500 billion infusion in the
Exchange Stabilization Fund, up to $454 billion of which can be used to
support the Federal Reserve's emergency lending facilities, such as the
Main Street Lending facilities and the Municipal Lending Facility.
The Fed has set up facilities funded both under and outside of the
CARES Act, and there is evidence that the mere announcement of some of
those facilities have had a positive and stabilizing effect on markets,
even before becoming operational.
Although any positive effect of these facilities is welcome,
getting them fully operational ensures that they achieve their full
effect.
On June 8, 2020, the Federal Reserve announced positive changes to
the term sheet to the Main Street Facilities that will allow additional
smaller and medium-sized businesses to access the facilities.
As I have urged in previous hearings, it is now time to get the
Main Street and other outstanding facilities up and running.
In addition to emergency lending facilities, the Fed can continue
to right-size regulations to increase lending and access to credit in
the economy.
In response to a letter that I sent to the Federal banking
regulators on April 8, Vice Chairman Quarles noted that ``Congress
should consider modifying section 171 of the Dodd-Frank Act (`The
Collins Amendment') to allow regulators to provide flexibility under
Tier 1 leverage requirements as banks respond to increased credit
demand.''
There are also several proposed rules that the agencies were
working on before COVID-19, and I encourage the agencies to finalize
these rules as soon as possible, such as the Volcker covered funds rule
and the inter-affiliate margin rule.
During this hearing, I look forward to hearing more on the state of
the economy, including its response to the CARES Act; an update on the
status of the 13(3) emergency lending facilities; how the facilities
have provided or stand to provide necessary credit to households,
businesses, States and local governments; and additional regulatory and
legislative changes that can increase credit and liquidity in the
marketplace and further support the economy.
Chairman Powell, thank you for joining us today.
______
PREPARED STATEMENT OF SENATOR SHERROD BROWN
Thank you, Mr. Chairman, for holding this virtual hearing, and
thank you, Chair Powell, for participating in this hearing remotely to
practice social distancing and to prevent the potential spread of
coronavirus, which is not dropping dramatically, but still spreading,
and is still taking the lives of hundreds more Americans every day.
Across the country, in big cities and small towns alike, Americans
are calling for their Government to respond to the health and economic
impact of the pandemic. They are outraged over the killings of Breonna
Taylor, George Floyd, Ahmaud Arbery, Rayshard Brooks, and so many other
Black Americans. They are demanding justice and an end to the systemic
racism that pervades every aspect of American society, including our
economy.
Your job, and our job on this Committee, is to oversee our economic
system--to be good stewards of our economy.
That requires seeing our economy as it actually is. You're not
overseeing some theoretical academic model of a perfect market. The
evils of racism have been woven into the fabric of our nation's history
since the beginning. Look at housing--we see how it works, from Jim
Crow to redlining to today's OCC dismantling an important civil rights
law.
We can't rely on the market to sort itself out--it never has and it
never will.
We know Black workers earn less than their White peers who do the
same jobs and have the same education levels. We know Black families
are far less likely to own their homes than White families. We know
Black students borrow more and pay more for college. We know Black
retirees have less money for retirement, and less wealth to pass on to
their children.
Many--including some members of the House and Senate--suggest, both
in their statements and in their policies, that Black Americans are
uneducated, don't work hard, don't want to start businesses or buy
homes or save or invest. That's a false, racist narrative.
The real reason behind the disparities is that we have centuries of
systematic oppression that denies Black Americans the opportunity to
fully participate in our economy.
And whenever we try to fix it, the people who created or
perpetuated that system--people who have no problem intervening in the
market to save corporations and the White men who run them--say oh no,
we can't have Government meddling in the economy.
Let's be clear: Government has always intervened in the economy.
It's only been a question of who it's intervening on behalf of--
corporations, the wealthy, the privileged? Or the people who make this
country work? That contrast has probably never been clearer than it is
today.
Workers are the people who make this economy run. It's not the CEOs
and other executives, but the people who stock our shelves, deliver our
packages, operate our subways and buses, and care for our health. We
have finally started calling these workers--mostly women,
disproportionately Black and brown workers--we have finally started
calling these workers what they are: ``essential.''
But our companies and our Government have not started treating them
that way.
Even before the pandemic, this economy wasn't working for working
Americans. Our essential workers faced barriers to housing and
healthcare. Wages were stagnant and wealth inequality continued to
rise. Corporations making record profits rewarded their executives with
huge bonuses, and increased dividends and stock holdings, juiced by
buybacks. They weren't using their record profits to pay their
essential workers what they are worth.
Now these same companies that have been lining the pockets of their
investors and executives, at the expense of their workers, now want the
Government to cushion the landing during this crisis.
And Congress asked the Treasury and Federal Reserve to serve as a
life raft--to lend trillions of dollars to support our economy during
this unprecedented time.
But while the Treasury and Fed are helping financial markets and
corporations, you are not holding up the other end of the deal--we also
asked you to make sure that working Americans remained employed and
safe.
Big corporations are staying afloat--just look at the stock
market--but the number of Americans out of a job is now over 20
million.
We saw how this played out in the 2008 financial crisis. Government
intervened to help banks and corporations--and they were all too happy
to take the bailouts. No complaints of ``Government handouts'' there-in
fact it was considered ``patriotic.''
But millions of Americans were left behind--losing their jobs,
their homes, getting paid less. Many of us fought for more help, more
stimulus, for the people who make the economy work--and Wall Street and
its allies in Washington called that a handout, Government meddling,
market interference.
History is repeating itself.
As COVID-19 spread across the country earlier this year, many
workers--mostly Black and brown--found themselves thrown from one
crisis into the next.
As it currently stands, and with no steps taken to actually ensure
the money they are lending goes to workers, Treasury and the Fed are
only reinforcing the inequities between workers and Wall Street, and
between Black and brown Americans and White Americans.
Chair Powell--you have said that Congress needs to do more to help
our State and local governments and put money directly in people's
pockets, and I agree. Democrats have a plan to get more help directly
to working Americans. But Mitch McConnell isn't in any rush to help
people, he says he sees ``no urgency''--his words, ``no urgency.''
Leader McConnell and this Administration want to pretend like we
are not in the middle of a pandemic and an economic recession. They
want to force people back to work without real safety protections at
the same low wages, while they shield their Wall Street friends from
liability if any of their workers get sick on the job. We want people
to go back to work, too--but they want us to return to ``business as
usual.''
We know what ``business as usual'' means: Government intervention
to put its thumb on the scale for corporations and their wealthy
shareholders, and ``the free market'' for everyone else.
We can't return to that ``business as usual.''
The economy and justice are not separate issues.
The Americans who are protesting across this country are demanding
more from their Government. They want an end to police violence that
take Black lives with impunity. They want to know their voices are
heard and their votes won't be suppressed. They want economic security.
They want a safe place to live, and they want a President who acts in
his citizens' interest--not his own.
They want to have faith in their Government.
Congress and the Fed can help restore some of that trust. It's
clear the White House isn't going to do it.
Both of us--Congress and the Fed alike--must take action now to
support the workers who make this economy run. That means providing
help for immediate needs and also addressing systemic racism and
economic injustice. If we fail to act, it will hurt many people and
make inequality worse. The Fed can make sure companies that get bailed
out keep paying their workers; that companies stop stock buybacks and
dividends on Wall Street, and adopt policies that combat inequality
rather than supercharge it.
The Fed cannot lend to big businesses and leave workers behind like
we saw during the last crisis. It's time for all of us to be better
stewards of the economy.
Chair Powell, I thank you for your service and your leadership. And
I would urge you to redouble your efforts to make sure that you and the
thousands of talented men and women who work with you are dedicated to
taking steps to ensure that this economy works for all Americans.
______
PREPARED STATEMENT OF JEROME H. POWELL
Chairman, Board of Governors of the Federal Reserve System
June 16, 2020
Chairman Crapo, Ranking Member Brown, and other Members of the
Committee, thank you for the opportunity to present the Federal
Reserve's semiannual Monetary Policy Report.
Our country continues to face a difficult and challenging time, as
the pandemic is causing tremendous hardship here in the United States
and around the world. The coronavirus outbreak is, first and foremost,
a public health crisis. The most important response has come from our
healthcare workers. On behalf of the Federal Reserve, I want to express
our sincere gratitude to these dedicated individuals who put themselves
at risk, day after day, in service to others and to our Nation.
Current Economic Situation and Outlook
Beginning in mid-March, economic activity fell at an unprecedented
speed in response to the outbreak of the virus and the measures taken
to control its spread. Even after the unexpectedly positive May
employment report, nearly 20 million jobs have been lost on net since
February, and the reported unemployment rate has risen about 10
percentage points, to 13.3 percent. The decline in real gross domestic
product (GDP) this quarter is likely to be the most severe on record.
The burden of the downturn has not fallen equally on all Americans.
Instead, those least able to withstand the downturn have been affected
most. As discussed in the June Monetary Policy Report, low-income
households have experienced, by far, the sharpest drop in employment,
while job losses of African Americans, Hispanics, and women have been
greater than that of other groups. If not contained and reversed, the
downturn could further widen gaps in economic well-being that the long
expansion had made some progress in closing.
Recently, some indicators have pointed to a stabilization, and in
some areas a modest rebound, in economic activity. With an easing of
restrictions on mobility and commerce and the extension of federal
loans and grants, some businesses are opening up, while stimulus checks
and unemployment benefits are supporting household incomes and
spending. As a result, employment moved higher in May. That said, the
levels of output and employment remain far below their pre-pandemic
levels, and significant uncertainty remains about the timing and
strength of the recovery. Much of that economic uncertainty comes from
uncertainty about the path of the disease and the effects of measures
to contain it. Until the public is confident that the disease is
contained, a full recovery is unlikely.
