[House Hearing, 119 Congress]
[From the U.S. Government Publishing Office]
U.S. TREASURY DEBT IN THE MONETARY SYSTEM
=======================================================================
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
__________
APRIL 8, 2025
__________
Serial No. 119-14
Printed for the use of the Committee on Financial Services
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
www.govinfo.gov
_______
U.S. GOVERNMENT PUBLISHING OFFICE
59-942 PDF WASHINGTON : 2026
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
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Tuesday, April 8, 2025
OPENING STATEMENTS
Page
Hon. Frank D. 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................ 4
WITNESSES
Mr. Tom Wipf, Managing Director, Union Bank of Switzerland (UBS),
Serving as CEO of Credit Suisse U.S. Entities.................. 5
Prepared Statement........................................... 7
Hon. Scott O'Malia, CEO, International Swaps & Derivatives
Association (ISDA)............................................. 36
Prepared Statement........................................... 38
Dr. Kristin Forbes, Jerome and Dorothy Lemelson Professor of
International Economics and Management, MIT Sloan School of
Management..................................................... 46
Prepared Statement........................................... 48
Hon. Nellie Liang, Senior Fellow, Economic Studies, Brookings
Institution.................................................... 55
Prepared Statement........................................... 57
APPENDIX
RESPONSES TO QUESTIONS FOR THE RECORD
Written responses to questions for the record from Mr. Tom Wipf
Representative Marlin Stutzman............................... 83
Representative Maxine Waters................................. 83
Written responses to questions for the record from Hon. Scott
O'Malia
Representative Scott Fitzgerald.............................. 85
Representative Marlin Stutzman............................... 86
Representative Maxine Waters................................. 87
Written responses to questions for the record from Dr. Kristin
Forbes
Representative Maxine Waters................................. 89
U.S. TREASURY DEBT IN THE MONETARY SYSTEM
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Tuesday, April 8, 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 2 p.m., in room
2128, Rayburn House Office Building, Hon. Frank D. Lucas
[Chairman of the Task Force] presiding.
Present: Representatives Lucas, Stutzman, Flood, Vargas,
Sherman, Casten, 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 titled, ``U.S. Treasury Debt in the
Monetary System.''
Without objection, all members will have 5 legislative days
within which to submit extraneous materials to the chair for
inclusion in the record.
I now recognize myself for 4 minutes for an opening
statement.
OPENING STATEMENT 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
Welcome to the next hearing of the Task Force on Monetary
Policy, Treasury Market Resiliency, and Economic Prosperity.
This hearing is entitled, ``U.S. Treasury Debt in the Monetary
System.'' Today, we will evaluate the health of the U.S.
Treasury market and hear from our expert panelists on where
improvements can be made.
The U.S. Treasury market is the deepest, strongest, and
most liquid in the world. As such, it is the foundation of the
global financial system, and we must safeguard its status and
functions. The Treasury market is invaluable because of its
multifunctionality. It equips investors with a safe investment
in times of market stress. It serves as a risk-free benchmark
for other financial instruments. It is also used to finance
government operations and manage our debt in addition to being
used as an essential tool with which the Federal Reserve (Fed)
conducts monetary policy. Put simply, U.S. Treasuries are the
most essential asset class to the global economy.
The willingness of global investors to hold Treasuries
attracted by their low risk and high liquidity is unrivaled.
However, the Treasury market has undergone fundamental changes.
First, the volume of U.S. debt has been rapidly increasing. Our
national debt has skyrocketed to over $35 trillion. Supply
chain constraints, global conflicts, and irresponsible fiscal
policy have contributed to unparalleled and unsustainable
growth of our national debt. The Treasury Department must
market this debt to investors to meet spending obligations.
With more than $28 trillion outstanding, the Treasury market
has doubled in the last decade alone.
Second, paired with this explosion in Treasury debt, there
are challenging conditions for market participants. The last
decade has brought significant changes in technology and
regulation which have impacted the capacity of dealers to
provide market liquidity in periods of stress. This was
underscored most recently in March 2020, where dynamic
volatility in the Treasury market required the Federal Reserve
to step in to calm the markets. We will hear today from our
witnesses about what these changes mean for the market and how
we should respond.
Today's hearing will also discuss how the Treasury market
is an essential tool for the Fed's monetary policy goals. The
Fed currently holds more than $4 trillion of Treasuries on its
balance sheet, the largest single holder of Treasury debt. The
composition of the Fed's balance sheet has a profound impact on
market conditions and economic stability. We must ensure that
the Fed's monetary policy functions are not impeding the health
of the Treasury market.
An efficient and resilient Treasury market is paramount to
U.S. leadership abroad and the dollar status as the world's
reserve currency. This privilege cannot be jeopardized. We must
prioritize greater liquidity of the Treasury market for the
United States, for the investor, and for the taxpayer.
With that, I yield back.
The chair now recognizes the Ranking Member of the Task
Force, Mr. Vargas, for 4 minutes for an opening statement.
OPENING STATEMENT 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. Thank you very much, Mr. Chairman, and thank
you for convening this hearing.
I also want to thank all the witnesses for being here
today. Thank you very much. We appreciate it.
Before we discuss the issue of Treasury market resilience,
we cannot ignore the larger threat to our country's economy.
Whether it is indiscriminate tariffs or increasing the deficit
to cut taxes for the wealthy, President Trump's economic
policies are making Americans feel less and less confident
about the economic future.
We see this in consumer sentiment data. The Conference
Board's Consumer Confidence Index has fallen to its lowest
level since January 2021. The University of Michigan's consumer
sentiment survey for March had its lowest rating since November
2022. It is not just consumers that are feeling these effects.
Businesses are tired of the chaos and the uncertainty.
A survey conducted by the Federal Reserve Bank of Dallas
had one executive respond, how can you do business planning
with all the uncertainty and all the daily changes in the
direction made by the Trump Administration? Small business
owners agree. A Harvard Business School study found that more
than half of small and mid-sized business owners in the United
States expect tariffs enacted by Trump and the Trump
Administration to increase their operating costs. More than 40
percent predicted that their sales would decline because of the
tariffs.
On Friday, Chairman Powell cautioned that these tariffs are
significantly larger than expected, and the same is likely true
for the effects which, ``will include higher inflation and
slower growth.''
These tariffs will not just hurt the 62 percent of
Americans who have exposure to the stock market. According to a
recent analysis from a research center at Yale, these tariffs
will cost the average U.S. household an estimated $3,800.
Others have estimated that households could end up paying
almost $8,000 more because of Trump's tariffs. This economic
tsunami is going to hit working-class and middle-class
Americans the hardest. Not only are these tariffs a tax on
Americans, but they are also a textbook example of the kind of
regressive tax that will be borne by most of the people who
have the least.
How does this uncertainty affect our Treasury market? Not
only is the Treasury market the deepest and most liquid market,
but as former Secretary Janet Yellen put it, it is the very
bedrock of the global financial system. The U.S. Treasury
market is so important because investors have come to trust the
stability and the credit of the United States. Yet, less than
80 days into his term, President Trump has shown he is willing
to gamble away the stability by picking a trade fight with the
rest of the world. A recent Bloomberg article warned that
foreign investors may also lose interest in purchasing more
Treasuries due to President Trump's actions.
Today, when we talk about what we can do to make our
Treasury market more resilient, we cannot lose sight of the
biggest threat to our economy: The Trump tariffs. This ongoing
tumult makes the resilience of our Treasury market all the more
important.
Within the Treasury market, we should always be looking for
ways to improve efficiency, resilience, and overall
functionality. This includes looking at the supplemental
leverage ratio (SLR) to make sure that the intermediaries are
not disincentivized to hold low-risk assets like Treasuries. We
must simultaneously make sure that the intermediaries remain
well-capitalized to maintain the safety and soundness of our
economy.
Central clearing is another way we can strengthen our
Treasury market and continue to mitigate risk. The Securities
Exchange Commission's (SEC's) effort to increase the number of
Treasury markets transactions that are centrally cleared is
laudable, and it is good to see that the market participants
are committed to a collaborative approach to making sure that
we reduce the risk in the Treasury market.
