[House Hearing, 119 Congress]
[From the U.S. Government Publishing Office]
REVISITING THE TREASURY-FED ACCORD
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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
SECOND SESSION
__________
MARCH 18, 2026
__________
Serial No. 119-65
Printed for the use of the Committee on Financial Services
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
64-108 PDF WASHINGTON : 2026
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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
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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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Wednesday, March 18, 2026
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
WITNESSES
Mr. Thomas Hoenig, Distinguished Senior Fellow, The Mercatus
Center at George Mason University.............................. 4
Prepared Statement........................................... 6
Dr. Jeffrey Lacker, Senior Affiliated Scholar, The Mercatus
Center at George Mason University.............................. 11
Prepared Statement........................................... 13
Dr. Jeffrey Huther, Adjunct Professor, Georgetown University..... 20
Prepared Statement........................................... 22
Mr. William B. English, Eugene F. Williams, Jr. Professor of the
Practice, Yale School of Management............................ 25
Prepared Statement........................................... 27
REVISITING THE TREASURY-FED ACCORD
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Wednesday, March 18, 2026
U.S. House of Representatives,
Subcommittee on 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 12:05 p.m., 2128
Rayburn House Office Building, Hon. Frank Lucas [chairman of
the task force] presiding.
Present: Representatives Lucas, Barr, Stutzman, Fitzgerald,
Flood, De La Cruz, Downing, Vargas, Sherman, and Casten.
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 ``Revisiting the Treasury-Fed
Accord.''
Without objection, all members will have 5 legislative days
within 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
SUBCOMMITTEE ON TASK FORCE ON MONETARY POLICY, TREASURY MARKET
RESILIENCE, AND ECONOMIC PROSPERITY, A U.S. REPRESENTATIVE FROM
OKLAHOMA
Welcome to today's Task Force hearing, Revisiting the
Treasury-Fed Accord of 1951. Seventy-five years ago this month,
the Department of the Treasury and the Federal Reserve System
reached full accord with respect to debt management and
monetary policies, what we know today as the Treasury-Fed
Accord. This agreement clearly delineated the roles and
responsibilities of the two institutions. That is, the Fed is
responsible for monetary policy in accordance with its dual
mandate, and the Department of the Treasury is responsible for
funding the government at the least cost to the taxpayer over
time.
In the 81st Congress--and yes, I was not here for that
session--just 1 year prior, the Joint Economic Committee
expressed support for the Fed and Treasury to reach an
understanding about the division of their authorities. It was
appropriate for Congress to be a part of the conversation then,
just as it is now. It is my intention for this Congress to
similarly express the need for a formal dialog between the Fed
and Treasury on the appropriate boundaries of their authority
and where increased communication might bolster the strength,
resilience, and depth of the Treasury market while reinforcing
monetary policy independence.
I plan to introduce a resolution to do just that. This is
because quite a few changes have occurred in the last 75 years.
Our nation's deficit-to-Gross Domestic Product (GDP) ratio has
ballooned from less than 2 percent to nearly 6 percent. As we
have discussed many times in this task force, the Treasury
market cannot continue to function well if the supply of
Treasurys outpaces market capacity to absorb it.
As Chairman Powell has said numerous times, the country is
on an unsustainable fiscal path. He is not the first chairman
to say so, but I hope he is the last. Rising debt servicing
costs push all parties involved into tough choices. We cannot
let fiscal irresponsibility interfere with the Federal
Reserve's (Fed's) ability to do its job. Additionally, the Fed
has moved to an ample reserve regime to allow stronger monetary
policy rate control and is engaged in four rounds of
quantitative easing, thereby significantly increasing the size
of the Fed's balance sheet.
