[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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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:]
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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.]
APPENDIX
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