I look forward to the discussion, and I yield back the
balance of my time.
Chairman Lucas. The gentleman yields back.
The chair now recognizes the chairman of the full
committee, Mr. Hill, for 1 minute.
STATEMENT OF HON. FRENCH HILL, CHAIRMAN OF THE COMMITTEE ON
FINANCIAL SERVICES, A U.S. REPRESENTATIVE FROM ARKANSAS
Chairman Hill. I thank Chairman Lucas.
I appreciate the panel being with us today.
The Treasury market is the world's largest, most liquid
government bond market. With 28 trillion of Treasury securities
outstanding, it is woven into the fabric of our economy and
that of the entire globe. It is the fundamental anchor of the
dollar-based reserve currency system. The Treasury market
affords investors the opportunity to purchase nearly risk-free
assets that facilitate our Nation using those favorably priced
proceeds to invest in our national priorities.
This globally critical role of the Treasury market requires
our attention. While the Treasury is the global safe-haven
asset for many trading partners, one must note that the most
consequential purchaser of the U.S. debt is not a foreign
Nation. It is the Federal Reserve. Owning over $4 trillion of
Treasuries through its many rounds of quantitative easing, the
Fed is the single-largest owner of U.S. debt.
However, increasing Federal budget deficits and owner's
regulations call into question the Treasury market's
resilience. A Treasury market that fails to function
effectively stops our economic growth from prospering. This
hearing is an opportunity to explore the relationships between
the Treasury market and examine its securities and how they are
utilized for monetary policy.
I thank the Chairman, and I yield back.
Chairman Lucas. The gentleman yields back.
The chair now recognizes the ranking member of the full
committee, Ms. Waters, for 1 minute.
HON. MAXINE WATERS, RANKING MEMBER OF THE COMMITTEE ON
FINANCIAL SERVICES, A U.S. REPRESENTATIVE FROM CALIFORNIA
Ms. Waters. Thank you very much.
While we examine ways to strengthen the resilience of the
Treasury market, it is impossible to ignore the impact of
Trump's harmful policies and the damage they are inflicting on
the economy. After Trump announced his tariff plan last week, a
record 6.6 trillion in wealth was erased in 2 days in the stock
market, and there is more pain to come. In fact, Fed Chair
Powell has warned that, and I quote, We face a highly uncertain
outlook with elevated risk of both higher unemployment and
higher inflation, unquote, So much for the lower costs for our
consumers.
Now, Republicans are trying to pass a budget loaded with 7
trillion in tax cuts for the wealthy while they slash Medicaid
by $880 billion. If we want lower prices, more jobs, and a
stable market, Trump and the Republicans should promptly
reverse course.
Thank you. There is a lot more I could say, but I will just
yield back the balance of my time.
Chairman Lucas. The chair thanks the gentlelady and notes
to my colleagues that, presently, we are scheduled to have a
couple of votes, but since the floor has not been called into
session, I am inclined--with the agreement of my ranking
member--to proceed with the testimony because your time is
extremely valuable, my friends. At a certain point in the
votes, we will suspend and return.
With that, today, I would like to welcome the testimony of
Mr. Tom Wipf, who is the Managing Director of the Union Bank of
Switzerland (UBS), currently serving as the CEO of the Credit
Suisse U.S. entities.
The Honorable Scott O'Malia, who is the CEO of the
International Swaps and Derivatives Association.
Also, Professor Kristin Forbes, who is the Jerome and
Dorothy Lemelson Professor of International Economics and
Management at MIT Sloan School of Management.
The Honorable Nellie Liang, who is a Senior Fellow of
Economic Studies at the Brookings Institute.
We thank 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 entered into the record.
Let us begin with you, Mr. Wipf. You are recognized for 5
minutes for your oral remarks.
STATEMENT OF MR. TOM WIPF MANAGING DIRECTOR, UBS, SERVING AS
CEO OF CREDIT SUISSE US ENTITIES
Mr. Wipf. Chairman Lucas, Ranking Member Vargas, and
distinguished members of the Task Force, thank you for the
opportunity to testify today on the United States Treasury
market.
My name is Tom Wipf. I am the Managing Director at UBS,
where I currently lead the integration of the Credit Suisse
acquisition. I am here today as a Board Member of the
Securities Industry and Financial Markets Association. Also,
from 2007 through 2019, I served as the Chair of the Treasury
Market Practices Group or the TMPG, a group sponsored by the
Federal Reserve Bank of New York that focuses on the integrity
and efficiency of the Treasury market.
I have also had the pleasure of testifying before this
committee in 2021 when I served as Chair of the Alternative
Reference Rates Committee or the ARRC, a group of private-
sector market participants convened by the Fed to ensure
successful transition from London Interbank Offered Rate
(LIBOR).
The U.S. Treasury market is the largest and most liquid
bond market on the planet. Its smooth functioning is essential
to achieving the lowest cost to taxpayers in connection with
the financing of our debt and the efficient operation of the
financial system.
Backed by the full faith and credit of the U.S. Government,
Treasuries are considered by market participants to be the
benchmark credit. Treasury yields have an impact on the rates
that consumers, businesses, and governments across the globe
pay to borrow money. In addition, the U.S. Treasury repo market
is a key transmission mechanism for U.S. monetary policy.
Treasury markets operate through primary dealers, banks,
and broker-dealers that have been designated as counterparties
of the Fed. They are the largest buyers of new Treasury debt
and act as market-makers or intermediaries in the secondary
market. Treasury securities are widely held and actively traded
by public and private institutions, particularly financial
institutions.
The Treasury market has grown significantly in recent
years, with $28 trillion in Treasury securities outstanding
today, which is more than double the total from 2016 of $13.9
trillion. This growth trend is likely to continue. While the
market has expanded significantly, the capacity for dealers to
intermediate has become increasingly constrained by the
application of additional capital and prudential requirements.
One example is a supplementary leverage ratio. The SLR and
other leverage requirements are intended to be risk-agnostic
backstops to risk-based capital requirements. However, they do
create binding constraints for some large dealer banks,
reducing their capacity to intermediate the Treasury markets.
Another is the original Basel III proposal's Fundamental Review
of the Trading Book, which would disincentivize banks from
market-making in U.S. Treasuries. Additionally, proposed
revisions to the global systemically important bank's (G-SIB's)
surcharge would inhibit liquidity in the Treasury futures
market.
Today, U.S. Treasury transactions are either settled
bilaterally or centrally cleared. The SEC finalized a rule in
December 2023 on the clearing of U.S. Treasury securities,
which will require most market participants to centrally clear
eligible cash and repo transactions.
We at the Securities Industry and Financial Markets
Association (SIFMA) remain steadfast in our efforts to
operationalize the clearing mandate. Over the past year, SIFMA
has been working with its members--both buy and sell side--and
other market participants to develop standardized
documentation, policies, and procedures to facilitate the
transition to mandated central clearing.
At the same time, SIFMA and its member firms are gratified
to see SEC Acting Chairman Uyeda extend the implementation date
for mandated central clearing of Treasury securities and repo.
This additional time will help ensure a smooth transition and
avoid disruption. We also think the SEC could make certain
technical fixes to the rule that I will cover in greater detail
in my written remarks.
I will close where I started. The U.S. Treasury market
remains the most important financial market in the world. Any
reform of the Treasury market should enhance liquidity, market
resiliency and preserve the capacity of dealers and other
market participants to meet the growing demand for and supply
of Treasury securities. Thank you.
[The prepared statement of Mr. Wipf follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Lucas. The gentleman yields back.
The chair now recognizes Hon. O'Malia. You are recognized
for 5 minutes for your oral remarks, please.
STATEMENT OF HON. SCOTT O'MALIA, CEO, INTERNATIONAL SWAPS &
DERIVATIVES ASSOCIATION
Hon. O'Malia. Chairman Lucas, Ranking Member Vargas,
members of this Task Force, thank you very much for the
opportunity to testify today.
The U.S. Treasury market is the deepest, most liquid in the
world, as has been stated. The most important changes are
coming to it in the form of mandatory requirements to centrally
clear Treasury securities. International Swaps & Derivatives
Association (ISDA) supports these measures. We also support
several important regulatory initiatives that will be
fundamental to their success.