As the Fed adjusts the size of its balance sheet through
quantitative easing (QE), quantitative tightening (QT), and
reserve management purposes, increased forward communication
with the Treasury Department could improve coordination between
the two entities without jeopardizing monetary policy
independence or stoking inflation. In 2009, the Treasury and
the Fed issued a joint statement outlining the Fed's role in
financial and monetary stability while leaving credit
allocation to fiscal authorities. While we are in normal
economic times--that is kind of an interesting thing to say
about it right now, is it not? The two entities should discuss
their appropriate bounds of responsibility, and the risk
encroachment imposes.
I look forward to hearing from our expert witnesses today
and engaging in a robust discussion.
I would note to the ranking member, this is really an
amazing panel we have here, experience beyond measure, and I
look forward to the insights that we are going to gain.
Chairman Lucas. With that, I yield back, and I recognize
the ranking member of the task force, Mr. Vargas, for 4 minutes
for an opening statement.
OPENING STATMENT OF HON. JUAN VARGAS, RANKING MEMBER OF THE
SUBCOMMITTEE ON 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. Again, I
would like to thank you for organizing this hearing. I agree
with you, this is a very important hearing, and I think we are
incredibly lucky to have the witnesses that we have before us
today, and I very much look forward to hearing from you.
During World War II, the Federal Reserve agreed to keep
interest rates low to help finance the war. In the years
following the war, inflation concerns at the Fed grew, leading
to a public dispute between the executive branch and the Fed.
The result was the landmark agreement known as the Treasury-Fed
Accord, which established a simple but critical principle.
Monetary policy must remain independent and not be used to
finance the country's debt. That principle has held for over 70
years, but it has come increasingly under threat.
A debate about the use of quantitative easing or the size
of the Fed's balance sheet is a worthwhile discussion. In my
view, the Fed's ability to quickly expand its balance sheet in
2008 and again in 2020 prevented what could have been a far
worse economic catastrophe and that capacity to act at scale
during a crisis is not something any potential new accord
should undermine.
But the more pressing threat of fiscal dominance is the
President's repeated interventions to try and bend the Fed to
his will, including to assist in financing our debt. He has
attempted to illegally fire Fed Governor Dr. Lisa Cook. His
Department of Justice opened a criminal inquiry into Chairman
Powell and even after a Federal judge struck down those
subpoenas, the Department of Justice (DOJ) announced it will
appeal. The President's intentions could not be any clearer. In
a June Truth Social Post, he wrote that if the Fed were, quote,
doing their job properly, our country would be saving trillions
of dollars in interest costs, close quote.
Interest payments on the debt are a serious issue, and no
one disputes the fact that our debt is on an unsustainable
trajectory, as the chairman noticed and as the Fed chair
noticed. The numbers speak for themselves. At around 120
percent of GDP, it is near its highest level since World War
II. So far this fiscal year, interest payments on the debt
surpassed defense spending, making them the third largest
Federal expense behind only Social Security and Medicare.
But Congress set the Fed's dual mandate of maximum
employment and stable prices. Fixing our deficit and our debt
is Congress' job, it is not the central bank's. Pressing the
Fed to cut rates to help clean up a fiscal situation this
administration made worse through the Big Ugly Bill, which is
projected to add more than $3 trillion to the deficit over 10
years, is both reckless and sets a dangerous precedent.
History gives us a clear warning. In Argentina and
Zimbabwe, governments that use their central banks to finance
debt triggered hyperinflation and economic collapse. In Turkey,
a President who fired the central bank Governors to force lower
interest rates sent inflation to nearly 80 percent and ordinary
people pay the price every day. Protecting the Fed's
independence from the dangers of fiscal dominance means
protecting Americans from politically driven cycles of
hyperinflation.
With that, Mr. Chair, I yield back.
Chairman Lucas. The gentleman yields back.
Today, we welcome the testimony of Mr. Thomas Hoenig, a
distinguished senior fellow at the Mercatus Center at George
Mason University; Dr. Jeffrey Lacker, a senior affiliated
scholar at the Mercatus Center at George Mason University; Dr.
