    [House Hearing, 119 Congress]
    [From the U.S. Government Publishing Office]

               EXAMINING MONETARY POLICY AND ECONOMIC OPPORTUNITY

    =======================================================================

                                    HEARING

                                   before the

                    TASK FORCE ON MONETARY POLICY, TREASURY
                   MARKET RESILIENCE, AND ECONOMIC PROSPERITY

                                     of the

                        COMMITTEE ON FINANCIAL SERVICES
                         U.S. HOUSE OF REPRESENTATIVES

                        ONE HUNDRED NINETEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 March 4, 2025

                                   __________

                                Serial No. 119-7

           Printed for the use of the Committee on Financial Services

           [GRAPHIC(S) NOT AVAILANLE IN TIFF FORMAT

                                www.govinfo.gov

                  U.S. GOVERNMENT PUBLISHING OFFICE
     59-639 PDF            WASHINGTON : 2025

                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        FRENCH HILL, Arkansas, Chairman

    BILL HUIZENGA, Michigan, Vice        MAXINE WATERS, California, Ranking
        Chairman                             Member
    FRANK D. LUCAS, Oklahoma             SYLVIA R. GARCIA, Texas, Vice
    PETE SESSIONS, Texas                     Ranking Member
    ANN WAGNER, Missouri                 NYDIA M. VELAZQUEZ, New York
    ANDY BARR, Kentucky                  BRAD SHERMAN, California
    ROGER WILLIAMS, Texas                GREGORY W. MEEKS, New York
    TOM EMMER, Minnesota                 DAVID SCOTT, Georgia
    BARRY LOUDERMILK, Georgia            STEPHEN F. LYNCH, Massachusetts
    WARREN DAVIDSON, Ohio                AL GREEN, Texas
    JOHN W. ROSE, Tennessee              EMANUEL CLEAVER, Missouri
    BRYAN STEIL, Wisconsin               JAMES A. HIMES, Connecticut
    WILLIAM R. TIMMONS, IV, South        BILL FOSTER, Illinois
        Carolina                         JOYCE BEATTY, Ohio
    MARLIN STUTZMAN, Indiana             JUAN VARGAS, California
    RALPH NORMAN, South Carolina         JOSH GOTTHEIMER, New Jersey
    DANIEL MEUSER, Pennsylvania          VICENTE GONZALEZ, Texas
    YOUNG KIM, California                SEAN CASTEN, Illinois
    BYRON DONALDS, Florida               AYANNA PRESSLEY, Massachusetts
    ANDREW R. GARBARINO, New York        RASHIDA TLAIB, Michigan
    SCOTT FITZGERALD, Wisconsin          RITCHIE TORRES, New York
    MIKE FLOOD, Nebraska                 NIKEMA WILLIAMS, Georgia
    MICHAEL LAWLER, New York             BRITTANY PETTERSEN, Colorado
    MONICA DE LA CRUZ, Texas             CLEO FIELDS, Louisiana
    ANDREW OGLES, Tennessee              JANELLE BYNUM, Oregon
    ZACHARY NUNN, Iowa                   SAM LICCARDO, California
    LISA McCLAIN, Michigan
    MARIA SALAZAR, Florida
    TROY DOWNING, Montana
    MIKE HARIDOPOLOS, Florida
    TIM MOORE, North Carolina

                          Ben Johnson, Staff Director

                                     ------

    TASK FORCE ON MONETARY POLICY, TREASURY MARKET RESILIENCE, AND ECONOMIC
                                   PROSPERITY

                       FRANK D. LUCAS, Oklahoma, Chairman

    BILL HUIZENGA, Michigan              JUAN VARGAS, California, Ranking
    ANDY BARR, Kentucky                      Member
    MARLIN STUTZMAN, Indiana             BRAD SHERMAN, California
    SCOTT FITZGERALD, Wisconsin          JOSH GOTTHEIMER, New Jersey
    MIKE FLOOD, Nebraska                 SEAN CASTEN, Illinois
    MONICA DE LA CRUZ, Texas             CLEO FIELDS, Louisiana
    TROY DOWNING, Montana                JANELLE BYNUM, Oregon
                             C  O  N  T  E  N  T  S

                                  ----------

                             Tuesday, March 4, 2025
                               OPENING STATEMENTS

                                                                       Page
    Hon. Frank Lucas, Chairman of the Task Force on Monetary Policy,
      Treasury Market Resilience, and Economic Prosperity, a U.S.
      Representative from Oklahoma...................................     1
    Hon. Juan Vargas, Ranking Member of the Task Force on Monetary
      Policy, Treasury Market Resilience, and Economic Prosperity, a
      U.S. Representative from California............................     2

                                   STATEMENTS

    Hon. French Hill, Chairman of the Committee on Financial
      Services, a U.S. Representative from Arkansas..................     4
    Hon. Maxine Waters, Ranking Member of the Committee on Financial
      Services, a U.S. Representative from California................    40
    .................................................................

                                   WITNESSES

    Dr. Donald Kohn, Senior Fellow, Brookings Institution............     5
        Prepared Statement...........................................     7
    Mr. Joseph Wang, Principle, Monetary Macro LLC...................    13
        Prepared Statement...........................................    15
    Dr. Norbert J. Michel, Vice President and Director, Center for
      Monetary and Financial Alternatives, Cato Institute............    18
        Prepared Statement...........................................    20
    Mr. Michael Konczal, Senior Director of Policy and Research,
      Economic Security Project......................................    32
        Prepared Statement...........................................    35

                                    APPENDIX

                       MATERIALS SUBMITTED FOR THE RECORD

    Hon.Maxine Waters:...............................................
        Jason Furman's op-ed: No Delusion: Bidenomics Wasn't Perfect,
          But It Did Many Great Things...............................    66
        Has U.S. Infrastructure Investment Really Declined...........    87
        Employ America...............................................   100

                     RESPONSES TO QUESTIONS FOR THE RECORD

    Written responses to questions for the record from Representative
      French Hill
        Dr. Donald Kohn..............................................   116
        Dr. Norbert J. Michel........................................   118
    Written responses to questions for the record from Representative
      Maxine Waters
        Dr. Donald Kohn..............................................   119
        Mr. Joseph Wang..............................................   120
    Written responses to questions for the record from Representative
      Monica De La Cruz
        Dr. Donald Kohn..............................................   121
        Mr. Joseph Wang..............................................   122
    Written responses to questions for the record from Representative
      Troy Downing
        Dr. Donald Kohn..............................................   124

               EXAMINING MONETARY POLICY AND ECONOMIC OPPORTUNITY

                                  ----------

                             Tuesday, March 4, 2025

                 U.S. House of Representatives,
                         Task Force on Monetary Policy,
                        Treasury Market Resilience, and
                           Economic Prosperity,
                               Committee on Financial Services,
                                                        Washington, DC.

        The Task Force met, pursuant to notice, at 10:04 a.m., in
    room 2128, Rayburn House Office Building, Hon. Frank D. Lucas
    [Chairman of the Task Force] presiding.
        Present: Lucas, Hill, Huizenga, Barr, Stutzman, Fitzgerald,
    Flood, Downing, Vargas, Waters, Sherman, Casten, Fields, and
    Bynum.
        Chairman Lucas. The Task Force on Monetary Policy, Treasury
    Market Resilience, and Economic Prosperity will come to order.
        Without objection, the chair is authorized to declare a
    recess of the Committee at any time.
        This hearing is entitled, ``Examining Monetary Policy and
    Economic Opportunity.''
        Without objection, all members will have 5 legislative days
    in which to submit extraneous material to the chair for
    inclusion in the record.
        I now recognize myself for 4 minutes for an opening
    statement.

     OPENING STATMENT OF HON. FRANK D. LUCAS, CHAIRMAN OF THE TASK
       FORCE ON MONETARY POLICY, TREASURY MARKET RESILIENCE, AND
        ECONOMIC PROSPERITY, A U.S. REPRESENTATIVE FROM OKLAHOMA

        Chairman Lucas. Welcome to the first hearing of the Task
    Force on Monetary Policy, Treasury Market Resilience, and
    Economic Prosperity. Our task force is charged with examining
    issues related to monetary policy, the Federal Reserve Act, and
    how economic growth and price stability affect the financial
    well-being of all Americans, all of which we will discuss
    today.
        The task force will also focus on the fundamental role that
    the U.S. Treasury debt plays in our economy and the resilience
    of the Treasury market.
        It is impossible to overstate the importance of a healthy
    Treasury market, and we will pay special attention to the
    recent stresses the market has faced and how to increase
    liquidity and stability for the market and its participants.
        Today, we will focus on monetary policy, how the Federal
    Reserve System (Fed) controls the money supply and interest
    rates, and why it matters to everyone in this country.
        The Fed uses interest rates, its open market operations,
    its reserve requirements, and a whole host of policy tools to
    stimulate the economy or to cool it down.
        While our constituents may not monitor the actions of the
    Fed on a daily basis; they all feel the squeeze when inflation
    runs rampant and their dollar does not go as far at the grocery
    store or at the gas pump. That is why it is important that the
    Fed gets it right.
        Since the first central bank in 1791 to the Federal Reserve
    System we have today, the bank has evolved as the country has.
    Three recent changes are worthy of focus today.
        First, the Fed's move to the ample reserve regime forced
    the Fed to use administered rates rather than the supply of
    bank reserves to steer policy.
        Second, the growth of the Fed's balance sheet. The four
    rounds of quantitative easing over the past 20 years have
    expanded the Fed's balance sheet, peaking at nearly $9 trillion
    in 2022. We will hear about this today as the Fed now engages
    in quantitative tightening.
        Third, the Fed's move in 2020 to their flexible average
    inflation targeting strategy, or FAIT. This strategy tolerates
    high inflation after periods of low inflation. I hope to
    discuss the effectiveness of this strategy considering the
    stubbornly high inflation we have dealt with since FAIT was
    announced.
        Finally, Dodd-Frank's considerable expansion of the Fed's
    regulatory and supervisory authority has exposed the Fed to
    more political pressures, threatening its monetary policy
    independence. The Fed enjoys broad independence in its
    implementation of monetary policy, but it is not unaccountable
    to Congress for its actions, particularly as we see the
    remarkable changes I have described.
        Our conversation today will be insightful to the Fed as it
    is wrapping up its 5-year review of its framework.
        The Federal Reserve system is an ongoing project. Congress'
    attention to this work is crucial as we know the actions of the
    Fed indirectly impact the economic well-being of all Americans.
        I want to thank Chairman Hill for creating this task force
    and Ranking Member Vargas for leading with me, and I look
    forward to our work together.
        With that, I yield back.
        The chair now recognizes the ranking member of the
    subcommittee, Mr. Vargas of California, for 4 minutes for an
    opening statement.