These initiatives include, first, changes to the
supplemental leverage ratio. This should be modified to ensure
banks have the balance sheet capacity to provide intermediation
and client-clearing services in the U.S. Treasury market,
including during periods of stress.
Second, the Basel III endgame and surcharge for globally
systemic banks or the G-SIB must be revised to remove any
unnecessary and disproportionate tax on clearing.
Third, margining and capital treatment of client-clearing
exposures must be revised to reflect the actual risk of
clients' overall portfolio.
Fourth and finally, it is important that policymakers,
market infrastructure providers, and market participants
continue to work together to address the various operational,
legal, and regulatory issues related to implementing the
clearing mandate.
Let me briefly describe each of these initiatives. First,
the SLR. At the height of the global pandemic in April 2020,
concerns about bank intermediation capacity prompted the
Federal Reserve to temporarily exclude U.S. Treasuries from the
SLR calculation. That is because the SLR serves as a nonrisk-
sensitive constraint on banks. It can impede their ability to
act as intermediaries, particularly in times of stress. Last
year, I sent a letter to the U.S. banking agencies requesting
that this exemption be introduced on a permanent basis.
The SLR is not part of the Basel endgame package; so, we
would need a separate consultation to amend it. We were pleased
to hear that Federal Chairman Powell acknowledged this in his
February testimony before this committee that changes are
necessary, as well as comments by Secretary Bessent and Reserve
Governor Bowman drawing attention to this issue as well.
A second capital issue is the impact of the U.S. Basel III
endgame rules and the surcharge on G-SIBs. It has long been
clear that these measures, as currently proposed, are
inappropriately calibrated. Nowhere is this more evident than
when it comes to clearing. Analysis by ISDA and SIFMA has shown
that the Basel proposals and the G-SIB surcharge would increase
capital on the U.S. G-SIB client-clearing business by more than
80 percent.
This punitive tax is completely at odds with the policy
objectives to promote the use of central clearing. It is not
aligned with risk and would bring economic viability of the
client-clearing business into question precisely at the wrong
time.
A third issue is the efficient clearing of U.S. Treasuries
by clients that requires the amount of margin posted to reflect
the actual risk of client exposures across their entire
portfolio. Capital requirements must also reflect this actual
risk.
To achieve this, margin offsets across Treasury securities
and futures transactions need to be extended to the client
positions as well, as they are currently for clearing members.
The offsetting risks--they need to be recognized when banks
determine their exposure to clients under the U.S. capital
framework. Without such recognition, bank capital requirements
will overstate the risk in a client's portfolio.
Fourth, ISDA and its members support the Treasury clearing
and believe that it is critical that markets are able to
implement the clearing mandates in a safe and efficient manner.
The committee's continued review of the implementation
timelines can help do that.
Good progress is being made in many areas. ISDA, for
example, has published an analysis of various clearing models,
conducted multiple education seminars and conferences, and is
collaborating with others, including SIFMA, to develop
appropriate client documentation, but clearing models and
clearinghouse offerings are still under development and will
require regulatory approvals to test--and test once they are
finalized. Then thousands of counterparties around the world
will need to agree to these new terms.
In closing, let me reiterate our view that has given us--
given the pivotal role that U.S. Treasuries play in the
derivatives and financial markets, we need to ensure that
capital and margin rules support Treasury market liquidity,
appropriately reflect risk, and facilitate clearing. We urge
policymakers to address necessary corrections and bank capital
regulations to ensure the effective implementation of the
clearing mandate.
Working to deliver the required legal and operational
solutions is already underway, but there is plenty more to do
in terms of addressing these issues. ISDA and our members are
committed to doing our part to making sure that the market
continues to function smoothly and effectively.
I would like to thank the Financial Services Committee and
this Task Force for their attention to this critically
important matter. Thank you very much.
[The prepared statement of Hon. O'Malia follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Lucas. Thank you, sir.
Dr. Forbes, you are recognized for 5 minutes.
STATEMENT OF DR. KRISTIN FORBES, JEROME AND DOROTHY LEMELSON
PROFESSOR OF INTERNATIONAL ECONOMICS AND MANAGEMENT, MIT SLOAN
SCHOOL OF MANAGEMENT
Dr. Forbes. Thank you for inviting me to testify. This Task
Force is an important addition to the oversight provided by
Congress.
A well-functioning Treasury market and effective monetary
policy are both critical foundations of U.S. economic
prosperity, and, unfortunately, both are facing challenges,
even before the volatility of the last few days. This is an
important time to reinforce what has worked well as well as to
consider how to address these new fragilities.
In my written testimony, I address four related points:
First, the importance of the U.S. Treasury market and monetary
policy to households, businesses, and the government; second,
the role of the Treasury market for monetary policy; third,
growing risk to the Treasury market; and fourth, growing
challenges for monetary policy. For my oral comments today, I
will only cover one of those points: Developments and risks in
the U.S. Treasury market.
First, let me briefly summarize my background. I am an
economist, and my primary role since receiving my Ph.D. is as a
Professor at MIT Sloan School of Management. My academic
research addresses questions in monetary policy, financial
regulation, capital flows, financial crises, contagion, usually
from a multicountry perspective. I have also taken several
leaves for policy service, including at the U.S. Treasury
Department, as a member of the White House's Council of
Economic Advisors, and, more recently, on the Bank of England's
Monetary Policy Committee. When not in public service, I have
also been involved in a number of advisory committees and
consultant roles. Today, I am speaking to you in my personal
role as an economist and a professor.
Now, let me turn to today's topic. There are many complex
networks we take for granted in our daily lives, from our
health to the electricity grid. When one component
malfunctions, the disruptions can be severe. The same applies
to the U.S. Treasury market. The market is critically important
to fund the government, and it is the benchmark for other
borrowing costs. A less efficient Treasury market increases not
only borrowing costs for the government but also for mortgages,
car loans, and bank loans for your constituents. The Treasury
market is also central to implementing monetary policy.
While--as we have heard from almost every speaker today--
the Treasury market is the deepest and most liquid financial
market in the world, cracks have recently appeared. Most
notable was in March 2020 when the market became dysfunctional.
Some of the underlying fragilities have only worsened since.
Let me highlight four related developments.
First is the increased scale of Treasury issuance. The U.S.
budget deficit is forecast by the Congressional Budget Office
(CBO) to be almost $2 trillion this year. Under current law,
this must be financed with new debt issuance, and a growing
share of existing debt is in short-term T-bills which need to
be rolled over every year. This combination makes the U.S.
Treasury market much more vulnerable to shocks even if they are
just short-lived.
Second is the more limited ability of broker-dealers to
intermediate between buyers and sellers in the Treasury market,
as we have already heard about from the other people today. The
capacity of this middleman has simply just not kept up with the
increased size of the Treasury market, and this limited
capacity could lead to illiquidity, less efficient pricing,
volatility, and spikes in borrowing costs.
Third is changes in who is purchasing U.S. Government debt
and how they are doing it. Foreigners are purchasing less
balanced by U.S. institutions purchasing more. Many of these
U.S. institutions are hedge funds and asset managers that are
not simply buying and holding Treasuries but using a
combination of repurchase agreements, futures, derivatives, and
hedging strategies combined with high leverage. These
developments have benefits and costs, but one risk is that
these highly leveraged investors are more prone to the fire
sales that trigger market dysfunction.
Fourth and finally there are shifts in geopolitical
alliances and the increased restrictions on trade and financial
flows. This could, over time, reduce the demand for U.S.
dollars and Treasuries. To date, the dollar and Treasury market
is still dominant, undoubtedly because all the other
alternatives have their own challenges. Nonetheless, if
foreigners do become more concerned about potential losses--
which could occur from high inflation, dollar depreciation, new
taxes on their holding, or restrictions on their ability to buy
and sell--this could trigger sudden sales, a sharp dollar
depreciation, and increased borrowing costs for our
constituents.