Jeffrey Huther, an adjunct professor at Georgetown University;
and Mr. William English, a Eugene F. Williams, Jr. Professor of
Practice at Yale School of Management.
I want to thank each of you for taking time to be here.
Each of you will be recognized for 5 minutes to give an oral
presentation of your testimony. Without objection, any written
statements will be added to a part of the record. Gentlemen, I
very much look forward to today's testimony. Mr. Hoenig, you
are now recognized for 5 minutes for your oral remarks.
STATEMENT OF THOMAS HOENIG, DISTINGUISHED SENIOR FELLOW, THE
MERCATUS CENTER AT GEORGE MASON UNIVERSITY
Mr. Hoenig. Chairman Lucas and Ranking Member Vargas and
members of the task force, thank you very much for this
opportunity to discuss, I think, a very important issue of a
Treasury-Fed Accord. The purpose of the 1951 Treasury-Fed
Accord, as you have already described, I think was to define
the relative responsibilities of both the Treasury and the
Federal Reserve at a time when the debt levels were excessive
and had to be dealt with.
I want to begin my comments with my conclusion. A new
accord, I think, is needed but I would emphasize that to be
successful, it would need the help of Congress. The Fed's
legislative mandate is to conduct monetary policy so as to
promote effectively the goals of maximum employment, stable
prices, and moderate long-term interest rates. Over time,
however, the Fed has broadened this mandate to deepen its role
in funding the Nation's debt. This evolution follows from a
repeated use of large purchases of government debt, QE,
following the great financial crisis of 2008, so much so that
the Treasury and the markets, I think, have come to rely on the
Fed as a ready buyer of Federal debt.
Between 2010 and 2015, the Fed's balance sheet increased
from $2.3 trillion to $4.5 trillion. In 2019 and following the
coronavirus disease (COVID), it increased to $9 trillion and I
think following that, it is worth noting that the national debt
has increased by five times from $8 trillion to $38 trillion
which you talked about and exceeds 100 percent of GDP, last
experience, after World War II. Also over that time, the
consumer price index (CPI) has nearly doubled, with asset
prices having risen sometimes as much or more but looking
ahead, which is the important part, gross Federal debt will
reach $40 trillion this year.
The nation's deficit will be $2 trillion this year and for
many years to come, as now projected and the Fed will be
expected to help fund this debt. This past fall, for example,
the secured overnight financing rate rose above the Fed's
target rate, the Fed funds rate, reflecting in part tightening
liquidity conditions in the ever-larger Treasury market. Not
long after that, the Fed restarted, my words, QE, by purchasing
automatically $40 billion per month of government securities,
about 25 percent of the average monthly increase in the
Nation's debt at this time.
So stable prices cannot be achieved without fiscal and
monetary policy discipline. The history of the Fed's actions
has left in its wake, I think, a less independent central bank,
a less accountable market, and a less constrained government
budgeting process. Thus, it is worth studying the 1951 Accord
to guide us for solving the current challenge.
So after World War II, like now, the Federal debt exceeded
100 percent of GDP, and Treasury expected the Fed to keep
interest rates and the cost of the Federal debt low. Inflation
was also increasing, however, and the Fed could no longer both
suppress interest rates on Treasury debt and control inflation.
The conflict between these competing goals was tense, but
ultimately, a compromise was reached, which confirmed the Fed's
right to manage bank reserves and set interest rates
independent of Treasury demands.
Given current circumstances, the new Treasury-Fed Accord, I
think, is needed, as I said. Like then, such an accord does not
have to shock the economy. It can be implemented over multiple
years, allowing time for the government to reduce its deficit
and for the Fed to concentrate on price stability. Reduction in
the deficit from its current 6 percent of GDP would reduce
pressures on interest rates, facilitate private investment, and
enable the economy to grow out of its current debt dilemma.
Consider, for example, the 10 years following the 1951
Accord. The debt-to-GDP ratio fell from 90 percent to 55
percent of GDP. The average growth rate was near 4 percent in
this country, and the interest rates were moderate by most
standards.