      OPENING STATMENT OF HON. JUAN VARGAS, RANKING MEMBER OF THE
    TASK FORCE ON MONETARY POLICY, TREASURY MARKET RESILIENCE, AND
       ECONOMIC PROSPERITY, A U.S. REPRESENTATIVE FROM CALIFORNIA

        Mr. Vargas. Good morning, Mr. Chairman, and thank you very
    much for introducing me.
        Again, good morning to everybody else.
        Let me congratulate you on being named as chairman of this
    task force. As you know, I have a great deal of respect for
    you. When I first came to Congress 13 years ago, I was on the
    Agriculture Committee, which you chaired, and I thought that
    you treated everyone evenhandedly, straightforward, and
    honestly. I appreciate that. I look forward to working with you
    and together on issues where we find common ground.
        Through this task force, I look forward to discussing
    important issues that affect our constituents and the entire
    economy, including the Federal Reserve's monetary policy
    framework review, the supplemental leverage ratio, and the
    debate between rule-based and discretionary monetary policy.
        I also plan to defend my core principles, and I know you
    will. Two of those core principles are my belief in the
    importance of the Fed's dual mandate and the need to protect
    the Fed's independence.
        The importance, first, of the dual mandate. As members of
    this task force, we are well aware that the Fed's dual mandate
    was established in 1977. The amendments to the Federal Reserve
    Act passed that year tasked the Fed with two important goals to
    create economic conditions that achieve both maximum employment
    and stable prices.
        The inclusion of employment was no accident. The addition
    was thanks, in large part, to the work of Coretta Scott King
    and many in the labor movement. Some have argued that the Fed's
    reserve dual mandate has been a distraction from solely
    focusing on price stability, but maximum employment should not
    be on the chopping block.
        When Congress charged the Fed with this dual mandate; it
    recognized that having access to a job is a signal of a healthy
    economy. Preventing the Fed from addressing employment would
    misunderstand the key way that many Americans experience the
    economy and would also disproportionately hurt working-class
    people.
        Low employment harms Americans who are already living on
    the edge working multiple jobs and surviving paycheck to
    paycheck.
        Chairman Powell said that the dual mandate has ``served us
    well'' and that he ``does not see the case'' to move forward
    with a single mandate of price stability. I agree. As the
    ranking member, I intend to continue to advocate for the
    importance of preserving the Fed's dual mandate.
        Now, with respect to the independence of the Fed, another
    area where the Fed has come under increased scrutiny is its
    independence. The research is clear that the central banks
    around the world function at their best when they are allowed
    to operate independently.
        Elected officials mostly operate on a short-term horizon,
    responding to short-term political incentives, but the Fed must
    make decisions considering a much longer time horizon. That is
    why it is critical that monetary policy be insulated from
    external political pressure.
        The President's recent executive order requiring
    independent agencies to submit proposed regulatory actions,
    strategic plans, and priorities to the White House for review
    only makes this issue more important.
        It is also worrisome that now Treasury Secretary Scott
    Bessent has floated the idea of creating a shadow Fed Chair
    before Chairman Powell's term expires in May 2026. We in
    Congress, regardless of political party, must continue to
    strongly defend the independence of the Fed.
        The new administration has brought in a wave of
    uncertainty. Whether it is tariffs or the future independence
    of the Fed, our constituents are increasingly unsure of their
    economic future. We see it in the recent national consumer
    sentiment numbers, which have shown that consumer confidence
    fell by seven points in the most recent Conference Board's
    Consumer Confidence Survey.
        I am hearing from businesses in my district in San Diego
    who are increasingly concerned about the impact that tariffs
    and trade wars will have on the economy.
        I hope that this task force will provide a forum for
    substantive debate and collaboration on these issues that
    impact our constituents. I am looking forward to it.
        With that, I yield back, Mr. Chair.
        Chairman Lucas. The gentleman yields back. The chair
    appreciates the very thoughtful discussion.
        With that, the chair now recognizes the chairman of the
    full committee, Mr. Hill, for a minute.

      STATEMENT OF HON. FRENCH HILL, CHAIRMAN OF THE COMMITTEE ON
        FINANCIAL SERVICES, A U.S. REPRESENTATIVE FROM ARKANSAS

        Chairman Hill. Thank you, Chairman Lucas.
        The Federal Reserve's dominance affects everyday family,
    business, and worker decisions in our country, and those Fed
    decisions, whether it is the cost of a mortgage or the return
    on savings or the stability of the economy, it is at the
    central--plays a central role.
        Many Americans who were not alive during the 1970s or early
    1980s quickly learned just how devastating inflation can be at
    the pump or at the grocery store with this 40-year record high
    inflation under President Biden. That is why the new Monetary
    Policy Task Force led by Chairman Lucas is holding its first
    hearing to examine how monetary policy shapes economic
    opportunity and what that means for the future of American
    prosperity.
        To begin this work, we must first establish a solid
    foundation. Today will be a level set for our members so that
    we can do deeper dives during this Congress. We will start with
    the fundamentals, including the Fed's monetary policy tools,
    decision making, balance sheet policy, and U.S. Treasury
    markets. We will hear how these policies have real consequences
    for investment, wages, and even the Federal debt where rising
    debt levels and interest costs pose a growing risk to our
    fiscal health.
        I look forward to our witnesses' testimony today.
        I yield back, Mr. Chairman.
        Chairman Lucas. The gentleman yields back.
        The chair now, today welcomes the testimony of Dr. Donald
    Kohn, who is currently a Senior Fellow at the Economic Studies
    at the Brookings Institute. He spent 40 years at the Federal
    Reserve system, serving previously as Vice Chairman of the
    Board of Governors.
        Mr. Joseph Wang is currently the Chief Investment Officer
    at the Monetary Macro LLC, a registered investment advisor.
    From 2016 to 2021, he was a Senior Trader on the Open Market
    Desk of the Federal Reserve Bank of New York.
        Norbert J. Michel is currently the Vice President and
    Director of Cato Institute Center for Monetary and Financial
    Alternatives.
        Michael Konczal is the Senior Director of Policy and
    Research for the Economic Security Project.
        We thank each of you for taking the time to be here, and
    each of you will be recognized for 5 minutes to give an oral
    presentation of your testimony.
        Without objection, your written statements will be made a
    part of the record.
        Dr. Kohn, you are now recognized for 5 minutes for your
    oral comments.

        STATEMENT OF DR. DONALD KOHN, SENIOR FELLOW, BROOKINGS
                              INSTITUTION

        Dr. Kohn. Thank you, Mr. chairman. It is a pleasure to be
    back in front of this committee.
        Mr. Hill told me I had not aged a day in the 10 years since
    I was last here. I sometimes do not feel that way, but it is
    nice. Thank you for the compliment.
        This task force should enhance Congress' ability to oversee
    monetary policy. Congress has set goals for the Federal Reserve
    in the conduct of policy maximum employment.
        Chairman Lucas. Would the gentleman redirect his microphone
    a little more in the direct--please.
        Dr. Kohn. All right. Thank you.
        Congress has set goals for the Federal Reserve in the
    conduct of policy, the dual mandate, maximum employment, stable
    prices. It has also very wisely allowed the Fed to determine
    the best policies to meet those goals without direct
    interference from the political process.
        That is because history shows that political pressures are
    invariably on one side--for lower interest rates, which people
    facing election see as boosting jobs. Giving into those
    pressures results subsequently in costly inflation.
        With a high degree of policy independence, however, comes
    responsibility--of the Federal Reserve to clearly explain what
    it is doing and why, and of the Congress to examine those
    explanations. Your staff suggested that I might be helpful in
    this regard by giving an overview of how monetary policy works.
        The path from policy choices on Constitution Avenue to
    prosperity on Main Street is a long and winding one. Policy
    decisions start by asking how the economy is likely to evolve
    over coming quarters relative to these goals, and if it is not
    likely to achieve the goals soon, how policy should be altered.
        Since 2012, the Fed's Federal Open Market Committee has
    issued a statement on longer run goals and monetary policy
    strategy that defines the goals and gives some very general
    thoughts on the approach to achieving them.
        In 2020, in response to a prolonged period of very low
    interest rates and persistent shortfalls of inflation, the Fed
    altered its strategy. The intention was mainly to make sure
    that inflation was high enough to average 2 percent over time
    which, in turn, would keep interest rates high enough to give
    the Fed sufficient room to lower interest rates should an
    adverse shock hit the economy.
        Obviously, the post-coronavirus disease (COVID) recovery
    presented the Fed with a very different environment, and it is
    now reviewing its statement. Its strategy must be robust to a
    variety of shocks and stresses.
        Adjusting an overnight interest rate is the main instrument
    the Fed uses to make progress toward the goals. That rate does
    not directly affect prices or employment; rather, it works by
    influencing prices in financial markets, which, in turn, induce
    changes in spending and the balance of aggregate demand and
    aggregate supply.
        Note how indirect this process is. Mr. Chairman, you used
    the term ``indirect,'' and that is exactly right. The effects
    of a policy on objectives will depend on how financial markets
    react to actual and expected policy and then how households and
    businesses respond to changes in financial markets.
        Moreover, financial conditions and the balance of aggregate
    supply and demand are affected by many things, in addition to
    monetary policy.
        In considering these shocks to financial conditions in the
    economy, the Fed needs to differentiate between those that
    happen on the demand side of the economy and those that happen
    on the supply side of the economy.
        Monetary policy is well suited to offsetting demand side
    shocks, but it cannot offset an adverse supply shock--the rise
    in the price of a good, say, from a reduction in supply, as we
    experienced in the 1970's in the petroleum markets, or an
    increase in taxes on that good.
        Advice for policymakers in this situation is to avoid
    trying to offset these effects because trying to might actually
    worsen the outcomes. Policymakers need to be very attentive to
    the second-round effects, the follow-on effects of these
    initial supply shocks.
        Expectations of prices and interest rates have played a
    critical role in our story. Expectations anchored around the
    Fed's targeted 2 percent are necessary to achieve that target.
    Expectations about future policy have important effects on
    financial conditions and, hence, on achieving objectives.
        The better people understand Fed policy and intentions, the
    more stabilizing market responses to policy and to unexpected
    economic developments are likely to be. That is why the Fed has
    become much more transparent over time about why it is making
    its decisions and its outlook.
        I hope my testimony has provided a framework for discussing
    monetary policy. I am happy to take your questions.

        [The prepared statement of Dr. Kohn follows:]

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        [GRAPHIC] [TIFF OMITTED] T9639.005

        [GRAPHIC] [TIFF OMITTED] T9639.006

        Chairman Lucas. Thank you, Dr. Kohn.
        Mr. Wang, you are now recognized for 5 minutes for your
    oral remarks.

        STATEMENT OF JOSEPH WANG, PRINCIPAL, MONETARY MACRO LLC

        Mr. Wang. Good morning, Chairman Lucas, Ranking Member
    Vargas, members of the committee. Thank you for inviting me. I
    appreciate the opportunity to testify today.
        My name is Joseph Wang, and my work focuses on
    understanding the transmission and impact of monetary policy.
        The ultimate effect of monetary policy depends on many
    variables outside of the Fed's control, so setting policy is a
    difficult job whose success rests upon good judgment. The
    significant discretion accorded to the Fed makes oversight
    especially important, but the complexity of the subject makes
    its actions difficult to evaluate. An understanding of the
    tools within the Fed's grasp and corresponding tradeoffs in
    their use can be helpful in that regard.
        Before discussing their tools, I will note the Fed's
    significant influence over the economy stems, in part, from the
    ambiguity within their dual mandate of price stability and full
    employment. While price stability is a mandate given by
    Congress, the current 2 percent inflation target was decided by
    the Fed itself. The level of unemployment rate considered to be
    full employment is also decided by the Fed itself. Where they
    decide to set these goalposts have wide ranging impacts on
    everyday people.
        Generally speaking, the two mandates call for conflicting
    policy prescriptions. The balance between the two mandates is a
    judgment left to the Fed, as is the appropriate timeline to
    meet their goals. The Fed's discretions to set its own goals,
    to balance these goals, and to set timelines to achieve them
    makes oversight difficult.
        Moving on to the Federal Reserve's tools. The Fed's primary
    monetary policy tools are interest rates and balance sheet
    policy. Regulatory policy is an additional tool that does not
    specifically target monetary policy goals but also has
    significant impact on the economy and financial markets.
        The reliance on interest rate policy means that the
    economic impacts of monetary policy are primarily through
    interest rate sensitive sectors. Typically, high interest rates
    would dampen economic activity in sectors like housing and
    autos as buyers in those sectors tend to finance their
    purchases. This lays the brunt of economic adjustments onto
    blue collar workers. Note that the overall economy's interest
    rate sensitivity also varies over time, where an asset light
    services focused economy tends to be less interest rate
    sensitive.
        Interest rates also impact economic activity through the
    wealth effect, where higher rates lower the price of financial
    assets and thus the spending power of households. Asset
    holdings are concentrated in a small percentage of the
    population, but that group has an outsized impact on economic
    activity.
        One last note on interest rate policy is its impact on
    fiscal policy. As the level of the public debt has risen, so
    has the level of interest rate payments. Interest rate
    expenditures now exceed $1 trillion a year, in part, due to the
    level of interest rates. An increasingly important side effect
    of Fed actions is its impact on the Nation's budget.
        The Fed's secondary tool is its balance sheet, which can
    influence interest rates and also allocate credit. The Fed can
    create money out of thin air and lend directly to borrowers or
    indirectly through purchases of debt. This is essential to
    performing its lender of last resort function.
        Fed purchases of securities are limited to a very small
    subset of assets that include mortgage-backed securities, which
    is, in effect, allocating credit to home buyers. Most recently,
    it was deployed during the pandemic where hundreds of billions
    of dollars worth of mortgages were purchased even as home
    prices nationally surged by 20 percent in a year. The
    distributional consequences of those actions look to last many
    years.
        Regulatory policy is less visible but also an influential
    part of the Fed's toolkit. Regulatory policy places constraints
    and costs on the actions of banks. More stringent regulation
    reduces the willingness of banks to take risks and results in a
    stronger banking system. However, a more constrained banking
    system also limits the supply of credit to the public. Small-
    and medium-sized businesses are more heavily reliant upon banks
    for financing, while larger businesses tend to borrow directly
    from the capital markets.
        More stringent regulation also impacts the function of
    Treasury markets and the level of interest rates. Regulations
    like the Supplementary Leverage Ratio contributed to the
    strength of the banking sector through the pandemic but also
    the malfunctioning of the Treasury market at that time.
        In summary, the Federal Reserve has large latitude in
    setting its own goals and exercising a range of tools toward
    achieving those goals. How those goals are set, and which tools
    are used have large impacts on the lives of the American
    people. This makes the task of overseeing the activities of the
    Fed both very important and difficult.
        I thank Chairman Lucas and Chairman French for their wisdom
    in establishing this task force to improve the performance of
    monetary policy toward greater economic prosperity.