If that is not enough to worry about, monetary policy also
faces an additional set of challenges. Disruptions to trade and
supply chains will increase both inflation and unemployment,
and central bank independence is under pressure in many
countries around the world. An independent central bank will
not be able to avoid painful economic adjustments but can
stabilize inflation more quickly, limit the extent of price
increases, and require fewer job losses.
To conclude, we are at a historic moment. The global trade
and financial architecture are being transformed. Periods of
transition create opportunities but can also aggravate
underlying risks and vulnerabilities. The risks to the Treasury
market are particularly large today given the sharp increase in
debt and other developments I have highlighted, and any
disruptions in the Treasury market will impede the ability of
the Fed to stabilize inflation and support employment with
moderate long-term interest rates.
The committee's work today has become even more important,
more important than just the 2 and a half months ago when you
were formed. I look forward to your questions.
[The prepared statement of Dr. Forbes follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Lucas. Thank you.
Dr. Liang, you are recognized for 5 minutes for your oral
testimony.
STATEMENT OF HON. NELLIE LIANG, SENIOR FELLOW, ECONOMIC
STUDIES, BROOKINGS INSTITUTION
Dr. Liang. Thank you, Chairman Lucas, Ranking Member
Vargas, committee members. I appreciate the opportunity to
appear today. I will focus on Treasury market resilience and
its importance for monetary policy and financial stability.
The Treasury market, as others have said, is key to
financing our government at lowest cost to the taxpayer. It is
an important channel for Federal Reserve monetary policy. It
provides the benchmark risk-free yield curve globally, and it
is the key source of safe assets and is used by many financial
firms to manage liquidity risk.
The Treasury market serves these critical functions because
it is the deepest and most liquid market in the world, but that
cannot be taken for granted. Electronic trading has increased,
and principal trading firms represent most of the trading in
electronic interdealer markets. Traditional securities dealers
have pulled back from market-making after capital standards and
risk management practices were strengthened after the global
financial crisis, and Treasury debt continues to grow. The
investor base is more price-sensitive as private funds with
leverage and redemption pressures have increased their
holdings, while the share held by foreign official entities who
are less price-sensitive has fallen.
The Treasury market dysfunction at the onset of the
coronavirus disease (COVID) pandemic in March 2020 illustrates
these risks. Without liquidity, Treasury prices fell, and
interest rates rose sharply--an unusual move since investors
would typically flee to safe-haven Treasuries in this type of
situation--and market functioning was restored only after the
Federal Reserve itself began purchasing huge amounts of
Treasury securities to provide liquidity and to ensure the
effective transmission of monetary policy.
Fortunately, the Fed purchases to restore market
functioning were aligned with its, their, monetary policy
objectives at the time to stimulate the economy and raise
inflation to its 2 percent target. It is possible, however,
that the Fed may confront the need to purchase Treasury
securities at a time that it would conflict with its dual
mandate, and avoiding this conflict underscores the importance
of regulatory reforms to strengthen Treasury market resilience.
I will turn now to some key reforms to strengthen
resilience which are detailed in my written testimony. There
have been some significant accomplishments under the umbrella
of the Interagency Working Group on Treasury Market
Surveillance. More data on transactions and on hedge funds are
now being disclosed, and new data is being collected on an
opaque but key segment of the repo market where dealers finance
their clients.
Treasury initiated a buyback program to allow dealers to
sell securities to Treasury to help free up balance sheets, and
the Fed put in place two standing facilities, including one to
finance Treasury repo, which could encourage dealers to invest
in capacity to make markets and support liquidity in times of
stress.
Partial progress has been made in other areas. Of special
importance is the SEC's rule to mandate more central clearing
of Treasuries and repo. Central clearing is used for other
assets and can reduce risk by standardizing risk management
requirements and increasing capacity for intermediation through
multilateral netting.
There are many complicated operational, accounting, and
regulatory issues to resolve, and industry groups are actively
engaged and committed to addressing them. They recently
received an extension of the deadline for 1 year, but they
should not delay further.
Changes should be considered to the supplementary leverage
ratio, the SLR, put in place following the global financial
crisis. The SLR requires banking firms to hold the same amount
of capital for riskless reserves at the central bank as they
would for risky assets. One change would be to exclude central
bank reserves from the SLR calculation but, importantly, with
an adjustment so that there would not be a reduction in total
bank capital.
Finally, to reduce surges in selling in periods of stress,
open-end bond funds should be required to reduce significant
liquidity mismatches which force Treasury sales, and
supervisors should prevent excessive leverage of hedge funds in
trades such as the cash-futures basis trade that can force
rapid or disorderly, unwise positions.
These reforms as well as others in the Inter-Agency Working
Group (IAWG) work streams are complementary and interconnected.
Any one on its own would not be enough to significantly
increase the resilience of Treasury markets in stress periods,
especially as the amount of Treasury debt continues to
increase.
Thank you. I would be happy to take your questions.
[The prepared statement of Dr. Liang follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Lucas. Thank you, Doctor.
After consulting with the ranking member of the Task Force,
we are now 14 and a half minutes into a 15-minute vote. Lest
the indulgence of the panel and the Task Force, we will stand
at ease until this, and the proceeding vote and let us return
for questions. The Task Force stands at ease.
[Recess.]
Chairman Lucas. The Task Force will now reconvene, and we
will turn to our members for questions.
The chair now recognizes himself for 5 minutes for
questions.
Mr. O'Malia, as you know, this week, the SEC will likely
get new leadership. The incoming chair will inherit issues that
have significant consequences for the swaps market at the
clearing room. What are the outstanding questions that warrant
the chairman's immediate attention before the industry is able
to fully implement the rule in time for the deadlines next
year? I will give you a nice question.
Hon. O'Malia. Thank you, Mr. Chairman. We are pretty
confident that Mr. Atkins is going to be able to hit the ground
running as an experienced SEC commissioner from a previous role
and colleagues around him to support him. The SEC is very
focused on this rule and will and should be able to address
this in a very reasonable and immediate way.
There are a couple of SEC changes that we would recommend.
There are some issues around inter-affiliate rules and some
accounting rules to really make this effective. There is some
more information in my testimony that could articulate that. We
need them as a partner in terms of the implementation to make
sure that they approve the various rule books for the
Depository Trust Compan (DTCC), Chicago Mercantile Exchange
(CME), and Intercontinental Exchange (ICE), which are the
competing clearinghouses. They need to make sure that the rest
of the rules are there to facilitate clearing and encourage it.
They have been very good up until now.
The goal of all of this is to make sure we have deep and
liquid markets. We also need to make sure that we have the
delivery of cost-effective clearing, and that also includes
cross-product netting solutions and operational changes that
need to be implemented.
Then, on the industry side, working with them to make sure
we have the appropriate timetables to implement the operational
changes to integrate clearing and custody and the legal
agreements to support the various clearing regimes that are
going to be made available.
Chairman Lucas. Turning to you, Dr. Liang, I continue to
urge the regulators to permanently exclude U.S. Treasuries from
supplemental leverage ratio and the enhanced supplemental
leverage ratio. Near riskless assets like Treasuries should not
be a balance sheet burden to hold like our current regulatory
regime treats them.
Would you expand on your written testimony? Should the
regulators change the SLR or enhanced supplementary leverage
ratio (ESLR) much like they did temporarily in 2022?
Dr. Liang. Thank you for your question. I do believe the
capital requirement that is not risk-sensitive should be
adjusted. I would support excluding reserves at the central
bank which are riskless. I have not supported excluding
Treasuries because they have interest rate risk.
Also, I think it is important to adjust but not in a way
that would reduce the total amount of capital. Bank of England
and the European Central Bank (ECB) have used different
formulations, but they have adjusted these SLR ratios in ways
to not penalize holding riskless assets while, at the same
time, not reducing capital.
Chairman Lucas. Thank you. As Ag Committee Chairman during
the implementation of the Dodd-Frank swap regime, I understood
the value of gathering perspectives from a wide range of
stakeholders.
Mr. Wipf, as former Chair of TMPG, how important is it for
the Treasury, the Fed, and the SEC to engage with industry? Why
does the market benefit when all parties collaborate?