There is, however, one important difference between then
and now. While the fundamental problem of too much debt is the
same, the 1950s deficit over that decade was far less severe,
with surpluses in some years. Current projections show only
large deficit through the next decade. Thus, a workable accord
must have the help of Congress in reducing the debt. Without
that, I think achieving a lasting accord will be nearly
impossible.
Finally, assuming the deficit problem also goes
unaddressed, inflation accelerates, the last option would be
for the Fed to unilaterally pull back on monetizing the debt.
This would slow growth of bank reserves. Interest rates would
rise, perhaps substantially. Such an option, I think, would
mirror the policies of the FOMC in late 1979 under Paul
Volcker's leadership, significantly disrupting the Treasury
market and plunging the economy into recession. Such an action
might cause Congress to reduce the deficit, but it also, I
think, would raise the challenge of Fed independence even more
severely than it is today.
Thank you.
[The prepared statement of Mr. Hoenig follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Chairman Lucas. Thank you.
Dr. Lacker, you are now recognized for 5 minutes for your
oral remarks.
STATEMENT OF JEFFREY LACKER, SENIOR AFFILIATED SCHOLAR, THE
MERCATUS CENTER AT GEORGE MASON UNIVERSITY
Mr. Lacker. Chair Lucas, Ranking Member Vargas, and members
of the task force, thank you for the opportunity to discuss the
Treasury-Fed Accord. The time is ripe to revisit the 1951
Accord, given the evolution of monetary, financial, and fiscal
conditions since then. A reexamination should be grounded in
the goals Congress has set out for the Fed, maximum employment,
stable prices, and moderate long-term interest rates. This
third goal means minimizing the premium that the U.S. Treasury
pays to compensate debt holders for potential future inflation
and other avoidable macroeconomic risks. The relationship
between the Fed and the market for Treasury securities is thus
central to the terms on which the U.S. Government can fund
itself.
The 1951 Accord restored the Fed's control over its balance
sheet and established modern monetary policy independence.
Chairman William McChesney Martin understood that a robust
market for Treasury securities required reining in
discretionary intervention by the New York Fed to avoid
discouraging private investment in market making. A 1952 FOMC
subcommittee warned that quote, the development of special
institutions and arrangements that serve to provide the market
with natural strength and resilience and to give it breadth and
depth tend to be greatly inhibited by official mothering,
unquote. The Martin Fed's policy of holding only Treasury bills
arguably contributed to the tremendous growth in depth and
liquidity in the U.S. sovereign debt market.
The Fed's stance toward the Treasury market, however, is
quite ambiguous right now. Before the great financial crisis,
the Fed maintained strict neutrality, holding only the Treasury
securities that it needed for monetary control and carefully
balancing its holdings across the curve. Since then, the Fed
has purchased large quantities of long-term Treasurys,
sometimes to stimulate growth and sometimes to preserve what
they call market functioning, a term that they have yet to
define satisfactorily.
Both types of interventions essentially aim to offset
shifts in market assessments of the fundamentals underlying
Treasury returns. The haziness of the distinction between the
two makes Fed intervention more difficult to predict and
discourages private investors from positioning themselves to
take advantage of buying opportunities when they arise. Market
resilience suffers.
A recalibrated accord should reflect each entity's
particular attributes. The Fed has sole control of the monetary
instruments that constitute its liabilities. That would be
currency and bank reserves, and these form the monetary base
through which it influences monetary conditions. Once a given
quantity of monetary liabilities, monetary base, has been set,
any asset the Fed acquires or any loan it extends requires
selling Treasury securities and thus could equally well be
performed by the Treasury.
The Fed's independence is essential for setting the terms
on which it supplies monetary liabilities, including the
interest rate on reserve account balances, but activities
beyond that, beyond monetary policy, such as credit allocation
or attempting to manipulate the maturity structure of Federal
debt, are fiscal in nature and are better assigned to the
Treasury and subject to congressional oversight. At least that
is how I read constitutional principles that apply here.