        [The prepared statement of Mr. Joseph Wang follows:]

        [GRAPHIC] [TIFF OMITTED] T9639.007

        [GRAPHIC] [TIFF OMITTED] T9639.008

        [GRAPHIC] [TIFF OMITTED] T9639.009

        Chairman Lucas. Thank you, Mr. Wang.
        Dr. Michel, you are now recognized for 5 minutes for your
    oral remarks.

    STATEMENT OF NORBERT J. MICHEL, VICE PRESIDENT AND DIRECTOR OF
       THE CENTER FOR MONETARY AND FINANCIAL ALTERNATIVES, CATO
                               INSTITUTE

        Dr. Michel. Good morning, Chairman Lucas, Ranking Member
    Vargas, members of the committee. Thank you for the opportunity
    to testify at today's hearing.
        My name is Norbert Michel. I am Vice President and Director
    for the Center for Monetary and Financial Alternatives at the
    Cato Institute, but the views that I express today are my own
    and should not be construed as representing any official
    position of the Cato Institute.
        In my testimony today, I argue that Congress has given the
    Fed too much to do and too much discretionary authority to
    carry out those mandates. To secure the best outcomes for the
    typical American, Congress should give the Fed less to do with
    less discretionary authority.
        The engine that drives prosperity for Americans is private
    enterprise, and the Fed should carry out its core function,
    supplying the economy's base money, by interfering as little as
    possible with that engine. It should ensure that it does not
    become the source of monetary induced slowdowns or inflation,
    and it should remain transparent and directly accountable
    through elected officials, goals that can be best accomplished
    with a monetary policy rule.
        Now, I will make three main points in support of my
    position.
        First, stable prices should not be equated with 2 percent
    inflation every year. Optimally, the rate of inflation would
    vary with the Nation's productivity, sometimes gently rising,
    sometimes gently falling. By targeting an always positive rate
    of inflation, even as productivity improves, monetary policy
    has been biased toward expansion, and that has hurt Americans
    by preventing them from enjoying the full benefits of a growing
    economy. Through much of the past several decades, the price
    level should have fallen gently, but it has not, meaning that
    Americans have experienced an unnecessarily high cost of
    living.
        Second, as the recent inflationary episode clearly
    demonstrates, Americans hate inflation, as I am sure I do not
    need to tell you. They understand that it lowers real income
    and that it reduces their real returns to savings. They also
    understand that the Fed cannot simply flip a switch and stop
    inflation once it takes off and that expansionary fiscal policy
    makes the Fed's job even harder. They do get it.
        They do not want to hear that, over time, nominal incomes
    tend to rise, offsetting inflation. They do not want to wait,
    and they do not want high inflation. They know that it
    increases their cost of living, and that is what they care
    about.
        Increasing inflation is only one side of the monetary
    policy coin. If the Fed mishandles monetary policy, it can also
    lead to an economic slowdown, one where output employment and
    income falls as the economy shrinks.
        During the past few decades, we have been spoiled and not
    had to endure many of those types of monetary induced
    slowdowns, but the potential is there and must be considered
    during any efforts to reform the Fed and improve monetary
    policy.
        Together, those types of slowdowns and inflation are
    examples of why congressional oversight of the Fed is so
    important and why it is critical that Americans are given the
    opportunity to hold both Congress and the unelected officials
    at the Fed accountable.
        Finally, the Fed should not be expected to fine-tune or
    manage the economy to hit precise macroeconomic targets, much
    less precisely improve micro-level metrics for certain groups
    of Americans.
        Monetary policy is a very blunt tool, one that works in
    conjunction with fiscal policy. Providing funds, whether
    through loans or grants, to specific groups or companies,
    financial or otherwise, is not an appropriate role for a
    central bank and representative democracy.
        If Congress wants to provide loans to just, for example,
    municipal governments, then it can appropriate the money and do
    so in a transparent manner so that voters can either approve or
    disapprove of those actions taken by their elected
    representatives.
        In closing, I am arguing that Congress has given the Fed
    too much to do and that it is hard enough to get monetary
    policy right in the first place. Many of these other tasks
    given to the Fed have only exacerbated that problem.
        Thank you for your consideration. I am happy to answer any
    questions you may have.

        [The prepared statement of Dr. Norbert J. Michel follows:]

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        Chairman Lucas. Thank you, Doctor.
        Mr. Konczal, you are now recognized for 5 minutes for your
    oral remarks.

      STATEMENT OF MICHAEL KONCZAL, SENIOR DIRECTOR OF POLICY AND
                  RESEARCH, ECONOMIC SECURITY PROJECT

        Mr. Konczal. Thank you.
        Chairman Lucas, Ranking Member Vargas, and distinguished
    members of the task force, thank you for inviting me to
    testify. My name is Mike Konczal, and I am the Senior Director
    of Policy and Research at the Economic Security Project, where
    we advocate for ideas that build economic power for all
    Americans.
        Previously, I was a special assistant to the President and
    chief economist at the National Economic Council under
    President Biden, where I specialized in macroeconomic issues.
        I applaud this task force for investigating central bank
    independence and the dual mandate. Despite the challenges after
    COVID, the U.S. economy performed better than many peers, and
    by late last year, we were on a solid footing. The balance
    between full employment and price stability, free from short-
    term political pressures, has worked well for us.
        I want to make three key points here today. First, the
    Federal Reserve helped the United States avoid a recession
    after the inflationary shocks caused by COVID and the war in
    Ukraine, achieving a rare soft landing. Second, this
    achievement is now at risk due to current administration
    policies. Third, the key macroeconomic decision this year will
    revolve about whether or not Congress worsens the debt and
    deficit, which will put pressure on the Federal Reserve,
    interest rates, and everyday families.
        First, there is a growing consensus that the global wave of
    inflation following the reopening was driven by rapid shifts in
    the composition of demand and shocks to supply chains and key
    inputs, like semiconductors, made far worse when global
    commodity markets went into chaos following Russia's unprovoked
    invasion of Ukraine. As Ben Bernanke, the former Federal
    Reserve Chair and Chairman of President George W. Bush's
    Council of Economic Advisors recently said, quote, I think that
    the inflation was caused pretty much by the supply side and
    that the demand factors were not strong enough, end quote.
        Professional forecasters and financial markets did not
    predict this inflation, which was, in fact, global. Other
    countries saw inflation in the same range as the United States,
    even countries like Canada and Australia that had less direct
    exposure to Russian energy, though all of their growth lacked
    their own.
        Many thought that this inflation was driven by excess
    demand and spending and, thus, we need a recession, higher
    unemployment and slower demand growth for inflation's decline.
    Inflation fell 6 percentage points as growth took off at an
    annualized 2.9 percent over the past 2 years, well above the
    average of the 21st century.
        Now, for people, for the Federal Reserve and others, this
    strong economy now faces three immediate macroeconomic risks
    from the, frankly, irresponsive policies of this current
    administration: unexpected tariffs, weakened State capacity,
    and pressures on Federal Reserve independence.
        Publicly announcing high tariffs outside formal processes
    and in an inconsistent and confusing manner not only weakens an
    investment but risks inflation expectations. Normally, tariffs
    are small, strategic, and have little effect on aggregate
    prices. However, the tariffs currently under discussion are
    significantly higher and broader than anything in recent
    history. Already, the University of Michigan survey found
    inflation expectations peaking in February to levels not seen
    since 1995, and certainly was not hit, as inflation
    expectations were managed under the Biden Administration.
        This is exacerbated by attacks on State capacity. Cutting
    government waste and fraud is important, and Congress' own
    research services have found many ways in which that can be
    done. This is not what is happening right now. This will raise
    prices and costs for everyday families, whether that is
    weakening consumer financial protections, poor Social Security
    services, or the inability to contain bird flu.
        We also dealt with avian flu outbreaks in the Biden
    Administration, but we were able to work with government
    agencies, such as the U.S. Department of Agriculture (USDA), to
    contain it. Instead, communications are altered for ideological
    reasons, and severe cuts at (USDA) include those tasked
    managing bird flu. Egg prices now exceed the peak seen during
    the commodity market turmoil and the avian flu outbreaks under
    the Biden Administration.
        The most important and I think the task force's most--it is
    most important you engage with is the removal of central bank
    independence. Though the executive order removing independence
    currently says that Federal Reserve monetary policy is
    exempted, I believe that is an unstable arrangement, as the
    politicization of other Federal Reserve functions and personnel
    will seep into monetary policy and central bank policy. Nothing
    could destable an economy faster.
        The President sought to influence central bank actions
    during his first term. The threat of him doing so again would
    risk the overall economy and the stability premium that we have
    as a Nation. Nothing this task force will discuss will matter
    for the long-term stability of macroeconomic conditions as much
    as stopping this effort.
        Third and last and most important, immediate determinant
    for macroeconomics this year will come from fiscal policy, in
    particular, how Congress handles the expiration of the Tax Cut
    and Jobs Act (TCJA). Right now, we are seeing that nonpartisan
    estimates have the current bill under discussion increasing
    that primary deficit to--or the deficit to 6.8 percent, a rate
    far higher given the near full employment we currently have.
    Worse, this exploding deficit will be used as justification for
    painful cuts to healthcare and social insurances and weakening
    some of the few countercyclical programs we have if a recession
    happens.
        The overall plan of tariffs and spending cuts creates a
    potential cruel double whammy where the proposed tariff
    packages could skyrocket the cost for everyday goods, coupled
    with cuts for critical services. Meanwhile, corporations
    getting these tax breaks can simply pass their costs on to
    consumers. The Federal Reserve is left with a very difficult
    decision about how it manages the subsequent price hikes.
        I look forward to taking your questions.

        [The prepared statement of Mr. Michael Konczal follows:]

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        Chairman Lucas. The gentleman yields back.
        The chair now recognizes the gentlewoman from California,
    the ranking member of the full committee, Ms. Waters, for 1
    minute.