Mr. Wipf. Thank you, Chairman. The view on this is that
every important moment--critical moment in the development of
the Treasury market has involved exactly that, which is a
public-private work where the industry can sort of lay out the
problems and regulators can address it in a more practical way.
Whether it be the original initiation of clearing, the
expansion of that, what we see today from the SEC--all of these
things are evolving.
I think when we go through some of the important moments
over the last several decades, whether it be the flash rally,
whether it be the--all these events, that the industry and the
regulatory community have addressed these issues and have come
to very practical solutions in some cases.
The TMPG, in 2008, following obviously the global financial
crisis and an incredible amount of settlement fails--and
settlement fails, obviously, are one of the key accelerants to
issues during times of stress. Settlement fails create
counterparty credit risk. Counterparty credit risk creates a
series of events and liquidations and serves to accelerate
issues. The TMPG put in place a fails charge which actually
reduced fails by 90 or 95 percent--settlement fails.
Also, over time and following the flash rally, the Treasury
Market Practices Group worked together with the Feds to lay out
a series of maps that served to highlight where there were
potential points of failure in the clearance and settlement
system of the U.S. Treasury market, and many of the things that
we have seen that have come out of the SEC have leveraged some
of that work to really identify where those problems are and
laid it out end to end.
I also think that when we think about the Treasury market
completely and we talk about liquidity, liquidity really is
certainly, obviously, the ability for buyers and sellers to
meet in large sizes and move positions when they need to. The
other part of this is that finality of settlement is critical,
and the robust clearing and settlement structure, which is only
enhanced by further central clearing, is incredibly important.
If we think about all the major events and major
enhancements we have seen, they have exactly gone down that
path, which is input from industry along with practical
outcomes from the regulatory community.
Chairman Lucas. Absolutely. 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 the panel. I apologize for our
tardiness. We did try to get back here as soon as we could.
Thank you, again, for your patience.
I would be remiss if I did not ask about tariffs and the
chaos in the markets. Sunday, walking from the church that I go
to from the entrance of the church to my car, I had three
different families stop me and ask about their 401(k)'s that
are now becoming 201(k)'s because they have lost so much money.
One family in particular is retired, and the chaos that they
see and the investment that they have seen throughout their
lives going down so rapidly has them terrified.
I have to ask. We heard today about stability, full faith
and credit of the United States, all this stuff and at the same
time right now, the markets are going crazy, and Americans are
incredibly fearful of what they see. Would anyone like to
comment on the issue? I think this is very important. I know
that it is not exactly on point, and I will ask some more
questions about exactly what we are here today, but I have to
ask this because, again, it is the question on everybody's
mind.
Ms. Liang, would you like to comment?
Dr. Liang. Thank you for the question.
Tariffs are a tax on imports, and an increase in tariffs in
the size and the breadth and to the very high levels that we
are seeing--historically high levels--is really a massive tax
increase and a major disruption to the economy.
I think we are seeing the effects of the unexpected
increase in the high levels, in the stock market, in the
volatility. Prices are falling. The Treasury yield curve, the
long end is rising. The Treasury yield curve is steepening, and
corporate borrowing costs are rising. I do think tariffs will
increase prices, it will slow down the economy, and we are
creating ourselves a stagflation scenario.
Mr. Vargas. One of the things that concerns me is the
independence to the Fed here because now--even on Friday, we
hear the President saying--on Truth Social saying, ``Cut
interest rates, Jerome, and stop playing politics.'' I see that
as a great danger when you have the President of the United
States speaking in that way and through that medium to the Fed
Chair.
What problems do we have when we do not have a central bank
that is independent? Dr. Forbes, could you comment on that?
Dr. Forbes. Thank you for asking. That is a very important
point.
We know that the immediate effect of tariffs is prices are
going to go up. As Dr. Liang said, the tariffs are just so big,
companies cannot absorb them, and prices are going up. As
people realize they cannot buy as much because things are more
expensive, they are going to be buying less. That means demand
will be falling, companies will sell less, and we could see
increased unemployment.
There is hope that the Fed can then step in and stabilize
the system. Lower interest rates can help support jobs, but
that is going to be tricky in an environment of higher prices.
The Fed cannot help, but the Fed will be much more effective if
it is independent. We have a long history and experience in
other countries that, if the Fed is not independent, inflation
expectations go up and it can be much harder to bring inflation
down. Look at Turkiye, which undermined the independence of the
Fed. We had inflation above 50 percent for 2 years in a row.
Mr. Vargas. I do hope that this information is getting to
the President and the administration because I think it is
going to be a disaster if he goes down this route.
I do want to ask, though, Mr. Wipf, about--you talked about
the full faith and credit of the United States and the mandated
central clearing. You spoke a little bit about that. The added
time that has been given, how important is that? Because we
also heard that, at the same time, they should not delay it any
further. Could you comment on that?
Mr. Wipf. Certainly. Obviously, this is the most important
market in the world. When we talk about periods of volatility--
which, we have recently seen--what is important is the ability
to transmit risk for buyers and sellers. What is important--
critically important is that buyers of Treasury who are seeking
to find that risk-free asset at that time actually get those
deliveries of those securities. That is critical.
I think we stress a lot about the robust infrastructure. We
stress a lot about the importance of central clearing, but by
reducing that traffic and these periods of high volatility, we
are able to see the market function. Obviously, the full faith
and credit of the U.S. Government is paramount.
Mr. Vargas. Thank you very much. I apologize. My time is
up. I did have a question for Hon. O'Malia. I apologize.
Again, I thank the Chair, and I yield back my 10 seconds.
Chairman Lucas. The gentleman yields back.
The chair now recognizes the gentleman from Arkansas, Mr.
Hill, who is also chairman of the full committee, for 5
minutes. Mr. Chairman.
Chairman Hill. Thank you, Chairman Lucas, and thanks for
this great panel.
I think we all just need to take our breath about asking
this panel to comment on equity markets when the equity selloff
is down to where it was a year ago, and I think everybody
believes that the equity markets were particularly overbought
during the run-up to the election.
Sticking to the subject at hand, the CBO is projecting that
we will pass the historic level of debt-to-GDP in 2029 and that
it will be 156 percent by 2055.
Mr. Wipf, the increase in government debt results from
persistently large deficits. That is a concern to both sides of
the aisle here, but since the pandemic, Congress has not been
very successful in doing anything about that. What happens when
the primary dealers run out of capacity to absorb U.S. Treasury
debt?
Mr. Wipf. I think this speaks back to the discussion about
the supplementary leverage ratio and the ability for the
primary dealer community to intermediate large positions, to
intermediate during normal times and during stressful times and
ensuring that the infrastructure around the market post-trade
is sufficient to handle what are greater and greater volumes.
We discussed this in the opening, and the same holds true
here, which is, regardless of the size, we have to ensure that
the infrastructure around the U.S. Treasury market remains
robust. Central clearing is one of the answers. Supplementary
leverage ratio can--by reducing that to any degree will allow
those bank intermediaries and the primary dealers to provide
that period of--the ability to intermediate during times of
stress to prevent some of those outcomes and to at least be
somewhat of a--to limit volatility to some degree by being able
to step in and intermediate without running the large capital
that comes----
Chairman Hill. Thank you very much.
In January, the Fed stated that it was considering slowing
down the pace of its balance sheet reduction due to concerns
about reserve balances around the debt limit negotiations. In
March, the Federal Reserve followed through and reduced the
pace of quantitative tightening (QT) despite one Governor
dissenting.
Professor Forbes, should the Fed have adjusted the pace of
balance sheet reduction and attribute it due to debt ceiling
negotiations? That sounds kind of political to me. What do you
think?
Dr. Forbes. I was worried about that. I am sympathetic to
the Fed wanting to slow down the pace of QT, especially before
they stated they wanted to slow the pace to be able to run it
off as much as possible. I think shrinking the balance sheet is
a worthy goal. It reduces the cost to the Fed, and the goal
should be to reduce it as much as possible, but it should not
be tied to fiscal policy and the government. One of the rules
of church and State is it should not--monetary policy should
not be affected by fiscal discussions.