Moreover, the longer the downturn lasts, the greater the potential
for longer-term damage from permanent job loss and business closures.
Long periods of unemployment can erode workers' skills and hurt their
future job prospects. Persistent unemployment can also negate the gains
made by many disadvantaged Americans during the long expansion and
described to us at our Fed Listens events. The pandemic is presenting
acute risks to small businesses, as discussed in the Monetary Policy
Report. If a small- or medium-sized business becomes insolvent because
the economy recovers too slowly, we lose more than just that business.
These businesses are the heart of our economy and often embody the work
of generations.
With weak demand and large price declines for some goods and
services--such as apparel, gasoline, air travel, and hotels--consumer
price inflation has dropped noticeably in recent months. But indicators
of longer-term inflation expectations have been fairly steady. As
output stabilizes and the recovery moves ahead, inflation should
stabilize and then gradually move back up over time closer to our
symmetric 2 percent objective. Inflation is nonetheless likely to
remain below our objective for some time.
Monetary Policy and Federal Reserve Actions To Support the Flow of
Credit
The Federal Reserve's response to this extraordinary period is
guided by our mandate to promote maximum employment and stable prices
for the American people, along with our responsibilities to promote the
stability of the financial system. We are committed to using our full
range of tools to support the economy in this challenging time.
In March, we quickly lowered our policy interest rate to near zero,
reflecting the effects of COVID-19 on economic activity, employment,
and inflation, and the heightened risks to the outlook. We expect to
maintain interest rates at this level until we are confident that the
economy has weathered recent events and is on track to achieve our
maximum-employment and price-stability goals.
We have also been taking broad and forceful actions to support the
flow of credit in the economy. Since March, we have been purchasing
sizable quantities of Treasury securities and agency mortgage-backed
securities in order to support the smooth functioning of these markets,
which are vital to the flow of credit in the economy. As described in
the June Monetary Policy Report, these purchases have helped restore
orderly market conditions and have fostered more accommodative
financial conditions. As market functioning has improved since the
strains experienced in March, we have gradually reduced the pace of
these purchases. To sustain smooth market functioning and thereby
foster the effective transmission of monetary policy to broader
financial conditions, we will increase our holdings of Treasury
securities and agency mortgage-backed securities over coming months at
least at the current pace. We will closely monitor developments and are
prepared to adjust our plans as appropriate to support our goals.
To provide stability to the financial system and support the flow
of credit to households, businesses, and State and local governments,
the Federal Reserve, with the approval of the Secretary of the
Treasury, established 11 credit and liquidity facilities under section
13(3) of the Federal Reserve Act. The June Monetary Policy Report
provides details on these facilities, which fall into two categories:
stabilizing short-term funding markets and providing more-direct
support for credit across the economy.
To help stabilize short-term funding markets, the Federal Reserve
set up the Commercial Paper Funding Facility and the Money Market
Liquidity Facility to stem rapid outflows from prime money market
funds. The Fed also established the Primary Dealer Credit Facility,
which provides loans against good collateral to primary dealers that
are critical intermediaries in short-term funding markets.
To more directly support the flow of credit to households,
businesses, and State and local governments, the Federal Reserve
established a number of facilities. To support the small business
sector, we established the Paycheck Protection Program Liquidity
Facility to bolster the effectiveness of the Coronavirus Aid, Relief,
and Economic Security Act's (CARES Act) Paycheck Protection Program.
Our Main Street Lending Program, which we are in the process of
launching, supports lending to both small and midsized businesses. The
Term Asset-Backed Securities Loan
Facility supports lending to both businesses and consumers. To support
the employment and spending of investment-grade businesses, we
established two corporate credit facilities. And to help U.S. State and
local governments manage cash flow pressures and serve their
communities, we set up the Municipal Liquidity Facility.
The tools that the Federal Reserve is using under its 13(3)
authority are appropriately reserved for times of emergency. When this
crisis is behind us, we will put them away. The June Monetary Policy
Report reviews the implications of these tools for the Federal
Reserve's balance sheet.
Many of these facilities have been supported by funding from the
CARES Act. We will be disclosing, on a monthly basis, names and details
of participants in each such facility; amounts borrowed and interest
rate charged; and overall costs, revenues, and fees for each facility.
We embrace our responsibility to the American people to be as
transparent as possible, and we appreciate that the need for
transparency is heightened when we are called upon to use our emergency
powers.
We recognize that our actions are only part of a broader public-
sector response. Congress's passage of the CARES Act was critical in
enabling the Federal Reserve and the Treasury Department to establish
many of the lending programs. The CARES Act and other legislation
provide direct help to people, businesses, and communities. This direct
support can make a critical difference not just in helping families and
businesses in a time of need, but also in limiting long-lasting damage
to our economy.
I want to end by acknowledging the tragic events that have again
put a spotlight on the pain of racial injustice in this country. The
Federal Reserve serves the entire Nation. We operate in, and are part
of, many of the communities across the country where Americans are
grappling with and expressing themselves on issues of racial equality.
I speak for my colleagues throughout the Federal Reserve System when I
say, there is no place at the Federal Reserve for racism and there
should be no place for it in our society. Everyone deserves the
opportunity to participate fully in our society and in our economy.
We understand that the work of the Federal Reserve touches
communities, families, and businesses across the country. Everything we
do is in service to our public mission. We are committed to using our
full range of tools to support the economy and to help assure that the
recovery from this difficult period will be as robust as possible.
Thank you. I am happy to take your questions.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM JEROME H. POWELL
Q.1. The Federal Reserve's Main Street Lending Facilities do
not require borrowing companies to retain workers. Over 20
million people are currently unemployed, and the Black
unemployment rate is higher at 16.7 percent, compared to the
White unemployment rate of 14.2 percent. Black workers have
suffered record job losses and disproportionately comprise the
group of essential workers continuing to go to their workplaces
without adequate protection and at lower wages. How will the
lack of worker protection and retention requirements in the
Main Street Lending Facilities exacerbate racial disparities in
wealth, income, and employment? Did the Federal Reserve
consider these disparities when creating the facilities? If the
Federal Reserve makes further changes to the facilities, will
it consider these factors?
A.1. Response not received in time for publication.
Q.2. We saw how the rollout of the Paycheck Protection Program
made it difficult for underserved communities, community-based
lenders, and minority-owned businesses to access funding.
Minority Depository Institutions and Community Development
Financial Institutions are more likely to be lending to
minority-owned businesses. How will the Federal Reserve ensure
that these lenders and the minority-owned businesses that they
support will have fair and equal access to the Main Street
Lending Facilities? Will the Federal Reserve report the loan
amounts that minority-owned businesses receive through the
facility, and the total amount of Main Street loans that MDIs
and CDFIs originate through the facility? Is the Fed
considering or consulting with CDFI or small business
stakeholders about any other support for CDFI small business
lending, particularly for underserved minority-owned small
businesses?
A.2. The Federal Reserve has taken a number of actions to
facilitate broad coverage by the Main Street Lending Program
(Main Street). Recognizing that the circumstances, structure,
and needs of small and medium-sized for-profit and nonprofit
organizations vary considerably, the Federal Reserve sought
feedback from a wide range of potential borrowers, lenders, and
the public on the proposed terms of the facilities to help make
Main Street as efficient and effective as possible. Based on
this feedback, the Federal Reserve has modified the terms of
Main Street to provide greater access to credit for small and
medium-sized for-profit and nonprofit organizations that were
in sound financial condition prior to COVID-19.
To provide potential lenders with information about Main
Street and to address their questions in real time, the Federal
Reserve has recorded 14 webinars and conducted a number of
other events (including three in collaboration with the Small
Business Administration (SBA)) explaining aspects of Main
Street and engaging in question and answer sessions. On June
24, the Federal Reserve hosted a webinar on Main Street
targeted toward minority- and women-owned businesses, and on
August 4, the Federal Reserve hosted a webinar targeted toward
tribal businesses. The Federal Reserve is exploring additional
outreach to raise awareness of the program among women- and
minority-owned businesses and in low- and middle-income
communities.
To encourage their involvement in Main Street, the Federal
Reserve has also conducted outreach to minority depository
institutions (MDI) and community development financial
institutions (CDFI) to provide opportunities to learn about the
program. On July 1, as part of the Federal Reserve's
Partnership for Progress program, staff of the Federal Reserve
Board and Federal Reserve Bank of Boston (FRBB), together with
the National Bankers Association, held a briefing on Main
Street for MDIs. On August 4, Federal Reserve Board and FRBB
staff attended a National Business Inclusion Consortium event
to present the details of Main Street. On August 12, staff
participated in an event sponsored by the U.S. Department of
Commerce's Minority Business Development Agency and provided a
Main Street overview.
Most recently on October 30, the Federal Reserve Board
adjusted the terms of Main Street to better target support to
smaller businesses that employ millions of workers and are
facing continued revenue shortfalls due to the pandemic. In
particular, the minimum loan size for three Main Street
facilities available to for-profit and nonprofit borrowers has
been reduced from $250,000 to $100,000.
The Federal Reserve will continue to assess the efficacy of
Main Street, including its effects on low-income or minority
communities. The Federal Reserve will collect and disclose
information regarding Main Street during the operation of the
facilities, including information regarding names of lenders
and borrowers, amounts borrowed and interest rates charged, and
overall costs, revenues, and other fees. We will also continue
to conduct outreach sessions to underserved communities to
promote Main Street awareness. In addition, we will continue to
monitor broader credit conditions across different communities
and geographies and weigh adjustments needed to reach eligible
borrowers.
Q.3. Under what authority did the Federal Reserve rely in
modifying the SMCCF to create an index of corporate bonds to
purchase? To what extent will this allow issuers to avoid
meeting all Eligible Issuer requirements that the Federal
Reserve originally established for participation in the SMCCF?