        STATEMENT OF HON. MAXINE WATERS, RANKING MEMBER OF THE
      COMMITTEE ON FINANCIAL SERVICES, A U.S. REPRESENTATIVE FROM
                               CALIFORNIA

        Ms. Waters. Thank you very much, Mr. Chairman.
        I thought we were going to talk about capital formation
    today rather than monetary policy.
        If we really want to discuss the cost of living; we should
    discuss President Trump's policies that have left working-class
    families bracing for disaster.
        Just yesterday, Trump announced massive new import taxes on
    Americans and American businesses buying things from Canada and
    Mexico. Last week, Republicans voted to advance Trump's budget
    and cut up to $880 billion in Medicaid funding, which could
    eliminate coverage for nearly 16 million people.
        Experts have said that Chairman Hill's district alone would
    lose $2.3 billion in funding for more than 180,000 of his
    constituents covered by Medicaid and other programs.
        We should reject these misguided policies that are raising
    the cost of living for most families while Elon Musk and
    billionaire class are pushing for their taxes to be cut.
        Thank you, and I yield back the balance of my time.
        Chairman Lucas. The gentlelady yields back.
        We will now turn to member questions.
        The chair now recognizes himself for 5 minutes for
    questions.
        Dr. Kohn, you spoke in your testimony about Fed
    independence. We know an independent central bank is important
    in making sure that monetary policy is not subject to the whims
    of partisan politics. That does not mean that the Fed cannot or
    should not be held accountable to Congress and the public.
        Can you talk more about the limitations of Fed
    independence, where it is important for Congress to exercise
    its constitutional authority to conduct oversight?
        Dr. Kohn. Absolutely, Mr. Chairman. I agree with what you
    said. I think the Fed has an arm's length relationship with the
    political system. It makes the decisions on the setting of its
    policies in order to achieve the goals that you gave it. It
    is--it should be account--it is accountable to the public and
    to you. You need to press it: Why did you make that decision?
    Why was it this way? How is that going to further your goals?
        I think the Federal Reserve benefits from good, focused
    questioning from the Congress.
        Chairman Lucas. Switching subjects, Dr. Kohn. In the past
    two decades, the Fed has moved to the ample reserve regime and,
    since then, we have seen a dramatic increase in the size of the
    Fed's balance sheet stressing dramatically. In 2022, the Fed
    began quantitative tightening and has decreased the size of its
    balance sheet. Chair Powell has said that the Fed will stop
    quantitative tightening (QT) when reserve balances are somewhat
    above the level judged to be consistent with ample reserves.
        Where should the Fed look to target its balance sheet size?
    Is there an ideal level of reserves they should aim for?
        Dr. Kohn. I think what they are aiming for, as Chair Powell
    said, is to reduce its balance sheet until reserves are just
    large enough to stabilize market interest rates. It is looking
    very carefully at those market interest rates to see whether it
    has go down that far or not, and so far, the market rates have
    been stable. There is no sense of instability. It is continuing
    to reduce its balance sheet.
        I think that is fine. I do not think--I do not see it as a
    big deal as to whether reserves are $2 trillion or $1 trillion.
    I mean, the Fed has government securities on one side of its
    balance sheet, it issues reserves to the banks on the other
    side of the balance sheet. I think the ample reserves regime
    should work just fine to control interest rates, and that is
    what you need it to do.
        Chairman Lucas. Mr. Wang, you include in your written
    testimony a discussion of the supplemental leverage ratio (SLR)
    and the Fed's regulatory relief during the pandemic. You write
    that the Fed's current regulations on the SLR deincentivize low
    risk activities like holding Treasurys.
        Given the stress we have seen in the Treasury market, do
    you think the Fed should reevaluate the SLR?
        Mr. Wang. Thank you for your question, Chairman Lucas.
        I absolutely agree. The SLR is basically a regulation that
    makes banks hold capital based on the size of the balance sheet
    without regard to the riskiness of their assets.
        Now, when you are looking at assets, for example, like
    reserves, which are very liquid, have zero credit risk, or
    Treasury securities that have no credit risk and are very
    liquid, it does not make sense to have to hold capital against
    those.
        Looking across the world, there are also other countries
    who have regulations that do not require reserves in the SLR.
        I think some adjustment there would significantly increase
    the capacity of the banking system and improve the functioning
    of the Treasury market.
        Chairman Lucas. Dr. Kohn, back to you for just a moment in
    the time I have remaining. There have been many significant
    developments in our economy, the market conditions, and the
    Fed's implementation of monetary policy these last 5 years.
        Are the issues you think the Fed--what are the issues you
    think the Fed should pay attention to during this framework
    review? Dr. Kohn.
        Dr. Kohn. I think it should pay atten--it said it is going
    to look at the strategy. I think it should look at what it did
    in 2020, assess whether that contributed to a delay in
    responding to inflation, and then change. I think it needs--the
    2020 framework review stressed the strategy was what do I do to
    counter the low interest rate, low inflation environment that
    2010 to 2019 put in. Remember, interest rates were at zero for
    a lot of this. It did not think about a high inflation
    environment.
        They need to have a strategy that is robust to all kinds of
    different outcomes. The minutes of their last meeting suggest
    that it is what they are trying to do. They are trying to
    modify that framework.
        Chairman Lucas. Thank you. My time has expired.
        The chair now recognizes the Ranking Member of the Task
    Force, Mr. Vargas, for 5 minutes of questions.
        Mr. Vargas. Thank you very much, Mr. Chairman.
        Again, I want to thank all the witnesses here today. I
    appreciate it.
        It is interesting that we seem to have an uneasy agreement
    with the independence of the Fed. I was curious to see that the
    first question that the chairman asked was the limitations that
    the Fed has in their independence.
        Dr. Kohn, the question was directed to you, and you gave a
    very interesting answer.
        I would ask Mr. Konczal. It is interesting that we seem to
    agree on the independence of the Fed and then very quickly we
    go to limitations of the Fed. Could you speak a little bit
    more--because you said that this is probably the most important
    issue we will talk about on this task force. Go a little more
    into depth about that. Because I think that, again, with the
    dual mandate and the independence, those are the two most
    important things that we should focus on in this task force.
        Go ahead, sir.
        Mr. Konczal. Yes, absolutely. Accountability is quite
    important, and Congress, obviously, sets the goals for the
    central bank. As you know, legislative bodies across the world
    set the goals for their central banks. Then there is reporting
    back.
        Obviously, Chair Powell and other Federal Reserve Chairs
    have come and talked to Congress twice a year. There is a lot
    of transparency in the way that they are talking about their
    actions, how they are carrying them out. I just feel that there
    is a lot of public accountabilities with media and so forth on
    their actions as well.
        What I would worry about is executive control of their day-
    to-day functions, excessive control about the way in which they
    are conducting--in the way that they are prioritizing and
    balancing their different priorities in the ways that reflect
    short-term political gains but may have long-term economic
    cost.
        Dr. Kohn. Can I pick up on that a little bit?
        Mr. Vargas. Yes, sure.
        Dr. Kohn. I think the main limitation on independence is
    you guys set the goals. They do not have independence with
    respect to their objectives. That is set by the people's
    representatives. That is just independence about how they get
    to those.
        Mr. Vargas. I think this is where the rubber hits the road
    because, obviously, we have political pressures that the Fed
    should not have. For example, the last time President Trump was
    President Trump, he clearly wanted to influence the Fed. I
    think we could all agree on that. He certainly said that about
    Mr. Powell, that is where I get concerned. Some of these
    executive orders get very close to that.
        Mr. Konczal, is not that correct?
        Mr. Konczal. Yes, absolutely. The executive orders, as
    currently stated--and, obviously, everyone is trying to figure
    out what is going to actually happen, to the extent they can
    politicize the Federal Reserve functions of financial
    regulatory policy, and many other things. I find that there is
    no way to have a strict wall and separation between the
    monetary policy and the regulatory policy.
        I do not think that works in practice. When I talk to
    people who have worked at the Federal Reserve, they agree that
    it is not a clear, separate room you can just put someone in.
    The supervisory functions seep into the monetary and open
    market policy discussions in a way that I think really risks
    the stability of our macroeconomy in a way that I--we are going
    to talk about a lot of different things here, but I really want
    to emphasize.
        Mr. Vargas. I do want to now move to the dual mandate. Now,
    one of the things that I heard today in testimony, and I think
    it is true, that most of the assets of the United States are
    held by very few people. Most people, most families, really
    deal with the economy with their job, their employment.
        I think that is why it is so important to have the dual
    mandate. Because, again, this should not be--the Fed should not
    be for the very wealthy that control most of the assets. It
    should be for the economy of all the people. Most of the
    people, the way they interact with the economy is their job,
    employment.
        Could you comment a little bit about that?
        Mr. Konczal. Yes. What I would emphasize--and, obviously,
    we are going to talk about the 5-year review--there are many
    different central banks among pure and developed countries that
    have many different ways of trying to implement their policies.
    All of them saw the same inflation we saw.
        The European Central Bank (ECB) is a very austere central
    bank. It has just a price stability mandate. Their inflation
    peaked at 10 percent, and it was rising even before Russia's
    invasion of Ukraine.
        You can go to New Zealand, which was one of the first
    inflation targeting banks. It has the reputation of being a
    particularly effective central bank. They use a range from 1 to
    3 percent, which I think might be a very effective thing for us
    as well. Their inflation also peaked at 8 percent.
        The dual mandate did not cause our inflation. What probably
    played an important role was the huge labor market recovery we
    saw both in 2019, before COVID, and over 2023 and 2024, where
    we have record high levels of labor force participation for
    women, for minorities, for people with disabilities.
        Mr. Vargas. This is where I reclaim my time. I think one of
    the things used to drive me crazy about Janet Yellen when she
    was--I think she is one of the smartest people that was here-
    every time she was asked about inflation, she never put it in
    the wider context of the world. Instead, of course, my good
    colleagues on the other side would beat us up, and rightfully
    so, about inflation because it was hurting our people.
        She never put it in the context of the whole world. The
    European Union (EU) was running much harder than we were, and
    she never mentioned it once. Even though I have great respect
    for her, she sure blew it on that one.
        With that, I yield back.
        Chairman Lucas. The gentleman yields back.
        The gentleman from Arkansas, Mr. Hill, the full chairman of
    the committee is recognized for 5 minutes.
        Chairman Hill. Thanks, Chairman. I appreciate it.
        I appreciate the panel. Great testimony. We are grateful
    for that.
        Dr. Michel, you said that you think the Fed is trying to do
    too many things. I heard that. Mr. Wang talked about that as
    well.
        Dr. Kohn, in your testimony, you say maximum employment is
    given by influences outside the control of the Fed,
    particularly the structure of the labor market. Then you say
    inflation is also subject to outside influences, but over time,
    the Fed can control inflation.
        Would you say that of the so-called dual mandate, that
    price stability is certainly something the Fed has more direct
    influence over rather than, quote/unquote, full employment,
    which is severely impacted by regulatory policy, tax policy,
    spending policy, budget deficits? Is that true?
        Dr. Kohn. Yes. I think economists would agree that over
    time inflation is, as Milton Friedman put it, everywhere and
    anywhere, a monetary phenomenon. That does not mean that the
    money supply directly feeds inflation. The Federal Reserve can
    control inflation over longer periods of time.
        In terms of full maximum employment, basically, the level
    of maximum employment, the lowest possible unemployment rate is
    inferred from the behavior of other variables around it. If you
    push the unemployment rate----
        Chairman Hill. You are not arguing that you are a Phillips
    curve guy, are you, Dr. Kohn?
        Dr. Kohn. Yes, I am a Phillips curve guy.
        Chairman Hill. Okay. All right. We will have another visit
    about that, because I think the last 50 years discredited that
    economic thought.
        You have been such an important voice in the Fed. We are
    glad to have you back before the committee.
        I heard you answer the question about the Fed's framework
    issue. What do you think would be the single most important
    thing that would go into that assessment about whether they
    missed it this time?
        I would argue I do not support setting 2 percent either
    under former Chair Yellen. Because that means in 25 years, we
    are happy that we have lost 50 percent of our purchasing power.