Chairman Hill. Yes. I agree with that, but regardless of
how big or small the balance sheet is, the size does interact
with the Fed's functioning.
Is maintaining a large balance sheet impeding the
functioning of the market as some would argue has occurred in
Japan? In other words, will shrinking the balance sheet too
quickly impede the functioning of the market or--and what
risks--or what if it just stays this enormous percentage of GDP
since no one will define how many excess reserves we actually
need to have? I am sure you will tell the committee the exact
number of how many reserves we need.
Dr. Forbes. Most definitely not and I am sure the number
changes, too, based on the market environment, which has
changed quite a bit.
Chairman Hill. Right. Yes. Yes.
Dr. Forbes. Shrinking the balance sheet is the goal. If you
have too large a balance sheet as Japan did, that can impede
market functioning in and of itself. If the government owns too
much of the market, it is not efficient. That is why Japan
actually did then shift from buying government bonds to buying
corporate bonds to buying equities because it was impeding the
market.
It is good to get out, but it is good to get out slowly
because if you do quantitative tightening and reduce the
balance sheet too tightly, it could cause stresses to emerge,
and you want to--the goal is to reduce it slowly enough that
you do not cause those stresses to emerge.
Chairman Hill. Thank you.
Former Under Secretary Liang, it is so nice to see you.
Thank you for being back before the committee. Can you share
some light on what happens in other countries? For example,
Canada was able to more quickly shrink its balance sheet. Is
there something we can learn from Canada or U.K. or New Zealand
or Sweden in how they modify their balance sheet size as a
percentage of the economy?
Dr. Liang. I am not that--thank you for the question. I am
not that familiar with how they operate or their operations. I
think in the U.S., we have a very market--capital markets-
oriented system that interacts with the reserves at the banks
in ways that make it unique and need to sort of address these
issues on their own. There are some lessons to learn, but I
would need to get back to you.
Chairman Hill. Yes. If the panel could reflect on that and
just send us your answers in writing and we appreciate your
time today.
I yield back to the chair.
Chairman Lucas. The gentleman's time expires. He yields
back.
The chair now recognizes the gentlewoman from California,
Ms. Waters, also the ranking member of the full committee, for
5 minutes.
Ms. Waters. Thank you very much.
I am going to direct this to Dr. Liang. First, I want to
thank you for your public service both at the Federal Reserve
and most recently at the Treasury as Under Secretary for
Domestic Finance during the Biden Administration, and I
certainly appreciate the work that you did on several fronts,
including stablecoins. Unfortunately, the Republicans seem more
interested in allowing Trump and Elon Musk to enrich themselves
while they write the rules of the road for everyone else.
On the issue of our Treasury market and monetary policy,
Trump has launched a trade war against the rest of the world,
including countries that used to be our friends, and, by doing
so, is raising the price of goods on hardworking families.
Powell has said this will make inflation and unemployment go
up. Do you agree with that?
Dr. Liang. Yes. Ranking Member Waters, I do agree with the
premise--the prediction that tariffs, this increase--both the
size of the increase and the level--have been very unexpected
and will be very disruptive, and we will have inflation and
much slower demand. I think we have created a scenario where--
which is much more difficult for our economy.
I would add that I think there are some longer-term
concerns as well. I believe we are undermining our global
leadership position, and that--coming back to Treasury
markets--raises the risk of undermining the attractiveness of
U.S. financial assets, something that we enjoy. There are
significant privileges to that, and I am concerned about losing
that privilege.
Ms. Waters. I am curious about all the tariff war that has
been created here, and I am looking at the countries and what
he has assessed. A little African country called Lesotho, 50
percent. What does that mean?
Dr. Liang. I am not familiar with how they calculated the
tariffs. I would say I do not agree with the goal of making
every bilateral trade relationship be a zero deficit, but even
stipulating that is the goal, as I understand it, some of the
size and increase in tariffs that they did calculate were based
on formulas that perhaps were not used correctly and were
miscalculated. That is an area where trade experts are better
equipped to answer.
Ms. Waters. I know that you have been talking somewhat
today about the impact all of this is going to have on the
Treasury market. Will you explain what impact it will really
have on the Treasury market and monetary policy, the tariffs?
Dr. Liang. The tariffs. As I mentioned in my testimony, the
Treasury market functioning raises risk to monetary policy if
the Federal Reserve feels that it is needed to intervene and
purchase securities at a time when monetary policy itself would
want to tighten because inflation is high. That raises some
significant conflicts in terms of the Fed's role for managing
crises and responding to market-functioning events in
Treasuries and its monetary policy objectives.
In my oral statement, I suggested that is one of the
reasons behind why it is so important and critical that
Treasury market resilience be strengthened. It is strong, it
can be stronger, and we need to keep working at that.
Ms. Waters. While Trump has made these horrendous moves,
now I understand he is thinking about pulling them back. What
is going on? Somebody help us out.
Dr. Liang. Yes.
Ms. Waters. Big booms, big publicity, and now is he trying
to put everybody in a position where they have to negotiate
with him? They have to come to him, and he can get something,
whatever it is he wants? Does anybody understand this stuff?
You have 7, 8 seconds. No, we are out of time.
I yield back the balance of my time.
Chairman Lucas. You are out of time. The gentlelady yields
back.
The chair now recognizes the gentleman from Nebraska, Mr.
Flood, who is Chair of the Subcommittee on Housing and
Insurance, for 5 minutes.
Mr. Flood. Thank you, Mr. Chairman.
As of January 2025, China was the number two foreign holder
of Treasury securities with about $760 billion worth. That
represents about 2.6 percent of our outstanding debt. Given
China's role as a major holder of Treasury securities, I am
interested in how a broader decoupling scenario with China
would affect Treasury markets.
Dr. Forbes highlighted some of the challenges that Treasury
markets could face in the coming years given the consistent and
persistent issuance of debt in the face of ongoing deficits in
her testimony. We are also seeing current efforts to confront
China directly on trade, something that could either lead to
better trade deals for America in the future or it could
expedite a potential decoupling scenario.
To Mr. Wipf, Mr. O'Malia, and Dr. Forbes, here is the
question: If we move into a bipolar world more similar to what
we saw during the cold war with the U.S. and Russia, where some
countries align themselves to the U.S. and the others to China,
could that have broader implications for our Treasury markets
in relation to foreign purchases of U.S. debt?
Let us start with you, Mr. Wipf.
Mr. Wipf. I will stick to the plumbing of the Treasury
market. I am not sure I can speak on the policy, but I think
when we envision an environment like that, it is just
incredibly important that we have a robust, functioning
Treasury market regardless of who the buyers are at any point.
I think getting back to the supplementary leverage ratio, it
does create economic disincentives for bank dealers to hold
low-returning assets, and because of that, when we get to a
point where we may have imbalances, the primary dealer
community plays a very important role.
I think as we focus on this, wherever volatility comes and
wherever imbalance comes from, it is incredibly important, I
think, that we focus on the ability for intermediaries to play
their role and we ensure that we have a very robust clearance
settlement infrastructure around the U.S. Treasury market.
Mr. Flood. Thank you.
Mr. O'Malia?
Hon. O'Malia. I would agree with that statement. The
supplemental leverage ratio could be a big relief in terms of
enabling U.S. banks and those who are aligned with U.S.
interests in supporting the Treasury market to fully support
that and make sure it is liquid. Beyond that, I would hope that
we have as much transparency into the activities of foreign
governments trading these products.
Mr. Flood. Dr. Forbes?
Dr. Forbes. I talk about this with some more numbers in my
testimony, but at a high level, if China steps back and
foreigners step back from buying our Treasuries, that would
have been a very big concern in the 2000s because then
foreigners were a major part of the demand for our Treasury
market. They have stepped back. Right now, foreigners own
roughly 30 percent of our Treasury market, which is well down
from over 50 percent a couple decades ago.
That means we are less vulnerable. Foreigners do not demand
as many of our Treasuries. The flip side of that is we are now
much more reliant on highly leveraged investors and other U.S.
institutions that have bought Treasuries through more
complicated transactions, which could increase vulnerabilities
through other channels.