Please provide all analyses of the Fed's authority to invest in
all corporate bonds regardless of eligibility requirements.
A.3. Response not received in time for publication.
Q.4. State and local governments are facing severe financial
strain in dealing with the pandemic. The Federal Reserve
established the Municipal Liquidity Facility (MLF) to help
State and local governments better manage cash flow pressures
in order to serve their communities. Yet, the terms of the
facility, including limits on maturity length and pricing, make
it difficult for most States and localities to benefit from the
program. These terms are much more restrictive than the terms
for the Corporate Credit Facilities, including the Secondary
Market Corporate Credit Facility, which the Federal Reserve
recently expanded even further. Please explain the Federal
Reserve's process and analysis for determining the terms of the
MLF. Why did the Federal Reserve choose to lend to
corporate borrowers on less restrictive terms than States and
municipalities?
A.4. Response not received in time for publication.
Q.5. State and local governments also employ a higher
proportion of Black workers than other industries. Will the
restrictive terms of the MLF exacerbate racial inequality?
A.5. Response not received in time for publication.
Q.6. The Federal Reserve's June 12, 2020, Monetary Policy
Report noted that financial-sector vulnerabilities are expected
to be significant in the near term, and the strains on
households and businesses from the economic and financial
shocks since March will likely create persistent fragilities.
Please describe the specific vulnerabilities facing our
financial system. To what extent is the Federal Reserve
coordinating with other Federal banking agencies and through
the Financial Stability Oversight Council (FSOC) to address
these risks? What is the Federal Reserve and FSOC doing to
address these risks?
A.6. Response not received in time for publication.
Q.7. The June Monetary Policy Report highlighted risks
associated with liquidity and maturity transformation in the
nonbank financial sector. Please elaborate on these
vulnerabilities in the nonbank financial sector. What is the
Federal Reserve doing to address these risks? What is the
Federal Reserve's analysis of how its monetary policy actions,
including its corporate bond purchases and lending to leveraged
companies, could exacerbate these vul-
nerabilities?
A.7. Response not received in time for publication.
Q.8. The latest ``FedListens'' Report \1\ notes that many of
the newly unemployed are facing a cliff when supplementary
unemployment insurance runs out: ``many who have been laid off
are benefiting now from the one-time stimulus checks and
temporary increase in unemployment insurance (UI) benefits
enacted in the CARES Act. The supplementary UI will end this
summer. At that point, it will be difficult for many families
to meet their financial commitments--rent, food, utilities, and
other payments--if the economic downturn continues and the
benefits are not renewed.''
---------------------------------------------------------------------------
\1\ https://www.federalreserve.gov/publications/files/fedlistens-
report-20200612.pdf.
---------------------------------------------------------------------------
The suspension of interest, payments, and involuntary
collections on Federal student loans enacted in the CARES Act
expires September 30th. The foreclosure moratorium expired on
May 17th, although the Federal agencies have extended that
moratorium through August 31st. The moratorium on evictions for
renters in federally backed properties or who are receiving
Federal assistance expires on July 24th. Don't student loan
borrowers, homeowners, and renters face the same fiscal cliff
that those whose UI benefits will run out face if these
protections are not extended? The Federal Reserve is making
monetary policy predictions based on assumptions about fiscal
policy--what happens after the CARES Act Federal student loan
suspension and moratoria on foreclosures and evictions ends?
How will this exacerbate inequalities for Black and Latinx
borrowers and households?
A.8. Response not received in time for publication.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
FROM JEROME H. POWELL
Q.1. Outside of the PPP program, how have small- and medium-
sized businesses accessed credit during the COVID-19 crisis,
given that most cannot access bond markets and the Main Street
facilities have not been running yet?
A.1. Banking organizations entered this crisis in strong
financial condition and have been able to continue to lend,
including to small- and medium-sized businesses. As you know,
the Small Business Administration's (SBA) Paycheck Protection
Program (PPP) has approved over $500 billion in loans to
provide funds for payroll costs, mortgage and rent payments,
and utilities. The Federal Reserve's PPP Liquidity Facility
(PPPLF) supports the PPP by supplying liquidity to
participating financial institutions through the extension of
credit to eligible financial institutions that originate PPP
loans by taking the loans as collateral. As of August 31, 2020,
the PPPLF had advanced over $68 billion to financial
institution lenders, providing liquidity to the institutions
for additional lending.
Businesses in certain sectors that have been particularly
challenged by COVID-19 have reported continued difficulty in
accessing credit; however, the most recent monthly survey from
the National Federation of Independent Business (NFIB) released
in August indicates that small businesses have been able to
meet their funding needs in recent months largely due to the
PPP.\1\
---------------------------------------------------------------------------
\1\ William C. Dunkelberg and Holly Wade (2020), NFIB Small
Business Economic Trends (Washington: National Federation of
Independent Business, June), https://assets.nfib.com/nfibcom/SBET-June-
2020.pdf.
---------------------------------------------------------------------------
Small- and medium-sized businesses and nonprofit
organizations were eligible for the SBA's Economic Injury
Disaster Loans (EIDL). The purpose of the program was to
provide economic relief to businesses experiencing a temporary
loss of revenue. Proceeds could be used for a variety of
business-related expenses. As of August 24, 2020, the SBA
reports that over $188 billion in EIDL loans were approved.
All of the Main Street Lending Program (Main Street)
facilities are now operational.\2\ Main Street was established
to support lending to small- and medium-sized businesses that
were in sound
financial condition prior to the onset of COVID-19. As of
October 15, 2020, the Main Street facilities had purchased
participations in 318 loans, totaling just over $3 billion.
More than 602 lenders have registered to participate in the
program, representing more than half of the U.S. banking
assets. Additionally, on October 30, the Federal Reserve Board
(Board) adjusted the terms of Main Street to better target
support to smaller businesses that employ millions of workers
and are facing continued revenue shortfalls due to the
pandemic. In particular, the minimum loan size for three Main
Street facilities available to for-profit and nonprofit
borrowers has been reduced from $250,000 to $100,000. We are
monitoring this
program and will make adjustments as needed to encourage
participation by financial institutions.
---------------------------------------------------------------------------
\2\ The Main Street facilities that are currently operational
include the Main Street New Loan Facility, Main Street Expanded Loan
Facility, and Main Street Priority Loan Facility.
Q.2. What metrics are the Fed using to get a real-time measure
---------------------------------------------------------------------------
of credit needs for small- and medium-sized businesses?
A.2. The Federal Reserve conducts the Small Business Lending
Survey (SBLS) quarterly, collecting quantitative and
qualitative information that is used to understand credit
market conditions for bank lending to small businesses. The
SBLS captures detailed, comprehensive information that is not
otherwise available about small business lending and how it
changes from quarter to quarter. Specifically, quantitative
information is collected on commercial and industrial loan
amounts, interest rates, maturities, and lending terms for term
loans and lines of credit with fixed and variable interest
rates, and applications received and approved. In addition,
qualitative information is collected on changes in credit
standards and terms and loan demand, as well as reasons for
those changes. Special questions may be included in the SBLS to
capture information about topics of interest or emerging risks.
For the quarter ending March 31, 2020, the special question
was, ``How has COVID-19 impacted your bank's small business
customers and what steps has your bank taken to mitigate these
impacts?'' The June SBLS included questions about current
lending standards in comparison to standards over the past 15
years to assess the availability of credit to creditworthy
borrowers, including small- and medium-sized businesses. The
third quarter SBLS included questions about Main Street,
specifically about why registered banks were not approving Main
Street loans and why banks did not register for the program.
Responses to the SBLS questions will be considered in assessing
the efficacy of Main Street.
The Federal Reserve dedicates substantial resources to
provide oversight of lending in supervised institutions. We
closely supervise institutions with larger exposures to small
business loans through processes such as the Comprehensive
Capital Analysis and Review, the Horizontal Capital Review, and
dedicated supervisory teams. Data is collected on Schedule RC-C
Part II--Loans to Small Businesses and Small Farms regarding
the number and current amount outstanding. Additionally, we
review industry information, such as the NFIB's Small Business
Economic Trends.
Q.3. The balance sheet currently stands above $7 trillion. Does
the Fed have a plan to unwind it as the economy becomes in less
need of accommodative support? If not, when will the Fed start
making a plan to unwind it?
A.3. The growth of our balance sheet this year initially
reflected our actions to stabilize the financial system and
thereby support the flow of credit to households and businesses
amid the pandemic. Our ongoing actions continue to sustain
smooth market functioning and help foster accommodative
financial conditions. These actions include purchases of the
U.S. Department of the Treasury (Treasury) securities and
agency mortgage-backed securities to support smooth market
functioning, and deployment of the Federal Reserve's emergency
lending powers to establish lending and liquidity facilities to
support the flow of credit to households, businesses, employers
of all sizes, and communities across the country. Expansion of
short-term liquidity provision through the discount window,
repo operations, and liquidity swap arrangements have addressed
pressures in short-term funding markets that would otherwise
have adversely affected policy implementation and the flow of
credit to U.S. households and businesses.
We announced after the September Federal Open Market
Committee meeting that we will continue to increase our
securities holdings at least at the current pace over coming
months to sustain smooth market functioning and help foster
accommodative financial conditions, thereby supporting the flow
of credit to households and businesses. In addition, if
financial conditions were to deteriorate in the future, the
credit and liquidity programs we have put in place over recent
months could expand to address market strains and support the
flow of credit to households and businesses. As we continue to
closely monitor economic and financial conditions, we will
continually assess how to best use our tools to promote our
maximum employment and price stability goals. In light of the
incoming data on economic and financial conditions, we are
prepared to adjust our plans as appropriate.