These principles suggest five key elements for a restated
accord. First, the Fed's balance sheet should be no larger than
needed for monetary policy. Monetary conditions can be managed
entirely adequately by setting the interest rate on reserve
balances and supplying just a few hundred billion dollars of
reserves, not trillions. The Fed should commit to a predictable
path toward such a minimal level of reserves and not reverse
course at the slightest widening it spreads.
Second, the Treasury should have sole responsibility for
debt management. The maturity structure of publicly held
Federal debt, that is outside the Federal Reserve, should
reflect Treasury decisions alone rather than the obscurely
coordinated actions of two distinct institutions with distinct
objectives.
Third, the Fed should return to a bills-only portfolio.
This would clarify that Treasury is accountable for debt
management. The Treasury itself would remain free to intervene
as it sees fit through its recently reactivated buyback
program.
Fourth, the Fed should set just one interest rate, the rate
on reserve account balances. Its current practice of managing
five interest rates amounts to pegging several money market
spreads. This is unnecessary and tangential to monetary policy.
Congress could usefully clarify governance by assigning
authority over the interest rate on reserves to the FOMC.
Fifth, a new accord should include a framework for credit
policy. Credit market interventions are fiscal in nature, as I
said, and should be conducted by the Treasury with
congressional authorization. A Treasury-Fed credit accord would
reduce expectations of ad hoc investor rescues and thereby
strengthen market resilience.
Thank you.
[The prepared statement of Mr. Lacker follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Chairman Lucas. Thank you.
Dr. Huther, you are recognized for 5 minutes for your oral
testimony.
STATEMENT OF JEFFREY HUTHER, ADJUNCT PROFESSOR, GEORGETOWN
UNIVERSITY
Mr. Huther. Okay. Thank you. It can be hard to visualize
the Treasury market at the time of the original accord. Most
securities were offered at fixed exchange rates, fixed rates.
Maturities were offered based on the views of officials.
Chairman Lucas. Doctor, would you spin your microphone
around a little closer to you there, please?
Mr. Huther. Right there, Okay, yes. Offerings might not be
marketable. They might be sold with early repayment options.
They might be exchangeable for other Treasury securities rather
than cash and so we did not really have an open auction system
that we have today. In addition, market participants were
accustomed to Treasury leadership on interest rate policies
through its choice of interest rates on the securities it did
issue.
The economic conditions are even harder to fully
appreciate. Over the previous 6 years prior to 1951, obviously
World War II had ended. Businesses were still transitioning
from military to consumer production. We had sharp spikes in
unemployment and inflation that had accompanied the transition,
and post-war memories were still haunted by the pre-war
depression.
At the time of the accord, we were in the midst of another
war, and inflation was high. The accord gave the Fed the
freedom to focus its policy decisions on economic conditions
rather than Treasury financing needs, while agreeing to support
Treasury offerings as long as they brought market yields as the
Fed determined.
Economic and financial market pressures over the following
decades led to a Fed portfolio that at the beginning of the
financial crisis was mostly Treasury securities unevenly
distributed across the maturity spectrum. On a mostly separate
track, the Treasury market had slowly evolved to the market we
have today, regular issuance of predictable quantities priced
through transparent auctions. The evolution is important
context. The government as a whole is much less involved in
price setting for its debt than it was in 1951.
The current path of projected deficits, if realized, will
eventually lead to a Treasury market instability, and that will
force the Fed to intervene. The level of debt at which this
instability occurs is unknown. While the Treasury market is
lauded for its depth and resiliency, it is not immune to shocks
that are inherent in financial markets that stem from human
nature, not institutional structure.