    How can you argue for that as a public official?
        What do you think, when you are--if you were sitting back
    in that meeting, what would be the most important point you
    would make about having missed it in 2021?
        Dr. Kohn. I think a lot of what happened in 2021 was a bad
    forecast, and the Fed was not the only person making a forecast
    that inflation was going to come down over 2022 as these supply
    constraints, the supply chain stuff--remember the ships off of
    Long Beach and the chips and all that thing came off. People
    returned to work--then prices would come back down again and
    that took much longer. In addition, there was way too much
    pressure in the labor market. It was not only supply
    constraints. There were demand constraints, but I think the bad
    forecast was a major reason why the Fed took so long.
        I think another reason was the forward guidance they gave
    on interest rates. Married with that forecast, they said: We
    are going to keep them at zero until we are back at full
    employment. I think it all delayed it.
        Now, if the Fed had gone a few months earlier, would that
    have made a big difference? No, but it might have made a little
    difference.
        Chairman Hill. Yes, I think--certainly, if you listen to
    Dr. Summers and other very prominent former officials in the
    Obama Administration, for example, going in Q4 of 2020 and
    starting, the shrinking of the balance sheet and slightly
    raising rates would have been potentially better.
        I think there you have bad monetary policy decisions, which
    we have talked about, but equally bad fiscal policy decisions
    by the incoming administration at the time of the Biden
    Administration.
        Dr. Kohn. I do think the Fed needs to be----
        Chairman Hill. Let me reclaim my time. I want to switch
    subjects. Thank you for that. Please respond in writing if you
    want to talk some more about that.
        Let me talk about the Fed balance sheet. Dr. Michel, you
    were talking about the Fed allocating credit as one of those
    things that you thought was beyond strictly scope on price
    stability. Do you think that is the case in buying mortgage-
    backed securities?
        Dr. Michel. Oh, yes, no doubt. Your----
        Chairman Hill. Should Treasurys be the only open market
    asset for the Fed for the Open Market Committee?
        Dr. Michel. That would be my preference, yes, Short-term
    Treasurys only.
        Chairman Hill. What do you think, have you looked at the
    pernicious impact of--as was said in your testimony--too much
    gas on the fire for housing right at the time when the housing
    market was rebounding?
        Dr. Michel. Yes. No, that never made any sense at all.
        Chairman Hill. Would you give us some more background of
    that in writing, please?
        With that, I yield back, Mr. Chairman.
        Chairman Lucas. The gentleman yields back.
        The gentleman from California, Mr. Sherman, who is also the
    Ranking Member of the Subcommittee on Capital Markets, is now
    recognized for 5 minutes.
        Mr. Sherman. Thank you.
        Mr. Wang, and I believe Dr. Michel, you may be right that
    the Fed should only buy U.S. Government paper rather than
    picking winners and losers in the economy, but I would argue
    that it should not just be short-term paper. There are times
    when we have to drive down long-term interest rates, which I
    think are more significant for those making investments in
    housing and in factories, especially factories.
        Dr. Michel, I have to strongly disagree with you on
    deflation, even gentle deflation being a good thing. If we are
    going to design things so that we may have gentle deflation,
    then we would have to realize that sometimes we would have
    ungentle inflation. You do not always get it right.
        Want to bring to the attention of this task force that, a
    few hours ago, the Securities Exchange Commission (SEC) sent an
    email to its staff offering $50,000 to every staff member who
    will resign. Those resignations are required by March 21. They
    are available to the top 60 percent.
        This is no way to run an agency. It means you lose the best
    people, the ones who can, between now and March 21, line up a
    job on the outside. It means you have no control over which
    parts of your agency get smaller and which stay the same size.
    Your support personnel to blind personnel gets radically
    changed because none of these buyouts were available to the
    bottom 40 percent.
        Most importantly, I oppose defunding the police, whether it
    is crime in the streets or crime in the suites. When we offer
    $50,000 to every cop to quit, we get more crime in the streets.
        I will point out this is all courtesy of Elon Musk, a man
    who has been investigated time and again for violating our
    securities laws, seems to have violated them even more on the
    issue of Department of Government Efficiency (DOGE) coin.
    Letting Al Capone set the size of the Chicago Police Department
    strikes me as a very bad idea.
        Let us talk about independence, Mr. Konczal. We have an
    independent Fed. Some countries do not. Turkiye comes to mind a
    place where there is intense pressure.
        Has that worked out well for other countries to let
    politicians or even dictators tell their central bank what to
    do?
        Mr. Konczal. I would say no.
        Mr. Sherman. Could not agree with you more.
        Project 2025 has some ideas that are interesting, such as,
    as I said, limiting which kinds of bonds the Fed would buy and
    limiting the lender of last resort function. When we were
    crafting Dodd-Frank, I was a strong voice for trying to hem in
    the right of the Fed to bail out private entities.
        The key thing that is being talked about is the dual
    mandate. Mr. Konczal, if we just had--if we did not have a dual
    mandate, so we told the Fed, do not care about unemployment,
    would we get more unemployment?
        Mr. Konczal. I believe so. I believe we probably would have
    caused an unnecessary recession to bring down the inflation
    that came down anyway. I think a lot of people at the margins
    of our labor force would be left behind under that kind of
    regime.
        Mr. Sherman. I would like to focus on tariffs but
    particularly their effect on housing. We need millions of new
    housing units built in this country. We now need to replace all
    the housing units in the Palisades and most of them in
    Altadena.
        The John Burns Research and Consulting folks say that the
    proposed White House tariffs will raise the cost of building
    structures in this country by 5 percent. Is that good for
    people who are looking to own a home?
        Mr. Konczal. No. I believe the cost of housing is already
    too high because of many things, including regulations. I think
    the tariff regulation will be quite bad for housing.
        Mr. Sherman. Another thing, a little off to the side of the
    Fed but part of 2025, is to, quote, privatize Fannie and
    Freddie. We had them privatized once where the taxpayers took
    all the risk and the private shareholders were supposed to make
    the profit.
        Should we go back to that, Mr. Konczal?
        Mr. Konczal. No. I think the old system is quite broken,
    and any system of conservatorship would have to be done
    carefully and accountable----
        Mr. Sherman. If we just did not have Fannie and Freddie,
    could we give 30-year mortgages with 10 percent or 5 percent
    down payments to ordinary Americans?
        Mr. Konczal. No. I believe our mortgage rates would be
    quite higher, even higher than they already are under Trump.
        Mr. Sherman. I yield back.
        Chairman Lucas. The gentleman yields back.
        The gentleman from Michigan, Mr. Huizenga, who also is vice
    chairman of the full committee, is now recognized for 5
    minutes.
        Mr. Huizenga. Thank you, Mr. Chairman.
        Dr. Kohn, good seeing you again. It has been a while. I was
    around first time you were in, but----
        The Federal Reserve system, what I want to talk about, the
    dual mandate. It actually is focused on three key monetary
    policy objectives: maximum employment, price stability, and
    moderation of long-term interest rates. Somehow that seems to
    get sort of forgotten.
        I am going to ask you a ``too high,'' ``too low,'' or
    ``about right'' for a response to this question. Are interest
    rates right now too high, too low, or about right, Dr. Kohn?
        Dr. Kohn. I do not have a judgment on what the right
    level----
        Mr. Huizenga. Okay. I do not have time for an explanation.
        Dr. Kohn. Okay.
        Mr. Huizenga. Do you think they are about right?
        Dr. Kohn. They are about right for what people expect.
        Mr. Huizenga. Okay.
        Mr. Wang.
        Mr. Wang. Today the 10-year yield is about 4 percent. I
    think that is about right.
        Mr. Huizenga. Okay.
        Dr. Michel.
        Dr. Michel. Sure. I have really no idea, and I do not think
    they do either.
        Mr. Huizenga. Okay.
        Mr. Konczal.
        Mr. Konczal. They are slightly restrictive, which I think
    is appropriate given inflation right now.
        Mr. Huizenga. Too low?
        Mr. Konczal. Slightly too high.
        Mr. Huizenga. Okay.
        Mr. Konczal. Appropriate but higher than they should be in
    the long run.
        Mr. Huizenga. All right. Great.
        Obviously, I was not here for the creation of Dodd-Frank in
    2010. I got elected in 2010, but I have been living with the
    echo effects of it ever since. I believe that today the Fed has
    even more power, more influence, and more control over our
    financial system than ever before.
        While improvements, as, Dr. Kohn, you had said, have
    happened in transparency, partially because of the push that
    came out of this committee, it does, I believe, remain shrouded
    in a mystery to most of the American people.
        Frankly, we are not talking about groundbreaking stuff
    right now. These are things that we talked about over a decade
    ago, and we were asking many of the same questions: How could
    the Fed be more transparent to Congress and the American
    people? How could they communicate its policy choices better
    and the direction it was taking so that consumers and investors
    could make informed decisions about today and the future?
        Dr. Michel, let us start with you. You noted and cited a
    paper by economist John Taylor, one of my favorites, titled,
    ``Monetary Policy Rules Work and Discretion Doesn't.'' As you
    know, Dr. Taylor became famous for the Taylor rule, which
    essentially has a suggestion of guides on how central banks
    could adjust interest rates to stabilize economic activity.
        I had suggested when Chair Yellen was in here that she
    could create the Yellen rule. It did not really matter what it
    was but where there were some rules that were published.
        Now, everybody says, well, we do this behind the scenes.
    The problem is it is behind the scenes, and nobody really knows
    what they are doing. They are saying a guessing game.
        Could you explain to the committee, Dr. Michel, how
    something like the Taylor rule or the Yellen rule or any other
    rule could have impacted the Fed's decision during the most
    recent economic downturn?
        Dr. Michel. Sure. If we go by the standard, any of the
    standard rules, really, that are accepted by a macroeconomist,
    then in that case, yes, the rates are too restrictive at the
    moment.
        If they had been following a rule, at the very least we
    would know what they are doing and why they are doing it. By
    we, I mean, you guys, Congress. I think that is the most
    important thing. There is no way to judge how good or how badly
    they are doing because you do not really know what they are
    doing.
        Mr. Huizenga. Okay.
        Dr. Michel. That is why a rule is important.
        Mr. Huizenga. Would something like the Federal Oversight
    Reform and Modernization (FORM) Act----
        Dr. Michel. Yes.
        Mr. Huizenga [continuing]. which had been a piece of my
    legislation, would that be a good starting point?
        Dr. Michel. I think that is a perfect starting point
    because it provides what we call a flexible rule. They put a
    base rule in place. They can pick the rule that they like, and
    they can stick to them, until they do not, as long as they
    explain to Congress what they are doing, that is different and
    why.
        Mr. Huizenga. I am running out of time, so I am having to
    jump around here a little bit.
        Obviously, the Fed now sets rates administratively, partly
    through interest on reserve balances, and there are
    significantly more reserves in the system now.
        Do not want to put words in Dr. Kohn's mouth, but it almost
    sounded like you said it does not really matter what the
    reserves are. What I need to know, though, is, has the Fed
    incentivized financial institutions to hoard reserves instead
    of putting capital work into the real economy?
        Dr. Kohn. I think the liquidity regulations put a premium
    on holding liquidity, and they need to look carefully into
    that, as to whether they are over-incentivizing holding
    liquidity. I do not think they are. It is important for
    financial stability.
        I agree that there are adjustments, as Mr. Wang said, to
    the leverage ratio that could be made that enable banks to
    intervene more or more aggressively in stabilizing the Treasury
    market and that would be helpful. For example, exempting
    reserves from the leverage ratio.
        Mr. Huizenga. Okay. My time has expired. We may be
    following up with some written questions.
        I yield back. Thank you.
        Chairman Lucas. The gentleman yields back.
        The chair now recognizes the gentlewoman from California,
    the ranking member of the full committee, Ms. Waters, for 5
    minutes.
        Ms. Waters. Thank you very much.
        Mr. Konczal, reporting has shown that American families are
    bracing for higher prices as consumer confidence fell
    drastically in February in response to Trump's actions as
    President so far.
        In my home State of California, a dozen eggs are going for
    $9 or more, and that is just the beginning. Families expect the
    price of housing, groceries, gas, and basic necessities to rise
    even further. This is especially true now that Trump said he
    would institute 25 percent import taxes on consumers and
    businesses buying goods from Canada and Mexico, and stock
    markets dropped in response.
        Given these trends, one of the Republican policies aimed at
    decreasing the cost of living are under Republican leadership.
    Can we only expect the cost of living to rise?
        Mr. Konczal. I think the policy--independent--I think the