Since mid-June, the size of our balance sheet was little
changed reflecting improved market conditions. The increases in
securities holdings was offset by declines in repo operations
and draws on central bank swap lines. Securities held outright
increased by about $550 billion, while our repo operations have
dropped from about $180 billion to zero and liquidity provided
by swap line has dropped by about $440 billion. Similarly,
liquidity provided through programs such as the Primary Dealer
Credit Facility, Money Market Mutual Fund Liquidity Facility,
Commercial Paper Funding Facility, and discount window
continued to move down with further stabilization in funding
conditions over the last couple of months.
When the time comes to shrink our balance sheet, securities
we have purchased will naturally roll off the balance sheet
over time. In general, we would not actively sell securities to
avoid the potential disruptions in market functioning. Over the
longer run, the Federal Reserve intends to return its balance
sheet to a size that is no larger than needed for the efficient
and effective implementation of monetary policy.
Q.4. Baghot's dictum, a commonly cited prescription for using
central bank emergency lending to combat a credit crunch, or a
liquidity crisis, can be summarized as, ``lend freely, at a
high rate of interest, on good collateral.'' To a good extent,
various Federal Reserve liquidity facilities have followed this
maxim. Given the economic impact of coronavirus, does Baghot's
dictum still apply or does it need adjustment? What have we
learned about setting the proper interest rate for liquidity
facilities within this context?
A.4. Under section 13(3) of the Federal Reserve Act and the
Board's Regulation A, pricing for the emergency facilities must
be at a premium to the market rate in normal circumstances,
afford liquidity in unusual and exigent circumstances, and
encourage repayment and discourage use of the facility as the
unusual and exigent circumstances that motivated the program
recede and economic conditions normalize. In addition, section
13(3) and Regulation A require the lending Reserve Bank to be
secured or indorsed to its satisfaction. The pricing and
eligibility terms in the facilities are consistent with these
requirements, prevent risk of loss to the Federal Reserve and
taxpayer, and support smooth market functioning and the flow of
credit to households and businesses.
Q.5. As I've mentioned before, I'd like to see nonbank lenders
eligible for the Main Street facilities. Does the Fed have a
status update on the Fed and Treasury's efforts here?
A.5. At this time, nonbank financial institutions that are
unaffiliated with depository institutions are not considered
eligible lenders for the purposes of Main Street. Currently,
eligible lenders include U.S. federally insured depository
institutions (including banks, savings associations and credit
unions), U.S. branches or agencies of foreign banks, U.S. bank
holding companies, U.S. savings and loan holding companies,
U.S. intermediate holding companies of foreign banking
organizations, and U.S. subsidiaries of the foregoing. The Main
Street underwriting criteria (including the use requirement of
a ``pass'' rating) and operational processes are currently set
up to facilitate loans by such institutions within the
regulatory perimeter. The Federal Reserve continues to consider
options to expand the list of eligible lenders in the future.
Any changes to the list of eligible lenders will be announced
on the Main Street website.
Q.6. Capital requirements should be countercyclical to the
extent possible. To that end, last month I asked Vice Chair
Quarles about his suggestion that Congress modify Dodd-Frank's
Collins amendment, which allows certain capital requirements to
be at least as high as they were in July 2010. Vice Chair
Quarles argued that Congress should consider temporarily
modifying the leverage ratio's denominator to exclude U.S.
Treasury securities and reserves held at the Federal Reserve.
Does the Fed still believe such a legislative change could be
useful to help financial institutions extend credit to needier
borrowers?
A.6. During the financial market distress of last spring, the
limitations imposed by section 171 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act complicated the
Federal bank regulators' ability to address rapidly changing
circumstances. As you know, section 171 establishes a floor on
both risk-based capital and Tier 1 leverage capital
requirements, anchoring the U.S. capital regime to the rules in
place in 2010. In the spring, there was a serious risk that the
provisions of section 171 would require a number of large banks
to turn away customer deposits and artificially restrict credit
extension at a time when many customers needed expanded support
in order to survive the shock of economic restrictions imposed
by many Governments in response to the COVID-19 outbreak. This
is because these firms were reaching their Tier 1 leverage
ratio limits as a result of the rapid expansion of the
denominator of that ratio as banks provided needed credit
support to the economy. The Federal Reserve Board temporarily
excluded central bank reserves and U.S. Treasuries from the
denominator of the supplementary leverage ratio, which
partially addressed this issue, but the ambiguous text of
section 171 makes it difficult to assess the extent of
flexibility under the provision for the Federal bank regulators
to provide temporary exemptions in emergency circumstances from
the Tier 1 leverage ratio to allow banks to respond to customer
needs.
Fortunately, the pressures on the banking system have
abated, and there is not today an immediate risk of banks being
required to restrict credit or limit deposit taking because of
their Tier 1 leverage ratio limits. Thus, the unclarity of
section 171 on this issue is not creating an urgent problem.
The COVID event is not over, however, and if the situation were
to evolve adversely over the next several months, we could see
renewed pressures of the sort we saw last spring.
Q.7. The Treasury Department and the Fed have obligated $195
billion of the $454 billion appropriated under the CARES Act to
backstop the Fed facilities. What is the Fed doing to determine
when--if at all--to allocate the remaining $259 billion of this
backstop, and if so, how?
A.7. The Federal Reserve, in conjunction with the Treasury, has
used funds appropriated under the Coronavirus Aid, Relief, and
Economic Security Act to operationalize the Primary Market
Corporate Credit Facility, the Secondary Market Credit
Facility, the Municipal Liquidity Facility, the Main Street
Program (comprised of the Main Street New Loan Facility, the
Main Street Priority Loan Facility, the Main Street Expanded
Loan Facility, the Nonprofit Organization New Loan Facility,
and the Nonprofit Organization Expanded Loan Facility), and the
Term Asset-Backed Securities Loan Facility. These facilities
support households, businesses, and State and local
governments. Together with the Treasury, we are monitoring the
implementation, use, and effectiveness of our facilities. If
needed, we will adapt or expand these programs. We will
continue to use our full range of tools to support the economy,
maintain the flow of credit to households and businesses, and
promote our maximum employment and price stability goals.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
FROM JEROME H. POWELL
Q.1. Financial wellness and access to opportunity are critical
to lifting up our underserved communities. Recently released
reports by the National Bureau of Economic Research found that
``the number of African American business owners plummeted from
1.1 million in February 2020 to 640,000 in April.'' Chair
Powell, what actions has the Fed taken to address the is
proportionate impact this pandemic has had on our Black-owned
and minority-owned businesses?
A.1. Response not received in time for publication.
Q.2. The Federal Reserve noted in the May 2020 Financial
Stability Report that the life insurance industry will be
adversely affected by a number of factors caused by the COVID-
19 economic situation, including near-zero long-term interest
rates. The COVID-19 crisis has reaffirmed the importance of
financial security products offered by life insurers. In
addition to other challenges; such as rating downgrades of bond
holdings, near-zero interest rates limit this vitally important
marketplace at a time when consumers face tremendous economic
uncertainty and seek
financial protection and security. Low interest rates also
negatively affect Americans in or nearing retirement. What can
be done to help Americans who want to do all the right things
to make sure their families have financial safety for uncertain
times like this?
A.2. Response not received in time for publication.
Q.3. Are you seeing any systemically critical fractures in the
commercial real estate market? And if so, do you think that the
Main Street will be able to help alleviate that situation,
especially when thinking of the hard downward spike in our
consumer spending and the impact on commercial locations like
shopping malls? What steps are you taking to provide assistance
to CMBS borrowers during this economic crisis? Would you
consider a new, separate lending facility to address the CMBS
crisis?
A.3. Response not received in time for publication.
Q.4. The Federal Reserve has restricted access to ratings from
the three incumbent credit-rating agencies. This action could
block access to relief to the most vulnerable, including
companies that coincidentally only have a credit-rating from
one or more nonincumbent credit-rating agencies. This
potentially undermines the regulation of credit-rating agencies
by the SEC and could lead to restricted competition in a market
where competition is sorely needed. What analysis are you
conducting, specifically, regarding inclusion of credit-rating
agencies? Will you make your analysis public? Are you also
analyzing all credit-rating agencies, including credit-rating
agencies that are already included in the facilities?
A.4. Response not received in time for publication.
------
RESPONSE TO WRITTEN QUESTION OF SENATOR ROUNDS
FROM JEROME H. POWELL
Q.1. Chair Powell, you've extensively discussed the economic
toll that the COVID-19 pandemic has taken on businesses and
communities across the United States. I agree with you that
these are challenging times that require thinking outside of
the box, but I'm troubled by proposals I've seen that would
force insurers to pay for business insurance claims in
situations in which a policyholder does not have pandemic
coverage or in which pandemics are excluded from a business
interruption policy.
Without a doubt there is a clear role for the Federal
Government to play in helping businesses to recover from the
pandemic. However, would you agree with me that forcing
insurers to pay business interruption claims outside the scope
of an insurance contract would risk the stability of our
insurance system and undermine the nature of contract law?
A.1. Insurance relies on two key elements: diversification of
risks and only a small portion of policyholders being impacted
by a given event. But, by their very nature, pandemics can
affect a large percentage of policyholders, which would
preclude diversification of risks in this area. Therefore, as a
general matter, most insurers consider pandemics to be
uninsurable and thus exclude coverage for related losses.
Because insurance is regulated State by State, not at the
Federal level, these matters will need to be resolved by State
insurance commissioners to determine what, if any, insurance
may apply.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS
FROM JEROME H. POWELL
Q.1. I understand the Main Street Program is a historic
undertaking by the Fed and that your role as a central bank
limits your ability to participate in loans to entities with
more challenging risk profiles. With several hundred billion in
unallocated dollars from Title IV of the CARES Act still
residing at Treasury, at what point does Congress need to
consider using fiscal policy tools to help significantly
distressed industries and businesses? These include hotels,
theatre owners, leisure industries, etc.?