In the context of fiscal dominance, a shock would result in
the Fed buying large quantities of Treasury securities paid for
with bank reserves that in the traditional view would be
inflationary. I am not sure there is evidence anymore that the
relationship between reserves and inflation will hold, but I
would characterize the credit accord proposals as constraining
the Fed's use of balance sheet to limit the risk that the Fed
assets go on too long, are too concentrated in long-dated
securities, or detrimentally include Mortgage-Backed Securities
(MBS).
In dire situations, as the financial crisis and the
pandemic have shown, we have seen that rules, regulations, and
even laws are set aside in the name of expediency. So, when we
think about constraints on the Fed, we have two areas of focus,
normal operating conditions, and conditions somewhere between
normal and dire. To me, the normal times seem like an easy lift
for most people, and the FOMC agrees that the Fed's balance
sheet should contain Treasury securities and little else. We
can also likely get agreement that those Treasurys should have
maturities that are at the very least tilted toward the short
end of the curve. One difficult question that remains, though,
is whether we can have clear guidance for the Fed when the
economy is between normal and dire. Ideally, guidance would
offset the market and political forces that can push the Fed to
a larger, more diverse balance sheet.
It is not entirely clear to me what that guidance would
look like. The closer we are to a dire situation, the more
important the judgments of Fed and Treasury officials are. The
closer we are to a normal situation, the more likely that those
same officials become complacent about policies that should be
limited to dire events. That is all.
[The prepared statement of Mr. Huther follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Chairman Lucas. Mr. English, you are recognized for 5
minutes for your oral remarks.
STATEMENT OF WILLIAM B. ENGLISH, EUGENE F. WILLIAMS, JR.
PROFESSOR OF THE PRACTICE, YALE SCHOOL OF MANAGEMENT
Mr. English. Thank you, Chairman Lucas and Ranking Member
Vargas, for holding this hearing and inviting me to testify on
the Treasury-Fed Accord. The Accord of March 1951 was a
watershed event in Federal Reserve independence. Such
independence is critical to effective monetary policy and
improved economic outcomes. Fortunately, there seems to be
general agreement on this point, I think on this panel, and
also when I testified before this task force in January on your
task force, there seemed to be general bipartisan support for
monetary policy independence.
The Fed's monetary policy independence is undergirded by
key features of the Banking Act of 1935. That act removed the
Secretary of the Treasury and the Comptroller of the Currency
from the Board of Governors, established overlapping 14-year
terms for the Governors and provided that the President could
only remove Governors for cause.
In addition, the act established the modern Federal Open
Market Committee, which includes the members of the Board as
well as five Reserve Bank presidents. The inclusion of the
Reserve Bank presidents supports Fed independence because they
are not nominated by the President but rather are chosen by the
boards of directors of their banks and approved by the Board of
Governors.
The historical record shows that Congress put these
protections in place because it wanted to ensure that the Fed
could operate independently in the public interest and remained
independent of the President, who might have political and
personal incentives that would affect policy in ways that would
harm the public good.
During World War II, policymakers at the Fed focused
monetary policy on the maintenance of low interest rates to
ease the financing of the war effort. After the war, the Fed
continued to maintain low interest rates, and as rationing and
wage and price controls were withdrawn, inflation rose
dramatically before falling back.
As demand picked up in 1950, the Fed judged that low rates
would lead to excessive inflation, but the Truman
Administration wanted the Fed to maintain low rates in order to
ease funding pressures. After a lengthy debate, the Fed and the
Treasury announced that they had reached full accord with
respect to debt management and monetary policies to be pursued
in furthering their common purpose, that is, the accord.
Importantly, the accord was a return to the status quo
ante. After the accord, the Fed returned to the independence
created for it by the Congress in 1935. In recent years, some
have called for a new accord. It is not always clear to me what
the purpose of such an agreement would be. One issue appears to
be the relationship between Treasury debt management and the
Fed's monetary policy implementation, particularly quantitative
easing. Put simply, the Treasury decides on the baseline
maturity structure of government debt, while the Fed, if
constrained by the zero lower bound on its policy rate, can use
quantitative easing--that is, large purchases of government
securities--to provide additional monetary stimulus and improve
economic outcomes.