    policy uncertainty about what is happening--for instance; I was
    off the grid last night, so I did not know whether or not we
    were going to have a North American trade war when I woke up
    this morning. Apparently, we do. That kind of policy
    uncertainty is very poor for investments, very poor for growth.
    The emphasis on prices increasing at a period where consumers
    and everyday people are much more sensitive to prices than they
    may have been in more decades. I do worry it will feed into
    inflation expectations, price increases, and wage demands in
    the way that will be much more persistent than what we saw
    during Biden Administration.
        Ms. Waters. Let me just ask you. This business of
    increasing the tariffs on our neighbors, will that absolutely
    increase the cost of living for Americans because there may be
    retaliation of some sort?
        Mr. Konczal. Very much so. That is kind of the point of the
    tariffs is to raise prices. We have already seen auto prices
    going up over the last several months in anticipation of this,
    I believe, after having declined for about 2 years beforehand.
    The way it particularly hits internal supply chains, because
    something like a car will go across the border so many times. I
    think it will be pretty complicated and very difficult for
    firms to do even if there were clear communications and a
    better process for implementing them.
        Ms. Waters. Committee Democrats have many proposals to
    address the rising cost of living. We are fighting for
    legislation to grow the middle class, lower costs, and fight
    against wealthy corporations. I am especially committed to
    addressing our Nation's growing housing and homelessness crisis
    through bills like, My Housing, Crisis Response Act, Ending
    Homelessness Act, and Down Payment to an Equity Act.
        If Republicans will take up these bills and pass them,
    would Democratic policies lower Americans' housing costs?
        Mr. Konczal. I believe so. I believe there is a real supply
    issue as well. I do believe that we need more money in people's
    pockets. It will help provide economic security and crucially
    find ways to build up the labor force, build the middle class
    better health outcomes, better education outcomes, I think,
    builds our labor force and our productivity and our ultimate
    growth.
        Ms. Waters. Do you have any idea what percentage of the
    American public are paying 30 percent or more for rent, for
    example?
        Mr. Konczal. It would not shock me. It would be quite high.
    I do not know. I am sorry.
        Ms. Waters. Do you believe that with the bills that I have
    just identified that we are passing would increase perhaps the
    ability to develop more housing, more affordable housing for
    people who are making lower incomes?
        Mr. Konczal. I believe so.
        Ms. Waters. Would you recommend that these bills be passed
    not only by Democrats, but by Republicans who are having
    tremendous problems in their own districts with people not
    being able to afford a decent cost of living?
        Mr. Konczal. I think housing is a serious concern for
    bipartisan support of major initiatives, yes.
        Ms. Waters. Thank you very much, and I yield back.
        Chairman Lucas. The gentlelady yields back. The gentleman,
    I should say, from Kentucky, Mr. Barr, who is also Chair of the
    Subcommittee on Financial Institutions, is now recognized for 5
    minutes.
        Mr. Barr. Thank you, Mr. Chairman. You lone dissenting
    voice in Lesley Stahl's biased and one-sided 60 minutes report
    on DOGE's audit of the Consumer Financial Protection Bureau
    (CFPB), which as you know is funded entirely from the Fed.
        In Ms. Stahl's critique of DOGE's access to personal,
    private financial information, she failed to point out--and by
    the way former Director Chopra also failed to point out--the
    only reason why DOGE had access to that information is because
    the bureau itself collected that information.
        Let me just ask you to correct the record for 60 minutes.
    Would DOGE have had access to personally identifiable financial
    information of Americans had the CFPB not collected it in the
    first place?
        Dr. Michel. No.
        Mr. Barr. No. Okay. Can you also inform the American public
    who maybe were misinformed by the 60-minutes interview what
    happened with all of that personal financial information that
    the CFPB collected in, I believe, it was March 2023 when the
    CFPB experienced a data breach?
        Dr. Michel. They had a data breach. A lot of people got
    access to information that they should not have had access to
    because that was collected in the first place.
        Mr. Barr. What is the greater threat to Americans'
    financial data privacy, the CFPB or DOGE?
        Dr. Michel. I did answer on that interview. I do not know
    that it made the segment, but I said they have no greater
    concern that anybody in the administration now has access to
    that information than it did at the agency. The Bureau itself
    had. I would say yes, my problem is that they have that
    information to begin with.
        Mr. Barr. Yes, exactly. Let me ask you this. Does the Fed's
    role in funding the CFPB politicize the Fed?
        Dr. Michel. Absolutely. It should not be set up that way.
        Mr. Barr. If you are concerned about politicization of the
    Federal Reserve, why we do not, how about this, take the Bureau
    away from the Federal Reserve and subject it to the
    congressional appropriations process? Do you think that is a
    good idea?
        Dr. Michel. Absolutely.
        Mr. Barr. Let us join in a bipartisan way, reassert
    Congress' appropriation authority, and actually depoliticize
    the Federal Reserve by taking the Bureau out of the Fed Bank
    regulation-Mr. Wang, I want to ask you about the bank
    regulation's impact on monetary policy, specifically, the way
    the SLR has currently calculated disincentivizing banks from
    serving as intermediators in the primary, secondary, and repo
    market for U.S. Treasury securities decreasing liquidity in the
    Treasury markets.
        Mr. Wang, would an increase in market liquidity and
    stability help bring the long end of the yield curve down,
    which would in turn reduce mortgage rates and therefore reduce
    the cost of living for Americans?
        Mr. Wang. I believe it would.
        Mr. Barr. Would this give the Federal Reserve greater
    flexibility to lower the Fed funds rate and ease monetary
    policy?
        Mr. Wang. Yes, it would.
        Mr. Barr. This is very important for all of us to remember.
    If you want lower interest rates, if you want to lower
    inflation, the Fed needs to focus on deregulation, and
    especially with the SLR.
        Let me ask you about the balance sheet, and I would like
    Dr. Kohn to weigh in on this. Shrinking balance sheet on the
    one hand obviously pulls the money supply back and from that
    standpoint might be disinflationary. Also shrinking the balance
    sheet decreases demand for Treasurys, possibly pushing upward
    pressure on the 10-year. Is shrinking the balance sheet
    inflationary or disinflationary?
        Dr. Kohn. I would say it is disinflationary to a minor
    extent for the reason you said. Pulling it back probably puts a
    little bit of upward pressure on that 10-year.
        Mr. Barr. Okay. Let me ask a final question, a lot of
    conversation about the 50-basis point cut in September.
    Certainly, even if Chairman Powell is right that they are not
    focused on politics, the perception was really bad. It was a
    bad look 2 months before a major election to cut that
    aggressively 50 basis points in my view. Was this a mistake
    because even though the Federal funds rate was cut
    aggressively, you still had an increase in the 10-year? All at
    the same time, anyone?
        Dr. Kohn. I do not think the increase in the 10-year
    reflected the cut in the Federal funds rate. There was very
    little increase in inflation expectations as measured in the
    market. It was mostly term premium over the next few months,
    and that is about uncertainty. Uncertainty created by the
    election, by financial and economic development, so it was not
    really about the cut in the funds rate.
        Mr. Barr. Obviously, the 30 or fixed-rate mortgage shot up
    despite the rate cut.
        Dr. Kohn. Right.
        Chairman Lucas. The gentleman's time has expired.
        Mr. Konczal. I would also flag, that summer, we breached
    this on rule. So many people were quite worried about an
    incoming recession; that rates were quite restrictive at that
    point.
        Chairman Lucas. The gentleman's time has expired. The chair
    now recognizes the gentleman from Illinois, Mr. Casten, for 5
    minutes.
        Mr. Barr. Okay. I yield back.
        Mr. Casten. Thank you. I just note Mr. Barr's support for
    giving unvetted personnel access to the Treasury payment system
    with unsecured devices, hacking in not only U.S. taxpayers'
    information, but other information held by the Treasury is
    neither patriotic nor supported by the full committee.
        I want to ask a really dumb question first--and this is not
    a gotcha question--does anybody disagree with the statement
    that price increases are inflationary? I see--Okay. We agree
    that the tariff policy that Donald Trump is imposing to raise
    prices on imported goods is inflationary. I am sure we may have
    differences. We certainly have differences up here. The fiscal
    consequences of that, but it raises questions about what
    happens when the first policy of the United States is at odds
    with the monetary policy of the Fed. One is trying to bring
    down inflation. One is actively working to bring it up.
        The 1890s show an example of what happens. I would rather
    not make America great again back in that time period, even
    though a lot of the White House seems to support what life was
    like in the 1890s. For us to manage that, we are going to have
    to keep an eye on the data and the system.
        Do all of you support--as Chairman Powell indicated when he
    was here a few weeks ago--that we have to make sure that data
    at the Bureau of Economic Analysis and the Bureau of Labor
    Statistics stays pure, stays accurate, stays untouched by
    political appointees trying to change that data.
        Dr. Kohn. I think the accuracy and the purity of that
    data--and the credibility of that data are absolutely
    essential. Can I make a distinction between price increases.
        Mr. Casten. I want to just move on because I want to get to
    another point that is not as partisan, but I think more
    supportive. I appreciate you saying that, because when Donald
    Trump is saying that he wants to go in and put schedule F
    employees--get rid of them, make this political, there are bad
    things that happen.
        I want to shift to a different issue. I have heard concerns
    from a number of people who I trust about the surging volumes
    of dollar-denominated deposits in non-U.S. banks. Specifically,
    that--and I have a hard time getting data that is--some of the
    data gets a little stale. In 2021, global banks were holding
    over 15 trillion in dollar denominated deposits. The first
    quarter of 2023, it broke a streak of three consecutive
    constractions. There was an increase $326 billion of U.S.
    dollar deposits in foreign banks.
        I guess, Mr. Konczal, given your work on the Federal
    Reserve board, is that consistent with what you are saying that
    we are seeing increased dollar deposits in non-U.S. banks?
        Dr. Konczal. I do not know anything about that.
        Mr. Casten. Okay. Have any of you seen this data or heard
    the concern before? Okay. The issue that has been raised to me
    by several folks is that there is a consistent bipartisan push
    at Treasury to have a strong dollar because it lowers our
    borrowing costs. That in terms makes the dollar very attractive
    for remittances, it makes the dollar very attractive as it--it
    makes our exports stronger.
        If we have increased dollar deposits at U.S. banks, we do
    not have--the Federal Deposit Insurance Corporation (FDIC) does
    not regulate those banks. If there is run on those dollars,
    there is macroeconomic concern. Bank of International
    Settlements (BIS) recently noted that global banks are turning
    to increasingly flighty funding services to secure those.
        In the first step of 2023, dollar funding by money market
    funds to global banks went up by 53 percent. Most of that came
    in the form of repos.
        I guess, Dr. Kohn, are there any hidden risks sitting out
    there in the repo market? Should we be concerned about any
    broader contagion if there is a run on those dollars?
        Mr. Konczal. I do not know enough to comment. I apologize.
        Mr. Casten. Anybody have any intel into that?
        Mr. Wang. I was a repo trader at the Federal Reserve. The
    repo loans are secured by Treasury collateral, so they are very
    safe. In the past, a lot of banks traded unsecured, there was a
    credit risk then. Today, it is a much more stable form of
    finance.
        Mr. Casten. I guess the security of money market funds
    makes sense when we are looking at our own borders. The concern
    I have is what happens if we have large volumes--I mean, maybe
    if any of you just want to answer academically, if you are
    familiar with the immediate data. If you have large growing
    volumes of dollar deposits that are outside the FDIC system,
    and those are being backed by money market funds, should we be
    concerned about that? It seems like with all of the checks we
    have internal to our economy, we know how to regulate those
    because our banks are regulated in the United States. What
    happens if you have huge numbers of dollar deposits at the Bank
    of China?
        Mr. Wang. Historically, what happens if we have a dollar
    distributed abroad is the Federal Reserve has foreign sublines,
    ethic soft lines where they will lend to foreign Central Banks
    who in turn support the dollar deposits in foreign
    jurisdictions.
        Mr. Casten. Does not that then create an issue where our
    foreign adversaries could potentially be creating a run that we
    have to step in and backstop with taxpayer money?
        Mr. Wang. That is possible depending on jurisdiction. Not
    all jurisdictions have soft lines.
        Dr. Kohn. I do think it is important for the authorities in
    the United States and globally to look for spots, examples of
    things that might become unstable because of runs. I do not
    know whether this is--that you have actually spotted one or
    not, but----
        Mr. Casten. I am getting a tap. I do not know if there is
    a--it is a concern. If you learn more, I would love to chat
    with you.
        Chairman Lucas. The gentleman's time has expired. The