A.1. Response not received in time for publication.
Q.2. What is the FOMC doing to make sure rates do not increase
too quickly? Will the Fed wait until core PCE is 2.5 percent or
above? Will the time that core PCE is below 2 percent be
subtracted from the time it is above 2 percent?
A.2. Response not received in time for publication.
Q.3. Many finance companies have been identified by CISA as
essential businesses. Why would the Fed leave such a vital
sector out of the Main Street Lending Program at a time that so
many Americans need assistance from financial companies to get
them through the pandemic?
A.3. Response not received in time for publication.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
FROM JEROME H. POWELL
Q.1. Can there be a robust economic recovery if childcare
centers and schools cannot reopen safely?
A.1. Response not received in time for publication.
Q.2. If there were to be a large increase in evictions and
foreclosures, how would that affect the broader economy? As
part of your answer, I would appreciate your also discussing
the economic impact on not just renters and homeowners, but
also on landlords.
A.2. Response not received in time for publication.
Q.3. Are there any material threats or risks to the financial
system or the economy that we should be aware of? If so, what
should we be doing now to address these threats?
A.3. Response not received in time for publication.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR MENENDEZ FROM JEROME H. POWELL
Q.1. The Federal Reserve's Municipal Liquidity Facility
currently only offers loans that must be paid back within 3
years. So it seems that by offering such a short term of credit
the Federal Reserve could be in a position of having to collect
from States and localities before they fully recover. All of
the private market business lending facilities offer at least
4-year lending, and the Fed extended the terms of the Main
Street Lending Facility to 5 years.
Can you please explain the rationale for limiting State and
local governments to shorter loan terms than that what the Fed
is offering private corporations?
A.1. The purpose of the Municipal Liquidity Facility (MLF) is
to enhance the liquidity of the municipal securities market by
increasing the availability of funding to eligible issuers
through purchases of their short-term notes. The 36-month
maturity limit reflects the purpose of the MLF to provide near-
term financing to eligible issuers facing severe liquidity
constraints resulting from the increase in State and local
government expenditures related to COVID-19 and the decrease
and delay of certain tax revenue, while allowing eligible
issuers access to funding over more than one budget cycle. By
addressing the cash management needs of eligible issuers, the
MLF was also intended to encourage private investors to
reengage in the municipal securities market, including across
longer maturities.
Strong evidence suggests that the announcement and
implementation of the MLF has led to significant improvement in
municipal bond market conditions. For example, interest rates
for a wide range of bond issuer types and credits, which rose
significantly in mid-March, have steadily decreased, reflecting
greater investor demand for these securities. Furthermore,
after experiencing sharp outflows from municipal bond funds,
the fund has experienced more than 20 consecutive weeks of
inflows since April. Moreover, after depressed primary-issuance
activity in March and April, issuance activity has been robust
in recent months. Conditions in the secondary market also have
improved, with transaction costs and bid-wanted amounts
returning to more normal levels.
We will continue to closely monitor conditions in the
markets for municipal securities and will evaluate whether
additional measures are needed to support the flow of credit
and liquidity to State and local governments.
Q.2. Similarly, the interest rates offered to investment-grade
municipalities isn't far below the rates the Federal Reserve is
offering to private companies, even though municipal bonds
historically have had much lower rates of default. And recently
the Federal Reserve announced that it would go a step further
and proactively buy certain corporate bonds without requiring
those companies even have to ask for Fed assistance.
Why is the Fed offering different interest rates to State
and local borrowers than to private companies that present a
similar credit risk?
A.2. Under the Federal Reserve Board's (Board) Regulation A,
which implements Section 13(3) of the Federal Reserve Act, the
interest rate on the eligible notes must be at a premium to the
market rate in normal circumstances, afford liquidity in
unusual and exigent circumstances, and encourage repayment of
the eligible notes and discourage use of the facility as the
unusual and exigent circumstances that motivated the program
recede and economic conditions normalize. Under the MLF, the
pricing methodology is based on the overnight indexed swap
(OIS) rate for a comparable maturity plus a fixed spread that
corresponds with the ratings of the eligible notes and their
relevant tax status. Our pricing methodology adjusts the
interest rate based on credit rating, maturity, and tax status
because these factors affect the pricing of similar municipal
debt in markets during normal times. The fixed spread over OIS
that applies for each credit-rating category under the MLF was
chosen because it meets the legal requirements.
Q.3. As with any crisis, the COVID-19 pandemic has laid bare
the racial inequalities in our economy. In the last
unemployment report, the Black unemployment rate was 16.8
percent and the Latino unemployment rate was 17.6, more than
four points higher than White unemployment. Between 1972 and
2019, other than during the aftermaths of recessions, the Black
unemployment rate has stayed at or above twice the White
unemployment rate.
Since the Black and Latino unemployment rate is
consistently higher than White unemployment rate, wouldn't
using the Black and Latino unemployment rate be a more accurate
metric for evaluating the health of our economy and of ensuring
maximum employment, and thereby a better reference point for
tracking the Federal Reserve's dual mandate? If not, why not?
When we see the tremendous lengths the Federal Reserve and
Treasury are going to for businesses--large, medium, and
small--what can the Federal Reserve do for Black and brown
communities?
A.3. Congress has tasked the Federal Reserve with fostering two
broad macroeconomic objectives: stable prices and maximum
sustainable employment. With respect to stable prices we have
set an objective of a 2 percent inflation rate, but the Federal
Open Market Committee (FOMC) does not have a numerical goal for
maximum employment. We believe that the sustainable level of
employment changes over time and is determined mainly by
nonmonetary factors that are outside the Federal Reserve's
control, such as evolving labor market practices, demographics,
social change, and fiscal policies. Nevertheless, FOMC
participants provide their estimates of the longer-run normal
level of the unemployment rate in the Summary of Economic
Projections, mostly recently published in September.\1\
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\1\ Summary of Economic Projections, September 2020: https://
www.federalreserve.gov/monetarypolicy/fomcprojtabl20200916.htm.
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The total unemployment rate is the most widely cited
statistic for gauging progress toward maximum employment, and
it is a useful summary statistic of the state of the labor
market. However, it provides a very incomplete picture. When
assessing the health of the labor market, FOMC members use a
wide variety of information, including the unemployment rates
and participation rates of different sub-groups of the working-
age population, as well as data on wages, job availability, and
surveys of households and firms. Some of that information is
described in the June Monetary Policy Report, which highlighted
the particularly dramatic reductions in employment of low-wage
workers, Hispanics, and Blacks from February through May.\2\
Examining the unemployment rates of
different demographic groups gives us valuable insight into the
functioning of the labor market, and examining broader groups
and a wider range of indicators gives a better understanding of
overall labor market conditions.
---------------------------------------------------------------------------
\2\ Monetary Policy Report, June 2020: https://
www.federalreserve.gov/monetarypolicy/2020-06-mpr-part1.htm#xbox1-
disparitiesinjoblossduringthep-106e806a.
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The tools at the disposal of the Federal Reserve are
effective at influencing the broad economy, affecting aggregate
demand and jobs. Creating a strong economic recovery will
improve the prospects for all households, and in particular
those households that have suffered the most from this
recession. But we do not have the tools to directly target
particular communities. In response to the current crisis, the
Federal Reserve and the FOMC have lowered interest rates and
created a number of credit facilities to ensure that credit
continues to flow to small and large businesses and to State
and local governments. These programs are designed to ensure
that firms have the capability to hire and invest as the
economy recovers. The goal of these programs is to support a
stronger recovery that will provide jobs for all households,
including Black and Hispanic communities.
Q.4. Through the CARES Act, Congress created programs to help
American businesses. The Paycheck Protection Program (PPP) to
help small businesses, the Main Street Lending for small- to
medium-sized businesses, and Title IV for larger businesses.
However, I have heard from many businesses that they do not
qualify for any of these programs.
Does the Federal Reserve have a plan to help businesses
that are too large to qualify for the PPP but do not fit the
requirements of the Main Street Lending program?
A.4. The employee size and revenue eligibility metrics under
the Main Street Lending Program (Main Street) were adopted to
enable the program to support small- and medium-sized
businesses that are unable to receive sufficient assistance
through other programs, such as the Small Business
Administration's Paycheck Protection Program, or that may not
have reached the scale needed to issue the kinds of capital
market instruments that would be purchased under the Federal
Reserve's Primary Market Corporate Credit Facility. Main Street
is designed to be broad-based in order to serve a wide-range of
industries, geographies, and business profiles. However, we
understand that not all businesses will be eligible for Main
Street due to eligibility and underwriting criteria. On October
30, the Board adjusted the terms of Main Street to better
target support to smaller businesses that employ millions of
workers and are facing continued revenue shortfalls due to the
pandemic. In particular, the minimum loan size for three Main
Street facilities available to for-profit and nonprofit
borrowers has been reduced from $250,000 to $100,000. We will
continue to monitor lending conditions broadly and consider
adjustments to Main Street terms and conditions, as
appropriate.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM JEROME H. POWELL
Q.1. Racial Inequality--Does the Federal Reserve currently
consider the impact of its monetary policy decisions on racial
inequality?
A.1. Response not received in time for publication.
Q.2. Does the Federal Reserve consider whether the actions it
takes with respect to payments, bank regulation, and the use of
its emergency authorities under section 13(3) of the Federal
Reserve Act affect different racial groups in different ways?
A.2. Response not received in time for publication.
Q.3. Following the Great Recession, White Americans recovered
from the economic damage in a faster and more robust manner
than Black and Hispanic households.\1\ Do you expect the same
trends to occur with the recovery from the current recession?
---------------------------------------------------------------------------
\1\ The Hill, ``Wealth Gap Grows After Recession as Minorities
Struggle To Recover,'' Reid Wilson, November 2, 2017, https://
thehill.com/homenews/state-watch/358433-wealth-gap-grows-after-
recession-as-minorities-struggle-to-recover.