Mr. Flood. In a scenario where we continue rapid deficit
spending and we lose significant buyers of our debt due to
broader geopolitical trends, are we in a position to find new
demand for our debt from other sources to offset loss demand
from countries that stopped purchasing U.S. debt?
Dr. Forbes, what do you think?
Dr. Forbes. Yes. We have seen the shift of less foreign
demand for our Treasuries and more demand from U.S. financial
institutions. Hedge funds, asset managers, et cetera--it has
compensated for that, but we also still need foreign inflows to
find our current account deficit. What has also been
interesting is foreigners are buying less of our debt, they are
putting more money in our equity market, and they are buying
more shares of our companies. Again, there are a lot of
different factors to balance out.
Mr. Flood. Mr. O'Malia?
Hon. O'Malia. I think some of the concern I would have
around this, if the U.S. cannot move its debt, it is going to
have to reprice it to a higher level to sell it, encouraging
more participants to come into the market, and that is only
going to make our problem worse.
Mr. Flood. Last question. Do you feel that we are prepared
for a scenario where the U.S. is decoupled from China and the
world is realigned on these bipolar lines?
Mr. Wipf, what do you think?
Mr. Wipf. I do not think I am prepared to answer on foreign
policy.
Mr. Flood. I will let Dr. Forbes try that.
Dr. Forbes. I will focus on the economics, not the foreign
policy or security side. On pure economics, if we decouple from
China, it does mean items will be more expensive. In the 2000
sense there were a lot of challenges, problems with adjustment,
but part of what kept inflation low was the fact we did buy
items from where they were made more cheaply, a lot of which
was China.
Mr. Flood. Thank you very much.
With that, I yield back, Mr. Chairman.
Chairman Lucas. The gentleman yields back.
The gentleman from Illinois, Mr. Casten, who is also vice
chairman of the full committee, is now recognized for 5
minutes.
Mr. Casten. Thank you, Mr. Chair.
Thank you all for being here. I have really been looking
forward to this hearing for a while. This is one of the more
interesting ones we have had in a while, and you are all living
up to my expectations.
Ms. Liang, on Friday, I had breakfast with a mutual friend,
a former colleague of yours, Brett Newman, who is now back at
the University of Chicago.
Dr. Liang. Yes.
Mr. Casten. We were having a good time catching up as old
friends, and then he told me he had to run off and write an op-
ed. I do not know if--did you have a chance to see the op-ed he
wrote in the New York Times? I think you alluded to it in your
conversation with Ms. Waters a moment ago.
Dr. Liang. Yes. I did not see the op-ed, but I also saw him
last week.
Mr. Casten. Good. I knew I liked you.
In this op-ed he mentioned what you had alluded to with
Ranking Member Waters that his research was cited as a basis
for some of the Trump tariffs, and he was very clear that he
had--that is actually a misapplication of his research, but
that as he looked at the impact of tariffs back in the last
round of Trump tariffs, to what degree producers raise their
price in response to tariffs. He found that for every dollar
increase in tariffs producers raised their price by about
$0.95, and that in the math where they claim to use this value,
they plugged in 0.25. His point, which he shared with me, and
in this article, was that if you accept the logic of their
tariffs on the face, which he does not, they are four times too
high, but in any event, massively inflationary.
I say that because I wonder, you had alluded to this in
your opening remarks. You have alluded to this a couple times.
I struggle to understand what happens if U.S. fiscal policy is
aggressively inflationary and the Fed has a mandate to bring
inflation down. As you said, the tools are out of sync. Does
the Fed have any tools?
Dr. Forbes, you had mentioned that sort of, sure,
eventually we get huge unemployment and finally the Fed's tools
work. If we want to avoid that point, does the Fed have any
tools, or do we just fight with each other with our monetary
and our fiscal policy for the foreseeable future?
Dr. Liang. I think a stagflation-type scenario, which one
could see as a likely outcome from the tariffs, are ones that--
is one that the Fed is not well equipped to handle. The Fed
manages aggregate demand, and this is--one can think of this as
a supply shock. Think of it as an increase in oil prices, just
a big increase in oil prices, such as we saw in----
Mr. Casten. Uh-huh.
Ms. Liang [continuing]. and monetary policy cannot fix--
cannot adjust that. They can adjust it only if the higher
prices work into inflation expectations, but then their policy
is to raise rates, which will not support----
Mr. Casten. Yes.
Ms. Liang [continuing]. economic growth. So, it is not a
scenario which monetary policy is designed for.
Mr. Casten. I hope we are all, on a very bipartisan basis,
as scared as I am by that answer.
Mr. Wipf, I wonder, if we accept that premise, how should
markets respond, right, if the Fed tools and Treasury are not
responding? I wonder specifically, when we saw the equity
collapse last week, we saw huge shifts in Treasury pricing, as
you would expect, if domestic folks were pulling money out of
equities and going into Treasuries.
If I am reading the numbers right, we had 15 months of
foreign net purchases of Treasuries prior to November. In the
Treasury data that has come out since November, which I think
is only through January, foreigners have been net sellers of
Treasuries, primarily Canadians. Obviously, something
politically happened in November.
Are you seeing at a granular level that those trends
through January are continuing? Are we seeing a rebalancing,
and is there some explanation for that rebalancing other than
the election in November, or is there something else that is
driving that shift in trend?
Mr. Wipf. I think what we have seen over the last several
days, certainly during this period of volatility, is that from
a central clearing perspective, the DTCC currently clears and
has about $10 trillion in clearing. The market volatility we
have seen and the volumes we have seen are reasonably well
managed across that infrastructure.
Regardless of where--really where the volume, the velocity
of markets or the volatility comes from, the critical piece is
that the markets remain open, and they remain available. I
think----
Mr. Casten. I guess--because I am tight on time. What I am
trying to understand, because I do not want to draw a line that
is not there. Presumably, we know that foreign buyers were
selling Treasuries prior to the tariff shock. We know that
after the Treasury shock, some buyers moved from equities into
Treasuries. Are those buyers domestic primarily, or is this
tariff shock and this conflict in U.S. policy moving foreigners
out of U.S. markets generally?
Mr. Wipf. I do not have that information for you. I would
be happy to get back to you.
Mr. Casten. Okay. I would love to see them.
Thank you. I yield back.
Chairman Lucas. The gentleman's time has expired.
The gentleman from Indiana, Mr. Stutzman, is recognized for
5 minutes.
Mr. Stutzman. Thank you, Mr. Chairman.
Thank you to the panel for being here today.
I would like to ask Mr. Wipf a couple of questions. I
appreciate your testimony and your charts and the information
that is in your documentation here. I really want to focus on
the debt of the Federal Government, because, to me, I believe
that is the greatest--has the greatest--will have the greatest
impact and is the greatest threat to the United States and
other parts of the world.
We have seen what has happened over the past couple of days
with a realignment from the tariffs and what President Trump is
doing bringing people to the table to restructure our trade
policy around the world. I believe that can be fixed over a
period of time. It may take a little bit, because there is a
real shock to the system, but a debt collapse would be almost
catastrophic. Would you agree with that?
Mr. Wipf. Certainly. When we talk about the Treasury
market, obviously the full faith and credit in the U.S.
Government needs to always, always be top priority, and that
means markets need to function. One of the things I think is
important to mention here as well, again, going back to the
SLR, is we always need a well-functioning U.S. Treasury repo
market as well, because it is also another shock absorber for
these big moves of securities across the market and allows, I
think, financing to be provided to people who are buying
securities as well.
Overall, again, it just comes back to the SLR, to central
clearing, and I think the ability for the markets to withstand
the type of volatility we have seen over the past several days
and to be available always.
Mr. Stutzman. Yes, and I want to comment on something that
Dr. Forbes said, too, about foreign investment buying more U.S.
equities versus U.S. Treasuries. At some point both are going
to come to a head, right? They do rely a bit on each other. Our
equity markets are depending on a solid U.S. Federal
Government, correct?
Dr. Forbes, would you want to comment on that?