    gentleman from Nebraska, Mr. Flood, who is also the Chairman on
    the Subcommittee on Housing and Insurance is now recognized for
    5 minutes.
        Mr. Flood. Thank you, Mr. Chairman. Good morning, everyone.
    I too have been concerned about the side of the Federal
    Reserve's balance sheet. Quantitative easing is a monetary
    policy tool that is less than two decades old. It has already
    led the Federal Reserve to carry a significant balance over the
    last decade.
        Today, the Federal Reserve's balance sheet remains more
    than $6.7 trillion of assets, despite recent efforts at
    quantitative tightening. My concern is that with a pattern of
    quantitative easing over the next couple of years, I feel that
    we will see the Fed's balance sheet grow much faster in bad
    economic times than it will shrink when the Fed moves to
    quantitative tightening during the good times. In this
    scenario, we could see the Fed's balance sheet grow larger and
    larger, and larger over time.
        I would like each one of our panelists to comment on this
    concern that I have. Here is the question. Do you feel that it
    is misplaced, or do you think that there is reason to have
    concern about the possibility of what I am talking about? Dr.
    Kohn, let us start with you.
        Dr. Kohn. I think the balance sheet would grow only if
    interest rates were already at zero and they were a threat to
    the U.S. economy. I am glad that the Federal Reserve has the
    authority and would make the decision to grow the balance sheet
    in order to lower interest rates and stimulate spendings at
    time of weakness. I am not particularly concerned about that.
        Mr. Flood. Thank you. Mr. Wang.
        Mr. Wang. Under current bank regulations, banks are
    required to hold lots of liquid assets, among them reserves. In
    a sense, in order for banks to meet those requirements, we
    would expect the Federal Reserve to gradually grow its balance
    sheet-maybe not at the same rate as it does during emergencies,
    but over time simply to produce liquidity for the banks to
    hold.
        Mr. Flood. Thank you. Dr. Michel.
        Dr. Michel. Yes, so especially if anything else happens,
    any other emergency situation, not necessarily as bad as the
    COVID crisis, but the runoff is so slow, as it was the first
    time; that it is more likely to increase than decrease in the
    long run I think for now.
        Mr. Flood. Thank you. Mr. Konczal.
        Mr. Konczal. I think there is a very big academic debate
    about whether or not we are still in so-called secular
    stagnation or in a period of very low interest rates in normal
    times. If we are still in that world, it would probably expand
    again in the next recession, but if we are not, the Federal
    Reserve has enough leeway with its interest rate policy to
    manage a business cycle, then not. My assumption is that
    baseline probably declined.
        Mr. Flood. Okay. Now that the Federal Reserve has amassed
    such a large balance sheet, one concern is that quantitative
    tightened too quickly could lead to instability in the market
    for Treasury security.
        Here is the question: If we are unable to unwind
    quantitative easy measures in a timely manner due to concern
    with the Treasury market, does that raise questions about how
    viable quantitative easing is as a long-term sustainable
    monetary policy tool? Dr. Kohn, let us start with you.
        Dr. Kohn. I think that I would answer that question the way
    I answered the previous one. I think they can still go out and
    buy more securities if they need to under the circumstances.
    There is really no relationship between the size of the balance
    sheet and inflation. I know that people worry about that in the
    20 teens. People from this committee had conversations with
    staff on this committee. The sheet is blowing up. We are going
    to have inflation. It did not happen until the COVID thing.
    Right? I do not worry about the size of the balance sheet
    relative to inflation, for example.
        Mr. Flood. Thank you. I would like to pivot to Federal
    Reserve's emergency liquidity 13(3) authority. Dodd Frank made
    some changes to Section 13(3), and in the economic downturn
    accompanying the onset of COVID-19's pandemic, we saw the
    Federal Reserve use this revised authority for the first time
    in its new form with Treasury.
        Mr. Wang, what lessons can we learn from how the Federal
    Reserve used Section 13(3) facilities during 2020, and how
    should we in Congress be thinking about this authority moving
    forward?
        Mr. Wang. When I take a step back and look, it seems like
    these 13(3) facilities are growing in their extent. We saw them
    come out during the great financial crisis to help money market
    funds asset that commercial paper. This time around in 2020,
    they also helped corporate credit and mainstream lending
    facilities. It seems that they keep growing, growing, and the
    Fed is in effect being the lender of last resort to everyone in
    the economy. I think it is worth thinking about if that is the
    design of the Fed, if that is in agreement with the wishes of
    Congress.
        Mr. Flood. Thank you, Mr. Wang and thank you, Mr. Chairman,
    for chairing today's committee. With that, I yield back.
        Chairman Lucas. The gentleman yields back. The chair
    recognizes the gentleman from Louisiana, Mr. Fields, for 5
    minutes.
        Mr. Fields. Thank you, Mr. Chairman, for having this
    hearing, and also the ranking member. Also I want to thank the
    witnesses for being here. I only have three questions that I am
    going to direct all three of them to Mr. Konczal.
        First, the Trump Administration's plan to shut down the
    Consumer Protection Bureau to lead to many consumers--to
    financial exploitation, including predatory lending and
    overdraft fees. Could the absence of strong consumer protection
    contribute to the economic instability or financial distress
    for the working class?
        Mr. Konzal. Yes, sir, I believe so.
        Mr. Fields. The Trump Administration also has openly
    pressured the Fed to cut rates. While Chairman Powell has
    consistently said that he has resisted those pressures, and he
    has, do you believe that the Fed is facing greater risk of
    political influence today than previous administrations?
        Mr. Konzal. Yes, I believe the attack on the independence
    of the independent agencies, including the Federal Reserve is--
    we have not seen that kind of risk in a long time. I think the
    way that they are trying--the Trump Administration is trying to
    thread a needle where they are saying the Fed would not be
    independent except for monetary policy is unstable. The people
    I talked to, who would know Reserve and nonpartisan analysts,
    believe that is not really a stable arrangement, and that the
    whole institution, including monetary policy, will be
    politicized under this administration.
        Mr. Fields. My last question is: There are reports that the
    Feds have recently removed public--removed public diversity and
    inclusion data from this website following the Trump
    Administration and opening an unlawful order to eliminate
    Diversity, Equity and Inclusion (DEI) programs.
        Do you see this as a concerning trend? How could we reduce
    transparency in the workforce and have an impact on financial
    policymaking?
        Mr. Konczal. This is not my world, but I do know many
    experts are worried not just about this or that initiative, but
    a more wholesale attack on Civil Rights Law in this country. We
    saw some of the Executive orders that came out. Financial
    inclusion is quite important. It is a huge priority for our
    administrations. You see things about research being pulled
    because it is looking into, say, the way credit or other things
    impact different populations. I think not being able to
    research that or address that would leave many Americans
    behind.
        Mr. Fields. All right. Thank you, Mr. Chairman. I yield
    back the balance of my time.
        Chairman Lucas. The gentleman yields back.
        The chair now recognizes the gentleman from Montana, Mr.
    Downing, for 5 minutes.
        Mr. Downing. Thank you, Mr. Chairman. To the witnesses that
    are on the panel, thank you so much for your time and being
    here today. I am going to start out a little bit on transitory
    inflation.
        Dr. Kohn, the Biden Administration and the Federal Reserve
    spent most of 2021 assuring the American people that the
    inflation they were seeing was merely transitory, and that no
    action was needed. What followed was the worse rate of
    inflation since the early 1980s when the Federal Reserve
    finally changed course. Inflation hits rural areas like
    Montana's Second District that I represent the hardest. How did
    the Federal Reserve get this wrong for so long?
        Dr. Kohn. I think, first of all, the Federal Reserve was
    not alone in getting it wrong. Most economists had it wrong. If
    you look at surveys of economists, they had that wrong.
        Second, I think we need to recognize how unique and unusual
    the situation was. Once a century, the global economy closes
    down because of a pandemic. Right? 1918, and the last time.
    There is really no precedent in how they are going to analyze
    this, what is going on, how soon it is going to unwind. It is
    very, very difficult.
        Third, I think to the Fed's credit, they recognize they
    made a mistake, and they tightened quite substantially in 2021.
    They will be the first to tell you, no, we should have gone a
    little earlier if we knew now--if we had good foresight, we
    would have gone earlier, but it was a very difficult situation.
    To separate the supply effects, when they were going to run off
    versus the demand effects, and tightening policy.
        Mr. Downing. Thank you. Switching here a little bit, this
    is for Mr. Wang. The United States now exceeds $36 trillion in
    debt. That is over $100,000 per person. It is staggering. The
    United States pays more on its interest than it does on
    national defense every year. At our current pace, the interest
    on our debt will be the second largest U.S. expenditure by 2035
    after Social Security. Chairman Powell has repeatedly stated
    our national debt is on an unsustainable path. What does an
    actual debt crisis look like, and how much longer can the
    United States stay on this debt path?
        Mr. Wang. I think in the case of the United States, we are
    special in that we can print our own currency. In that sense,
    we can always afford our debts, but there are macroeconomic
    consequences to this where that could ultimately place upward
    pressure on inflation.
        Mr. Downing. Thank you. Switching again, this is for Dr.
    Michel. I know that Chairman Hill asked a similar question to
    Dr. Kohn, but I am going to try to rephrase. I would love to
    hear yours.
        Federal Reserve has a dual mandate of stabilizing prices
    and maximizing employment. We also know an economy that is too
    hot is likely to suffer from high inflation. The Federal
    Reserve had to react to the trillions in dollars in spending
    from congressional Democrats during the 117th Congress by
    raising interest rates.
        I noticed in your opening remarks that you said that
    Congress gives the Fed too much to do and too much
    discretionary authority. My question to you is: Would the
    Federal Reserve be more effective if its sole mandate was to
    achieve stable prices?
        Dr. Michel. Yes--no, I believe it would. You would be
    giving it something to do that it could actually control, and
    that it could actually directly affect as opposed to something
    that is nebulous and very difficult to define, much less
    control.
        Mr. Downing. Thank you. Dr. Kohn, back to you. During the
    first 2 years of the Biden Administration, congressional
    Democrats spent trillions of dollars in economic stimulus
    despite early warning signs of inflation. Does this sort of
    unprecedented spending make the Federal Reserve's job of
    combating inflation more difficult?
        Dr. Kohn. I think the Fed still had the tools to combat
    inflation. I think what disappointed me a bit was that they
    took so long to use them, and they should have seen the demand-
    enhancing effects of those spending. That should have sent
    their antennas quivering a bit faster on that inflation. The
    Fed could have fought the inflation, but there was difficulty
    analyzing it and difficulty figuring out when to move.
        Mr. Downing. All right. I thank you for your answers, and,
    unfortunately, I have run out of time. Mr. Chair, I yield.
        Chairman Lucas. The gentleman yields back. The chair now
    recognizes the gentlewoman from Oregon, Ms. Bynum, for 5
    minutes.
        Ms. Bynum. Thank you, Mr. Chair, and thank you to our
    witnesses today. The first question I have--kind of, I am a
    mom. I have four kids. Two of them are college age. I love
    them. I want them to live in our community, but it does not
    feel like there is a whole lot of hope for our kids moving out
    of our homes these days. I wanted to ask if any of you knew the
    average age of the first-time home buyer and whether we should
    be concerned? I believe it is.
        Dr. Michel. I believe it has risen up to 32.
        Ms. Bynum. 38 is what I was told.
        Dr. Michel. I believe it is in the thirties now, which is
    higher than it has been, yes. If you are asking me if I am
    concerned about that, no.
        Ms. Bynum. Would you elaborate?
        Dr. Michel. I do not think that the policy that the U.S.
    Congress implements or that the Federal Government implements
    should be directed at picking a particular age for the first-
    time home buyer. I think that the age has gone up is a whole
    set of circumstances, some of which they cannot control. I do
    not think that should be the goal anyway.
        Dr. Kohn. A lot of this is a response to constriction on
    local supply. I think a lot of this has to do with our local
    communities and the zoning laws. We need to increase the supply
    of houses, and that would make it more affordable. A lot of
    that is just State and local regulation.
        Ms. Bynum. Okay. That is very helpful. Thank you.
        Mr. Konczal, so rising mortgage rates have made it much
    harder for first-time home buyers to afford a home and so many
    existing homeowners are locked into low rates, limiting our
    housing supplies, some of which was just alluded to. Given that
    monetary policy plays a role in interest rates, but is not the
    only factor in housing costs, what policy solutions do you
    think could complement the Fed's efforts to ensure
    affordability without increasing inflationary pressures?