What policy decisions can the Fed make to ensure
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that this does not happen?
What policy decisions can Congress make to ensure
that this does not happen?
A.3. Response not received in time for publication.
Q.4. Safety and Soundness of Financial System--Can you commit
that all regulatory rollbacks made in response to the COVID-19
pandemic will be temporary?
A.4. Response not received in time for publication.
Q.5. Describe how the Federal Reserve considers the uncertainty
of the economic trajectory in the coming months when making
regulatory policy decisions. Specifically, how does the Federal
Reserve reconcile the fact that ``significant uncertainty
remains about the timing and strength of the recovery,''\2\
when relaxing capital requirements and refusing to suspend bank
dividend payouts?
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\2\ Statement by Jerome H. Powell, Chair, Board of Governors of the
Federal Reserve System before the Committee on Banking, Housing, and
Urban Affairs, U.S. Senate, June 16, 2020, https://
www.banking.senate.gov/imo/media/doc/Powell%20Testimony%206-16-202.pdf.
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A.5. Response not received in time for publication.
Q.6. I submitted the following questions for the record on
leveraged lending in February for the last Humphrey-Hawkins
hearing. I understand that you are still preparing responses.
When you do so, please include any relevant developments
regarding your views of the risks in the leveraged loan market
associated with COVID-19 and the economic downturn.
The most recent report from Shared National Credit (SNC)
Review program conducted jointly by the Fed, Federal Deposit
Insurance Corporation (FDIC), and Office of the Comptroller of
the Currency (OCC), stated that ``credit risk associated with
leveraged lending remains elevated'' and ``lenders have fewer
protections and risks have increased in leveraged loan terms
through the current long period of economic expansion since the
last recession.''\3\
---------------------------------------------------------------------------
\3\ Board of Governors of the Federal Reserve System, Federal
Deposit Insurance Corporation, Office of the Comptroller of the
Currency, Board of Governors of the Federal Reserve System Federal
Deposit Insurance Corporation Office of the Comptroller of the
Currency, ``Shared National Credit Program: 1st and 3rd Quarter 2019
Reviews,'' https://www.federalreserve.gov/newsevents/pressreleases/
files/bcreg20200131a1.pdf.
Please explain how the Fed monitors and evaluates the
credit-risk management practices of a financial institution to
ensure that these procedures, some of which are untested, will
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be sufficient during an economic downturn.
Do you believe that the Interagency Guidance on
Leveraged Lending \4\ issued in 2013 is sufficient to
address the risks associated with leveraged lending,
particularly with respect to the growth of nonbank
lenders?
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\4\ Federal Reserve Board of Governors, Federal Deposit Insurance
Corporation, Office of the Comptroller of the Currency, ``Interagency
Guidance on Leveraged Lending,'' March 21, 2013, https://
www.federalreserve.gov/supervisionreg/srletters/sr1303al.pdf.
Describe how the Fed monitors compliance with that
guidance and what actions are taken when a bank is
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found to have inadequate credit risk protections.
Increasingly, the riskiest leveraged lending is
occurring outside the banking system.
Do those loans currently pose a risk to financial
stability? If not, please explain why and under what
circumstances the Fed would begin to judge them a
threat to financial stability.
Many of these nonbank lenders fall into a
regulatory gap. What tools does the Federal Government
have to mitigate the risks from the growth of leveraged
lending and the deterioration of the terms of those
loans?
Private equity firms often finance acquisitions
through highly leveraged loans. According to the
private equity industry, firms acquired in these
acquisitions now employ more than 8 million workers.\5\
In an economic downturn, what would you expect to
happen to employment in these firms?
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\5\ Office of Senator Elizabeth Warren, ``Letter from Senator
Elizabeth Warren et al., to Carmine Di Sibio, Global Chairman and Chief
Executive Office of Ernst and Young AG, November 18, 2019, https://
www.warren.senate.gov/imo/media/doc/Lener%20to%20Ernst%20and%20
Young%20re%20PE%20report.pdf.
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A.6. Response not received in time for publication.
Q.7. Fiscal Policy--Does uncertainty regarding the fiscal
policy decisions Congress will make have an impact on the
effectiveness of Federal Reserve's decision making, both with
respect to monetary policy and the recent 13(3) actions?
A.7. Response not received in time for publication.
Q.8. Do you agree with your predecessors, Chairs Ben Bernanke
and Janet Yellen,\6\ that policies that would guarantee relief
to Americans during economic downturns by automatically taking
effect based on a trigger, such as the unemployment rate, would
provide more financial security for households?
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\6\ New Democrat Coalition, ``New Democrat Coalition Chair
Statement on Rep. Beyer's Proposal To Implement Automatic Stabilizers
or Unemployment Benefits,'' May 5, 2020, https://
newdemocratcoalition.house.gov/mediacenter/press-releases/new-democrat-
coalition-chair-statement-on-rep-beyers-proposal-to-implement-
automatic-stabilizers-for-unemployment-benefits.
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A.8. Response not received in time for publication.
Q.9. Would the use of automatic stabilizers for programs like
unemployment insurance, the Federal Medical Assistance
Percentage (FMAP), and State and local aid reduce economic
uncertainty both at the household level and for the economy as
a whole?
If so, describe how that certainty would impact the
effectiveness of Federal Reserve policy?
Would these types of policies provide relief to low-income
families that the Federal Reserve's current tools are not well-
suited to deliver?
A.9. Response not received in time for publication.
Q.10. The latest ``FedListens'' report notes that many of the
newly unemployed are facing a cliff when supplementary UI runs
out: ``Many who have been laid off are benefiting now from the
one-time stimulus checks and temporary increase in unemployment
insurance (UI) benefits enacted in the CARES Act (Coronavirus
Aid, Relief, and Economic Security Act). The supplementary UI
will end this summer. At that point, it will be difficult for
many families to meet their financial commitments--rent, food,
utilities, and other payments--if the economic downturn
continues and the benefits are not renewed.''\7\
---------------------------------------------------------------------------
\7\ Federal Reserve System, ``FedListens Perspectives from the
Public,'' June 2020, https://www.federalreserve.gov/publications/files/
fedlistens-report-20200612.pdf.
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Describe how these difficulties would impact the trajectory
of our economic recovery.
Would the same type of difficulties apply for
student loan borrowers if the suspension on loan
payments is allowed to expire?
Would the same type of difficulties apply for
individuals in housing if mortgage forbearance and the
eviction moratorium are not extended?
A.10. Response not received in time for publication.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHATZ
FROM JEROME H. POWELL
Q.1. A letter released by former Fed Chairs Ben Bernanke and
Janet Yellen, along with other esteemed economists called for
additional fiscal stimulus from Congress--they say it ``must be
large, commensurate with the nearly $16 trillion nominal output
gap our economy faces over the next decade, according to CBO
estimates.''
Do you agree with this statement?
What is the bigger risk to the economy right now--
that we provide too little support for the economy or
too much?
Right now, are we in any danger of high inflation?
Have we seen any evidence in the last decade that
deficit spending sparks inflation or curbs economic
growth?
A.1. Response not received in time for publication.
Q.2. In response to a letter I sent you about suspending
capital distributions, such as the payment of dividends, you
stated the following: ``Dividends, which are part of the
livelihood of many older citizens on a fixed income, have been
limited to their existing rate.''
What data is the Federal Reserve using to make this
assertion?
Exactly how many working families and middle-class
retirees depend on big bank dividends to make ends
meet?
Is this point a consideration in the Federal
Reserve's decision on whether to suspend payment of
bank dividends?
If yes, how is that appropriate?
The purpose of equity is to be able to absorb
potential losses. If certain shareholders are so
reliant on dividends that these payouts cannot be
suspended, is common equity still functioning the way
equity should? Should the Federal Reserve instead treat
equity that is paid out in dividends like debt?
A.2. Response not received in time for publication.
Q.3. Do you see any risks to the economic recovery from the
pandemic because of the damage that will be done to millions of
people's credit reports and scores?
A.3. Response not received in time for publication.
Q.4. In a recent response to questions I asked you about the
Fed's activities on climate financial risk, you said ``we
expect to continue a number of longer-term supervisory and
financial stability projects in the year ahead, including on
climate-related risks.''
Could you elaborate on what work you plan to do in the year
ahead in terms of incorporating climate-related risks into the
Fed's supervision and financial stability work? Please provide
as much detail, including estimated timelines, as possible.
A.4. Response not received in time for publication.
Q.5. If banks were engaging in an activity that increased the
risk of instability in the financial system and the risk of
economywide disruption, does the Federal Reserve have the
authority to discourage that activity?
For example, could the Fed require banks to improve
their risk management and governance practices or issue
guidance to discourage the risky activity? Could the
Fed increase the risk-weighting of related assets?
Data from the U.S. Government and international
sources are clear that climate change will severely
damage our economy. Regulated financial institutions
are amplifying this risk by financing activities that
accelerate climate change. Is there any discussion at
the Fed of taking steps to discourage activities that
accelerate climate change on the grounds that they
increase risk to the financial system and will disrupt
the functioning of the economy in the future? If no,
why not?
A.5. Response not received in time for publication.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM JEROME H. POWELL
Q.1. How will the Federal Reserve ensure that firms
participating in the Main Street Lending Program and other
CARES programs maintain payroll?
A.1. Response not received in time for publication.
Q.2. We know that job loss, unemployment and eviction are more
likely to impact Black, Latino, and young workers who are more
likely to be low-income and work in hard-hit sectors like
hospitality, restaurants, and retail. How will the Federal
Reserve
consider the impacts on these communities when making policy
recommendations?
A.2. Response not received in time for publication.