Dr. Forbes. As long as we run a trade deficit, which we do
right now, it has been worse in the past, but it is still about
4.5 percent of GDP, we have to fund that by capital inflows
from abroad. It is just math. It is economics. Before more of
that funding came through bonds, now more is through equities.
If that funding dries up, we will see an increase in the cost
of our debt, and Treasury yields will rise.
Mr. Stutzman. Mr. Ray Dalio was here a couple of weeks ago
and spoke to Members of Congress, and he, of course, has
experience around the globe with failing governments, and the
question was asked: Can we restructure our debt? He actually
paused for a moment and said, ``I do not think so.'' I mean,
and that is pretty sobering to the fact that we are at that
point where our bondholders, our debtholders would not
restructure U.S. Federal Government debt at this point. He gave
some solutions and directions saying we should have at least 4
percent revenue growth, 4 percent spending cuts, and 1 percent
reduction in interest rates if possible.
Treasury Secretary Scott Bessent had a similar plan of 333,
and I know you probably would all agree to those. You all are
kind of nodding your heads, but to get Congress to do that
seems to be the hurdle today. I hope not. I hope we can get
through that. Is that the right direction, and does that help
the long-term health of not only the United States but other
parts of the world? Anybody want to comment on that?
Dr. Liang. I do not think--I would agree with you,
Representative. The deficit in Fiscal Year 2024 was 6.4
percent, a very high number, given the economy was near full
employment. The trajectory for the deficit given the aging
population is not the right direction. I think any tax in
spending considerations that Congress and the President are
working on need to consider the impact on the debt trajectory.
I do think we are in that kind of situation.
From a risk management perspective, which is where I sat
recently, the concern could be when investors view the path as
unsustainable and start to demand higher interest rates, that
itself increases the deficit, and you can get a spiral that is
concerning. I think the previous administration proposed a
budget with some deficit reduction. That was not passed. I
think in this current administration, considerations for both
tax and spending need to have this in front of mind.
Mr. Stutzman. Okay. Thank you, Mr. Chairman. I will yield
back.
Chairman Lucas. The gentleman's time has expired.
If the panel would indulge the chair, I think the ranking
member and I would like to ask one more question apiece and, by
the way, we appreciate your tolerance while we were in recess,
at ease until the floor situation was addressed in votes.
Mr. O'Malia, you noted in your written testimony that the
Basel III end game proposal would have significant effects on
both the Treasury market and derivative end users. Can you
expand on how important it is for all relevant agencies and
regulators to work together? Would it have been helpful for the
prudential regulators to collaborate with the Commodity Futures
Trading Commission (CFTC) and the SEC before proposing a rule
like Basel III?
Hon. O'Malia. The answer is, yes. I think we had an
instance with the Basel III end game proposal coming out, and
the left hand did not quite know what the right hand was doing.
I think the clearing mandate, which is a safer form of
management for the Treasury market, came through. In the
meantime, the end game proposal has significantly higher
capital charges for client clearing, up to 80 percent. So,
those two policies are not aligned at all.
We think that the SLR, which is not part of the end game,
should be included in this to make sure that we have deep
liquid markets. ISDA and SIFMA put forward a very thorough
analysis of the trading book rules that identified a whole host
of different elements that were gold plated that we think
should be risk--go back to kind of a risk metric and risk-
appropriate level, which we can provide to this Task Force,
because it is a very thorough analysis of how high the numbers
were, and if you bring them down to a more risk-appropriate
level, you will get a better outcome.
Clearing is one example of that, but we have an area where
securities financing transactions, where the U.S. is all alone
in proposing an 18-percent increase. We think that is too high,
that would affect this market, and it is an imbalance with
European partners that did not take the same proposal and put
it into their rule. That is another area as an example that we
think should be modified as well.
Now, we are encouraged, both--the last proposals we were
hearing about did seem to recognize this coming out of the Fed,
but we have an opportunity to reset the deck here, and we would
hope that they go back to a very risk-appropriate solution,
include some of these other items, including the SLR reforms
and the cross-product netting reforms, which are very important
to make sure we have an efficient clearing market.
Chairman Lucas. Before I turn to my colleague, I would just
simply note, I have been around long enough that I remind my
constituents back home, these issues matter to every person.
Whether they realize it or not, they matter to every person. I
have been around long enough for the dot-com boom and bust. I
have been around for the shock after 9/11, the property boom
and bubble and bust of 2008 and 2009, the COVID trauma that set
off everything. We have to be prepared for the unexpected, the
things that would seem unmanageable, because they happen. That
is why this Task Force, and your input are so critically
important, making sure we can address what may yet come.
With that, I yield back the balance of my time, and I turn
to the ranking member for his question.
Mr. Vargas. Thank you very much, Mr. Chair. I appreciate
it.
Again, I want to thank the witnesses here today.
There is a big disconnect. It is interesting today, one of
the things that I heard quite a bit not only from the panel but
also from my colleagues on the other side is debt, the issue of
the national debt, and how it is increasing. Yet, right now,
what my colleagues on the other side are attempting to figure
out is how to increase that debt by $3 trillion to $4 trillion.
I find that amazing, the disconnect between what is said and
then what they are attempting to do.
I think that we are going to see--I think they are going to
figure out a way to give billionaires a tax cut that increases
the debt by trillions of dollars. It is fascinating to me,
because I got elected in February 1993. I have been around for
a long time, City Council, State Assembly, State Senate, and
now Congress, and you do see these cycles, and every time it is
the same. You hear my colleagues on the other side talk about
being fiscal hawks, and then when they are in charge they blow
up the debt, they blow up the deficit. In fact, in my lifetime
the only person that has ever balanced it is, of course, who,
which President? Who is that?
Chairman Lucas. A Republican Congress.
Mr. Vargas. Yes, that is right. It was Bill Clinton. Bill
Clinton. He made cuts and he increased taxes. It is the only
time it has ever happened, it has been balanced in my lifetime,
that I am aware of. Yet here we go once again.
What did concern me though in all this conversation, and my
question to you is, I was not quite aware of this as I should
have been, that foreigners are buying less of our debt and more
the groups that have more pressure, more debt leverage, more
issues associated with wanting to have liquidity are buying our
debt. Again, we cannot move our debt. As you have said, the
only thing we can do is reprice it. That concerns me. It
concerns me deeply. Could someone talk about that?
Dr. Forbes, could you talk about that?
Dr. Forbes. Yes. It is quite a remarkable shift in our
market of how we are financing our debt, and, like so many
things, there are pros and cons. When foreigners held a larger
share of our debt, especially sovereign wealth funds, foreign
central banks, they were pretty steady sources of demand. They
sort of fixed them out, roughly, sort of every month, every
year. It was pretty steady, even as markets went up and down,
and volatility went up and down. So, it was a source of
stability but then you are relying on foreigners to fund your
debt, and there could be geopolitical issues, security issues,
if that support dried up for whatever reason. Now, since more
of the debt is purchased domestically, we are less vulnerable
to if another country wants to sell our debt, which is
positive. Also, the fact that more of the purchases of our debt
are done by these leveraged investors through swaps and trades
and derivatives actually means the market is quite liquid, and
they do a good job of smoothing out small pricing
discrepancies.
It does make the market more efficient. They buy and sell
quickly when the small price moves but that is the normal time.
When there are big price moves, like we have seen in the last
few days, they are so levered that then small moves that
trigger margin calls or people to worry can trigger for sales
that then cause much bigger market movements. So we are more
vulnerable in that sense.
Mr. Vargas. Thank you.
Thank you, Mr. Chair.
Chairman Lucas. Thank you.
The chair would note, the last true fiscal conservative
President was Dwight Eisenhower. That was a long time ago.
I would like to thank all witnesses for their testimony
today. Without objection, all--and note that Mr. Stutzman will
submit written questions to the panel to be answered, and I ask
for that by unanimous consent.
Seeing no objection.
Without objection, all members will have 5 legislative days
to submit additional questions to the witnesses for the chair.
The questions will be forwarded to the witnesses for their
response.
Witnesses, please respond no later than May 13. Thank you
very much.
This hearing is adjourned.
[Whereupon, at 4:09 p.m., the Task Force was adjourned.]
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