        Mr. Konczal. Investments vary. I think associations believe
    there are somewhere between three and six million too few
    homes, so policies that allow us to build homes faster and
    cheaper. More generally, productivity and construction and
    housing have lagged quite a bit over the last few decades. I
    think there has been a lot of research trying to figure out
    why. As Dr. Kohn mentioned, local constraints seem to play a
    role in that.
        I will say efforts to boost income security for young
    families are quite important. I look at the monthly child tax
    credit that was fully refundable that was passed by the
    American Rescue Plan, which cut child poverty in half. I think
    it was an incredibly good investment in families and community,
    and then that investment in children and families pays off
    dividends decades later as better health outcomes, better
    education outcomes and better outcomes for everyone.
        Ms. Bynum. Thank you. My second question on that is we know
    that increasing the housing supply is critical to long-term
    affordability, but the higher borrowing costs have made it more
    expensive for developers to build new homes. How do we ensure
    that efforts to curb inflation do not worsen the housing
    shortage and make affordability even harder in years to come?
        Mr. Konczal. There was an irony, and a difficult part of
    the recovery was that one place where we knew higher
    restrictive interest rates were particularly binding was on the
    housing market, which slowed quite dramatically after having
    picked up. That said, the housing deficit is a longer-term
    problem. It certainly comes from the aftermath of the financial
    crisis, the large rate of foreclosures that happened after
    that, and the much lower rate of housing building that happened
    following that. That was something the Federal Reserve actually
    took into account.
        The fact that the housing--the way that housing inflation
    was measured was quite high, but they were also restricting the
    supply of new housing. That was a more temporary short-term
    problem. As rates normalize, hopefully, we can see home
    building pick up, and we can find ways to make home
    construction productivity even better.
        Ms. Bynum. Mr. Chair, I would just like to put on the
    record, I am very concerned that our young people, based on the
    testimony of the witnesses here today, cannot really look
    forward to being able to purchase a home in the next 10 years
    if they are just graduating college at about 22. I think that
    is what you are seeing as an uprising in his country, and that
    is really challenging for me. Maybe it is on policymakers.
    Maybe what you all are suggesting is not on the Fed, but it is
    on policymakers to make that a reality for our young people.
        Chairman Lucas. The gentlelady is duly noted. Statements
    and comments are duly noted.
        Ms. Bynum. Thank you. I yield back.
        Chairman Lucas. The gentlelady yields back. The chair now
    turns to the gentleman from Indiana, Mr. Stutzman, for 5
    minutes.
        Mr. Stutzman. Thank you, Mr. Chairman, and I thank you,
    gentlemen, for being here, for your comments. I would like to
    go to Dr. Michel and then would also like to invite any other
    comments from the panel as well. As we know, the Federal
    Reserve is mandated by Congress to ensure price stability and
    promote maximum employment. It was only in 2012 that the Fed
    publicly made it known that it had a 2 percent inflation
    target.
        Dr. Michel, your testimony describes some of the reasons
    the Fed has used to justify the 2 percent target. Practically
    speaking, what does it mean to target a constantly positive
    rate of inflation? Is it fair to think about it as debasing the
    value of the dollar by 2 percent a year? I think there are a
    lot of folks on this 2 percent inflation number. I would like
    to hear your comments on that.
        Dr. Michel. That is fair. That is an accurate way of
    looking at it. The most common sort of reason given is that the
    Fed needs to keep inflation going so that the economy keeps
    moving, sort of a grease the wheels thing and motive, rather.
    There is a lot of academic research that suggested that is not
    really the way that works. If you do have a growing economy, an
    increase in supply, everything else constant, you should see
    prices come down. There are more goods and services available.
    They should become less expensive. We prevent that from
    happening. I do not solely blame the Fed, because there is a
    fiscal component, a spending component to that. In conjunction,
    I do blame Federal policy, partly on the Fed side, for trying
    to ensure that the price level never falls.
        Contrary to what Mr. Sherman believes, it is perfectly
    okay, and it has been historic to have a gently falling price
    level. It does not mean that there is a calamity.
        There is a huge difference between a collapse in asset
    prices and a gently falling price level. The latter is not a
    bad thing. It is a good thing.
        Mr. Stutzman. Supply and demand dictate price levels to a
    point, but it feels like we are also trying to manipulate the
    market to hit this 2 percent number.
        Mr. Wang, would you comment? You are shaking your head
    there like----
        Mr. Wang. No, I agree. The 2 percent target is something
    the Fed has said itself where it is demanding given by Congress
    is price stability. It seems like that could be defined by
    Congress if it were of their choosing.
        Mr. Stutzman. So----
        Dr. Kohn. I like the definitions that Chairman Volker and
    Greenspan gave to price stability. That is, is inflation low
    enough that people do not have to take account of it in their
    everyday activities. I think we have a lot of evidence that 2
    percent reaches that. No one was talking about inflation when
    inflation was two or just a little under the teens, or two in
    the early 2000's.
        I think--and another--Dr. Michel is right that one of the
    reasons that people favor a little bit of inflation is that it
    greases the wheels of the--and I have some purical studies that
    I counter him with. I think another reason is the level of
    nominal interest rates.
        Expected inflation gets built into nominal rates. If
    nominal rates are already at one or zero and something bad
    happens to the economy, there is very little the Fed can do to
    lower interest rates. It will be forced into buying securities.
        Keeping nominal rates high enough to embody that 2 percent
    inflation and a 1 or 2 percent real rate, 4 percent means in
    equilibrium, and then something bad happens, then the Fed as 4
    percentage points to lower interest rates to stimulate the
    economy without resorting to quantitative easing (QE).
        Mr. Stutzman. I know my district--I want to come to you,
    Mr. Konczal. I know my district is full of small businesses,
    manufacturing, agriculture. To anticipate these marks is
    sometimes difficult. It is more important to look at where you
    are in the business and where do you believe you can make
    profits. Mr. Konczal, would you?
        Mr. Konzal. I was just going to amplify, the committee
    seems very concerned about the level of balance sheet, and that
    is something that people wonder about. If we were trying to
    target zero percent inflation, the balance sheet would be much
    more volatile because that would basically be the only tool you
    have.
        Mr. Stutzman. You think the 2 percent target is the right
    target?
        Mr. Konczal. I personally prefer a 1 to 3 percent target.
    If it had served New Zealand and many other countries that had
    really fantastic macroeconomic concerns, I think the point
    target is a little hard and gets into this averaging question
    that the Fed is currently doing--it is actually a wide variety,
    and I think it would be a great thing for the task force to
    study.
        Mr. Stutzman. Mr. Chairman, I will yield back the balance
    of my time, but I do think supply and demand economics is
    critical for our country to really be successful.
        Chairman Lucas. The gentleman yields back. The chair now
    recognizes the gentleman from Wisconsin, Mr. Fitzgerald, for 5
    minutes.
        Mr. Fitzgerald. Thank you, Chairman. Thank you, gentlemen,
    for being here. Jason Furman--I think, his name came up
    earlier--was President Biden's top economist at the Council of
    Economic Advisors (CEA). He recently published a lengthy op-ed
    admitting that Bidenomics was a failure. His arguments, what he
    argued was--I think a lot of Democrats were kind of in denial
    of this, but the inflation was principally caused by too much
    government spending. I know there were numerous bills that were
    rolled through while I was a Member the last couple of
    Congresses and not just the global shock of the supply chains,
    right?
        Yet, when I read Mr. Konczal, your written testimony, you
    did not acknowledge that government spending led to
    inflationary increases at all. I would just like to hear your
    response to that because I think it is important as we look
    back on what happened now. What is the case with those that say
    that did not happen? I do not want to put words in your mouth.
        Mr. Konczal. Absolutely. I am very familiar with Jason's
    article. To me it is an argument from 2022. Jason Furman at
    that point argued you would need a mild recession to get
    inflation below 4 percent, a severe recession to get inflation
    below 3 percent. Right now inflation is about 2.5 percent,
    still a little higher than we would like it, with a period of
    growth that was above trend and unemployment below 4 percent on
    average.
        I think that argument, which is what the argument is of the
    piece--there is a lot of different arguments about how much the
    American Rescue Plan (ARP) may have contributed. Prices rose to
    about 21 percent under President Biden's 4 years. Normally,
    they would have risen about 8 percent.
        I have seen some arguments that maybe about 2 percent of
    that could have been attributed to fiscal stimulus. With 19
    percent instead of 21 percent, prices really have changed the
    needle for everyday families, probably not. The income security
    that came particularly through the child tax credit and many
    other things helped stabilize balance sheets that I believe
    gave us the best recovery following the invasion.
        You you can look at blue chip forecast. It was brought up
    before this private, nonpartisan. Even after the American
    Rescue Plan passed the highest estimate in blue chip for
    inflation in 2022 with 3.2 percent, the actual number was 8
    percent. I think the shocks of the reopening, the shocks of
    huge changes and demand and as a reminder, the unprovoked
    invasion of Ukraine by Russia really threw commodity markets
    into turmoil, which in the long run those relative prices do
    not matter.
        In the short term, the price of goods skyrockets, but the
    price of services does not fall. That increases overall
    inflation, and services come back online to a higher price
    level.
        We can argue at the margins how much a difference it made,
    but the idea that it was the primary driver of an inflation
    that was global and was seen by other peer countries, I just do
    not think the evidence is there.
        Mr. Fitzgerald. Dr. Michel, was not inflation a result of
    not just supply side shocks related to the pandemic, but just
    too much government spending? I mean----
        Dr. Michel. Yes, it definitely was a cause, one of the
    causes for sure, and that it did occur globally by the way. We
    are not the only country that did a lot of government spending.
    We are not unique in that regard either.
        Mr. Fitzgerald. Dr. Kohn, let me just kind of switch topics
    really quick. Recent economic data indicates long-term interest
    rates have disconnected from the Fed's expectations. With 10-
    year rates now about 40 basis points higher than what the Fed
    expected, do you think that was predictable, or do you feel
    like everything that has happened--we have had the chairman
    before the committee numerous times, the full committee. Where
    do you think we are right now?
        Dr. Kohn. I think there have been a couple of different
    contributors to the rise in long-term rates. One is that
    because the economy was so strong in the fourth quarter and
    coming into the first quarter, and financial markets were
    ebullient, people took out some easing that they had built into
    the Fed policy. They thought the economy was going to be
    weaker, Fed policy was restrictive, Fed was going to have to
    cut into rates by more.
        Now, they have put a little more back in there, but the Fed
    itself and the market saw less need for easing. It was not a
    question that the Fed would need to raise rates, but it would
    be easing less.
        Second, there is a little bit of extra inflation in there
    partly because of the concerns about the tariffs and what that
    would do to the price level near-term inflation.
        Third, a lot of it is the so-called premium, the stuff we
    cannot attribute to expected policy or inflation. It is
    uncertainty about what is coming next. The fact that if you are
    holding a long-term security, you are taking risks because the
    price of those securities goes up and down. You need to be
    compensated for risks, and you have concerns about the risks.
        Some of it could be the fiscal trajectory that we have been
    talking about. The unsustainable fiscal trajectory and few
    hints that it will change any time soon. I think there are a
    bunch of different reasons for that basis point increase in the
    10-year rate.
        Mr. Fitzgerald. Mr. Chairman, before I yield back, can I
    ask unanimous consent to insert Jason Furman's op-ed titled,
    ``The Post-Neoliberal Delusion. The Tragedy of Bidenomics,''
    into the record.
        Chairman Lucas. Seeing no objection, so ordered.

        [The information referred to can be found in the appendix.]

        Chairman Lucas. The gentleman's time is expired. I would
    like to thank all of our witnesses for their testimony and
    simply to note that as we would say back home, monetary's
    policy is a chess game. It is not checkers, is it gentlemen?
        Without objection, all members will have 5 legislative days
    to submit additional written questions for the witnesses to the
    chair. The questions will be forwarded to the witnesses for
    their response. Witnesses please respond no later than April
    30, 2025. This hearing is adjourned.

        [The information referred to can be found in the appendix.]

        [Whereupon, at 11:49 a.m., the committee was adjourned.]

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