Q.3. Local government layoffs are expected to have a
disproportionate impact on Black workers and Black communities,
including an analysis by the Center for Economic and Policy
Research which found that ``the workers who lose their jobs as
a result of layoffs in the public sector are 20 percent more
likely to be Black than workers who lose their jobs in the
private sector''.\1\
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\1\ https://cepr.net/cutting-state-and-local-budgets-is-an-attack-
on-the-countrys-black-workers/.
Given this fact, how will the Federal Reserve
ensure that its efforts to stabilize and strengthen the
economy in the crisis are especially effective at
addressing high unemployment rates for African
---------------------------------------------------------------------------
Americans employed in Government?
The Municipal Liquidity Facility (MLF) is the
Federal Reserve's program that is most targeted to
address layoffs of the local government employees that
are most likely to be Black, but the lending capacity
of the MLF only represents one-third of the total
lending capacity authorized in the CARES Act. Are there
any other Federal Reserve Programs that will
specifically provide financing to employ Black local
government workers during the economic collapse due to
the pandemic?
A.3. Response not received in time for publication.
Q.4. A recent analysis by the Center for Popular Democracy
reports that, of the 255 States, cities, and counties that have
been named by the Federal Reserve as size-eligible for the
Municipal Liquidity Facility (MLF), 97 percent are functionally
excluded because their credit rating would be likely to make
the cost of the MLF exceed the cost of the municipal bond
market.\2\ This includes the three cities and one county in my
State of Nevada, as well as the State itself, none of which
stand to benefit from the MLF because of our quality credit
rating, even though the fiscal situation facing our State and
local governments is severe and our needs are not being fully
met by the private bond market. Would the Federal Reserve
consider making the following changes to the Municipal
Liquidity Facility? Please respond with why or why not.
---------------------------------------------------------------------------
\2\ https://populardemocracy.org/news/publications/aiming-
underachieve-how-federal-reserve-lending-program-local-governments-
designed.
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Eliminate penalty-pricing model of the MLF?
Lower the interest rate to below-market pricing
equal to the Federal Funds rate?
Extend maturities to 5 years or longer?
Eliminating the requirement that States and cities
prove they cannot get private financing before they go
to the MLF?
Use its Section 14(2) authority to establish
unlimited credit lines for State and local governments?
Reduce the population threshold for eligible cities
and counties?
A.4. Response not received in time for publication.
Q.5. Please explain the Federal Reserve's rationale for
establishing terms for the Municipal Liquidity Facility that
are designed to make the MLF a lender of last resort, while
other Federal Reserve lending programs, such as the recently
revised terms for the Main Street lending Program and the
Secondary Corporate Credit Facility, are designed to
proactively encourage borrowing from those sectors.
A.5. Response not received in time for publication.
Q.6. The Federal Reserve has said that it is developing a
lending facility for nonprofits, many of which are ineligible
for CARES Act programs like PPP or the Main Street Lending
Program.
How did the Federal Reserve determine what types of
nonprofits are eligible for the Main Street Lending
Program?
Will the Federal Reserve consider loans to
nonprofits with larger staffs or who are not
501(c)(3)s? Why or why not?
When do you think the lending facility for
nonprofits will be operational and can you share what
the terms might look like?
Will you ensure that the public knows the name of
the borrower and the loan specifics for the nonprofit
lending facility as well as other lending facilities?
A.6. Response not received in time for publication.
Q.7. Will the Federal Reserve release all the comments they
received about the MSLP in an easily searchable format?
A.7. Response not received in time for publication.
Q.8. Why is the Federal Reserve purchasing investment-grade
bonds when bond rates are low--below 4 percent and the bond
market liquid? What metrics will the Federal Reserve consider
to slow or stop purchasing corporate bonds?
A.8. Response not received in time for publication.
Q.9. Why does the Federal Reserve refuse to provide firm-
specific results of the most recent stress tests?
A.9. Response not received in time for publication.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR JONES
FROM JEROME H. POWELL
Q.1. Congress tried to anticipate the coronavirus' financial
shock to workers with stimulus payments and expanded
unemployment benefits. The majority of Americans used their
stimulus checks and unemployment benefits to pay for
necessities like groceries and rent.
Congress also put in place a moratorium on evicting renters
from federally financed properties, but it expires at the end
of July. Yet, CNBC declared ``A housing `apocalypse' is
coming.'' And Alabama Legal Services said, ``the avalanche of
evictions is here, and foreclosures aren't far behind.'' Making
things worse, the country faces a second wave of the
coronavirus pandemic.
Is the Federal Reserve prepared for the economic
implications of a second wave along with evictions?
A.1. COVID-19 has taken a tragic human toll measured in terms
of lives lost and suffering inflicted. It has also inflicted a
heavy toll on the levels of activity and employment in the U.S.
economy as a direct result of the necessary public health
policies put in place to mitigate and control the spread of the
virus. In response to these economic events, the Federal
Reserve and Federal Open Market Committee (FOMC) have deployed
their entire toolkit to provide critical support to the economy
during this challenging time. That said, the prospects for the
economy will largely depend on the course of COVID-19 and the
public health policies put in place to mitigate and contain it.
If a second wave of COVID-19 unfolds this fall or winter, the
principal response will be from other Government agencies,
particularly public health authorities. The Federal Reserve and
FOMC will also employ their tools to minimize the damage to the
economy.
The Federal Reserve has been closely monitoring the
financial hardships faced by households and recognizes the
concerns that you have outlined in your question. Households
that have been evicted or that have experienced a foreclosure
face substantial costs, both financial and nonfinancial. For
example, such households have persistently lower credit access
and are more likely to experience adverse health outcomes. The
foreclosure and eviction moratoria enacted by the Federal
Housing Finance Agency have recently been extended through the
end of 2020, and the Administration also recently announced an
eviction moratorium through the end of 2020. We will continue
to closely monitor the economic conditions faced by households
as we implement our policies. By supporting the economy's
return to full strength, we will facilitate job creation and
improve the economic prospects for all households, including
renters.
Q.2. Would it benefit the economy if Congress extends
assistance to workers and small businesses to keep employees
paid and in a home?
A.2. The Coronavirus Aid, Relief, and Economic Security Act
(CARES Act), along with other enacted legislation, is providing
direct help to families, businesses, and communities. This
support can make a critical difference in helping both families
and businesses in a time of need, as well as in limiting long-
lasting damage to our economy. For instance, the Paycheck
Protection Program (PPP) has been helpful in meeting the
immediate credit needs of many small businesses and in
supporting the retention of their employees. In order to
bolster the effectiveness of this program, the Federal Reserve
launched the Paycheck Protection Program Liquidity Facility
(PPPLF), which supplies liquidity to lenders backed by their
PPP loans to small businesses. In addition, the CARES Act
helped keep many people in their homes by providing up to a
year of forbearance for Government-backed mortgages and by
expanding unemployment insurance, allowing many households to
continuing making rent or mortgage payments. Looking ahead,
however, it is the responsibility of the Congress and the
Administration to decide on the appropriate size and
composition of any additional fiscal policy actions.
Q.3. Black Businesses Impacted by Coronavirus--Chairman Powell,
you have been vocal regarding the stark difference the pandemic
is having on minority workers. The latest data shows that the
Black unemployment rate is 16.7 percent and Hispanic
unemployment at 18.9 percent, while the White unemployment rate
is 14.2 percent. Last week, Bloomberg reported that African
American owned businesses declined by 41 percent from February
to April, representing 440,000 businesses. This is a stark
contrast to 17 percent drop of White owners.
I've heard from folks in Alabama's Black Belt that they're
concerned about the pandemic impacts, but they'd like to make
sure businesses in their communities are supported. Congress
passed the CARES Act to help small businesses weather the
pandemic--yet these numbers for minorities are still
distressingly high.
What are the long-term implications of losing a business
during a pandemic? Can it discourage entrepreneurs in the
future? What is the Fed doing to preserve Black-owned
businesses?
A.3. COVID-19-related business closures can exact a
considerable long-run toll on the economy, partly by idling
productive capital, partly by discouraging innovative
entrepreneurs, and partly by leaving dedicated employees out of
work. The direct and indirect impact of the virus on
individuals and their families cannot be overstated.
Recognizing these implications, the Federal Reserve has
initiated a number of responses within its statutory and
regulatory authorities. To specify just a few examples, the
Federal Reserve has done the following:
Quickly and aggressively adopted a highly
accommodative stance of monetary policy, including
near-zero short-term interest rates and a balance sheet
expansion to sustain smooth market functioning and help
foster accommodative financial conditions, thereby
supporting the flow of credit to households and
businesses.
Established the PPPLF to bolster the effectiveness
of the Small Business Administration's PPP by supplying
liquidity to participating financial institutions
through term financing backed by PPP loans to small
businesses.
Established the Main Street Lending Program (Main
Street) to support access to credit for small- and
medium-sized businesses located all across the country
that employ millions of dedicated people. (Importantly,
Main Street loans to small- and medium-sized businesses
have principal payments deferred for 2 years and
interest payments deferred for 1 year, providing
businesses relief during the acute phase of COVID-19
and over the expected path to economic recovery.)
Encouraged the banks we supervise to work
effectively with their borrowers to postpone loan
payments and make other credit adjustments to help
borrowers navigate these difficult economic
circumstances in a prudent and empathetic manner.
Q.4. Municipal Liquidity Facility/State and Local Funding--
Rural communities in Alabama have been hit hard by the
coronavirus. Providing resources to rural areas and their
Governments is one way to help communities of color fight back
against this deadly virus. The Municipal Liquidity Facility
provides capital to Governments. Yet, only one county in my
State, Jefferson County, qualifies. And none of the cities in
Alabama have a population in of 250,000. This Fed facility can
only work for rural communities if smaller governments are
eligible.
Would you support a funding stream for micropolitan areas
and small towns with populations below 50,000?
A.4. Under the current Municipal Liquidity Facility (MLF) term
sheet, in addition to Jefferson County, the Governor of Alabama
can designate the most populous city or second-most populous
county in Alabama to participate in the MLF and can designate
up to two revenue bond issuers located in Alabama to
participate in the MLF.\1\ In addition, the terms of the MLF
allow the State of Alabama to borrow directly from the MLF and
downstream such funds to any of its political subdivisions and
other governmental entities. We will continue to closely
monitor conditions in the markets for municipal securities and
will evaluate whether additional measures are needed to support
the flow of credit and liquidity to State and local
governments.
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\1\ The MLF term sheet, effective June 3, 2020:
www.federalreserve.gov/newsevents/pressreleases/files/
monetary20200603a1.pdf.
Q.5. Small-Dollar Lending and Payday Lenders--My colleagues on
this Committee and I have repeatedly criticized payday lenders
and the CFPB's recent actions to repeal the rule. The Fed's own
data reports that 40 percent of Americans don't have $400 in
the bank for emergency expenses. When workers are in a bind--
like the current pandemic--they need access to quick capital
not debt traps.
Last month, the Federal Reserve published a joint statement
with the CFPB, FDIC, NCUA, and the OCC to encourage the
respective entities to implement responsible small-dollar
lending.
Have you received feedback from financial institutions on
these lending principles?
A.5. On March 26, 2020, the Federal Reserve, with the Consumer
Financial Protection Bureau, Federal Deposit Insurance
Corporation (FDIC), National Credit Union Administration
(NCUA), and Office of the Comptroller of the Currency (OCC),
issued a statement encouraging banks, savings associations, and
credit unions to offer responsible small-dollar loans to
consumers and small businesses affected by COVID-19.\2\ As
discussed in the statement, responsibly offered small-dollar
loans can help consumers meet their credit needs due to
temporary cash-flow imbalances, unexpected expenses, or income
shortfalls during periods of economic stress or disaster
recoveries.
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\2\ https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20200326a.htm.
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In May 2020, the Federal Reserve, FDIC, NCUA, and OCC
published a more in depth document, the Interagency Lending
Principles for Offering Responsible Small-Dollar Loans
(Principles).\3\ Both statements were limited in scope to
banks, savings associations, and credit unions.
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\3\ https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20200520a.htm.
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The Federal Reserve staff have heard from representatives
of the industry that financial institutions have generally
appreciated more clarity regarding the agencies' views on
responsible small-dollar lending programs.\4\
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\4\ For example, see https://www.consumerbankers.com/cba-media-
center/media-releases/cba-statement-interagency-small-dollar-guidance.
Q.6. What is the Federal Reserve's goal for consumers when
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encouraging more small-dollar lending?
A.6. The Federal Reserve has long encouraged banks to respond
to customers' small-dollar credit needs in a responsible
manner. These loans can play an important role in helping
customers meet unexpected expenses or shortfalls during periods
of economic stress. As noted in the previous response, the
Principles were issued in May.\5\ The Principles are designed
to encourage banks to develop responsible small-dollar lending
programs that promote successful repayment outcomes and
minimize cycles of debt.
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\5\ https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20200520a.htm.
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The Principles address product design (structure and
pricing), underwriting, marketing, and servicing. In addition,
the Principles note that all loan products must comply with
applicable statutes and regulations, including consumer
protection laws.
Q.7. Main Street Lending Facility--I was pleased to learn that
the Federal Reserve's Main Street Lending Program will support
lending to small- and medium-sized businesses that were in
sound financial condition before the onset of the COVID-19
pandemic.
On June 15, 2020, the Fed announced that financial
institutions could start registering to participate in the
program. Businesses will soon get the opportunity to apply for
a loan through a bank as long as they have fewer than 15,000
workers or $5 billion in annual revenues in 2019 or less. Banks
can then sell 95 percent of the loan to the Fed, transferring
most of the risk to the central bank.
Yet, there are industries, like the motor vehicle parts
sector that employs 41,000 in Alabama, facing a severe
liquidity crisis after being closed and still need financing.
It is critical that these jobs are not lost to the coronavirus.
Has the Federal Reserve considered setting aside capital from
the Main Street Lending Program to create a fund that provides
short-term lending assistance to medium-sized companies like
the motor vehicle parts sector?
A.7. Consistent with Section 13(3) of the Federal Reserve Act,
Main Street has broad-based eligibility requirements and does
not target lending to any particular sector of the economy. The
overall objective of Main Street is to promote lending to
businesses that were in sound financial condition prior to
COVID-19 and to meet the needs of a broad range of eligible
businesses across every sector of the economy. Specific
eligibility requirements and terms for each the Main Street
facilities can be found on the facility term sheets.\6\ The
Federal Reserve and the U.S. Department of the Treasury have
assessed the size of the program to be appropriate in light of
the current financial strains facing eligible borrowers, and
believe that there is sufficient capacity to support lending to
eligible
borrowers. On October 30, the Federal Reserve Board adjusted
the terms of Main Street to better target support to smaller
businesses that employ millions of workers and are facing
continued revenue shortfalls due to the pandemic. In
particular, the minimum loan size for three Main Street
facilities available to for-profit and nonprofit borrowers has
been reduced from $250,000 to $100,000. For more information on
Main Street, please see www.federal
reserve.gov/monetarypolicy/mainstreetlending.htm.
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\6\ For the Main Street New Loan Facility, see
www.federalreserve.gov/newsevents/pressreleases/files/
monetary20200728a3.pdf. For the Main Street Priority Loan Facility, see
www.federalreserve.gov/newsevents/pressreleases/files/
monetary20200728a2.pdf. For the Main Street Expanded Loan Facility, see
www.federalreserve.gov/newsevents/pressreleases/files/
monetary20200728a5.pdf.
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The Federal Reserve's Primary Market Corporate Credit
Facility (PMCCF) extends credit to CARES Act-eligible
businesses without imposing restrictions related to revenues or
number of employees and may be available to the motor vehicles
parts companies noted in your question. As with Main Street,
borrowers under the PMCCF must meet facility-specific
eligibility criteria. As of June 29, 2020, the PMCCF has been
operational and available for use. For more information on the
PMCCF, please see www.newyork
fed.org/markets/primary-market-corporate-credit-facility.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SMITH
FROM JEROME H. POWELL
Q.1. It is my goal to expand opportunities in agriculture for
everyone, and to ensure that all farming communities in
Minnesota can access USDA resources. In the Farm Bill, I pushed
for the inclusion of a provision that would request a GAO study
to evaluate access to credit and outreach to traditionally
underserved farming communities, like the Hmong, Latino, and
Native communities in my State. The study came out in July
2019. If you have not read the study, you should. The study
found that traditionally underserved farming communities face
significant barriers to receiving private agricultural credit.
What can the Federal Reserve do to ensure that these
communities are aware of all their credit options when trying
to operate their farms.
Have you visited with Native farmers, Hmong farmers, and
Latino farmers in Minnesota to hear about their experiences
firsthand?
A.1. Response not received in time for publication.
Q.2. During the 1980s farm crisis, we lost a generation of
young farmers and farmers of color. It was a perfect storm of a
down economy and high levels of farm debt. Due to the combined
impacts of the COVID-19 pandemic, natural disasters, and
haphazard trade policy, farm debt is increasing rapidly. In
real 2020 dollars, 1981 farm debt peaked at $440 billion.
Today, total farm debt hovers around $425 billion. Chair
Powell, what remedies would you suggest to keep young farmers
and farmers of color on their farms, driving rural economic
activity, in the face of high levels of debt?
A.2. Response not received in time for publication.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
FROM JEROME H. POWELL
Q.1. Does the Federal Reserve plan to expand its Main Street
Lending Program (MSLP) to allow regulated vehicle finance
companies and consumer finance business as eligible businesses?
Please elaborate on the Federal Reserve's current thinking on
this matter.
A.1. Response not received in time for publication.
Q.2. Is the Federal Reserve seeing similar data regarding
unemployment and declines in consumer spending in the travel
and hospitality sectors? Is there more that the Federal Reserve
can do within its existing authority to help these sectors?
A.2. Response not received in time for publication.
Q.3. The Federal Reserve has said that it's developing a
lending facility for nonprofits, many of which are ineligible
for CARES Act programs like the Paycheck Protection Program
(PPP). When do you think this lending facility will be
operational? Can you share what the terms might look like?
A.3. Response not received in time for publication.
Q.4. Does the Federal Reserve have a plan to help businesses
that are too large to qualify for the PPP but do not fit the
requirements of the MSLP?
A.4. Response not received in time for publication.
Q.5. At the June 16 Senate Banking Hearing, Senator John
Kennedy asked if the Federal Reserve was expanding the credit
ratings it was willing to accept from issuers beyond the big
three ratings agencies. You replied that the Federal Reserve
had ``admitted three additional ones.'' You were subsequently
asked a similar question by Congressman Brad Sherman on June 17
during your appearance before the House Financial Services
Committee, where you clarified that the Federal Reserve was
only accepting ratings from the three additional agencies if an
issuer also had a rating from one of the incumbent ratings
agencies. This led Rep. Sherman to state, ``So you haven't
really given real equality to the six [rating agencies] that
you have decided.'' How is the Federal Reserve's decision to
include the ratings from three additional rating agencies an
expansion of the acceptable credit ratings when the Federal
Reserve still requires an issuer to have an additional rating
from one of the top three agencies? Please provide a specific
rationale for this bifurcated process that requires issuers who
want to use a credit rating from DBRS, Kroll, and AM Best to
also have a crediting rating from one of the top three
agencies.
A.5. Response not received in time for publication.
Additional Material Supplied for the Record
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT OF THE CREDIT UNION NATIONAL ASSOCIATION
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]