As one would expect, the Treasury and the Fed consult
regularly on these topics, and it is not clear to me that any
new formal agreement is needed at this time. However, both the
Treasury and the Fed could improve decisionmaking by the other
institution by providing as much clarity as they can about
their future plans.
A second issue is the extent to which Federal Reserve
policy actions have implications for credit allocation. That
was a concern after the financial crisis, but Congress in the
Dodd-Frank Act required Fed emergency lending programs to be
approved by the Secretary of the Treasury, providing for clear
democratic oversight.
Another concern is related to Fed purchases of agency
mortgage-backed securities as part of its QE programs, but
Fannie Mae and Freddie Mac have been in conservatorship since
2008, making them effectively part of the government and in the
face of disruptions in mortgage markets, such purchases can
help to limit distortions rather than cause them. That said,
the Fed should bear in mind the potential effects on credit
allocation of such purchases when considering the benefits and
costs of QE.
Any new accord must take account of the separate
objectives, tools, and responsibilities of the Treasury and the
Fed. In particular, the agreement must not impinge on the Fed's
ability to use its tools provided by the Congress to foster its
objectives, also provided by the Congress, independent of
short-term political consideration. In particular, any new
accord needs to ensure that monetary policy will not be
targeted at financing government debt. Fiscal policy is the
responsibility of the administration and the Congress, not the
Fed.
Thank you. I look forward to our discussion.
[The prepared statement of Mr. English follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Chairman Lucas. Thank you.
We now turn to member questions, and I recognize myself for
5 minutes for questioning.
Mr. Hoenig, it is great to see you again. You assert in
your testimony that over time the Fed has expanded beyond its
congressionally mandated goals of price stability and maximum
employment. In your view, is the Fed at risk of becoming
polarized if they are seen as financing government spending and
how can Congress ensure that the Fed stays on track?
Mr. Hoenig. I think, frankly, that over time as the Fed has
not only engaged in QE during the emergency but has continued
its purchase of government securities long past the immediate
crisis, it has set up an expectation that it will buy
government securities as they are issued and keep that market
stable and liquid. I think that does put the Fed at risk of
becoming subservient to Congress and so what has to happen is
the Fed has to have a conversation not just with Treasury, but
there has to be help from Congress to control the growing
deficit. Otherwise, the pressure to finance that deficit will
be the Fed's, and I think it will be very hard for the Fed to
resist that.
I am not talking about where we are because if you look
back, the Fed has been doing that but looking forward, the
projections are new deficits every year of $2 trillion or more.
Who is going to fund that? I think they will be looking to the
Fed, and if the Fed chooses not to do that, I think you will
see interest rates spike, and then the tension will rise
quickly. Congress needs to help.
Chairman Lucas. Dr. Huther, I remain concerned that the
market's capacity to absorb all the debt that the Treasury is
issuing is becoming constrained. In your view, what are the
risks of dependence on the Fed's intervention for market
functioning, and would it be helpful for the Fed to define the
conditions that warrant market intervention?
Mr. Huther. Yes, I would say it would be helpful to define
what those rules are. I do not see us at this juncture, anyhow,
of having concerns about actual debt issuance being received by
the markets. I think we are still in the depth part of the
Treasury's story. Can we get to a point where it is harder to
absorb new Treasurys? Absolutely. As I said in my testimony, it
is just you cannot tell where that point is, where things go
off the rails.
Chairman Lucas. Dr. Lacker, your testimony states that a
modernized Treasury-Fed Accord should restore clear
institutional boundaries between the two entities. Can you
describe where those lines may currently be blurred and how
Congress can ensure that the Fed actions are squarely within
the boundaries of monetary policy?
Mr. Lacker. Yes, Chair Lucas. As I noted, quantitative
easing involves two things. It involves increasing the monetary
liabilities of the Fed, and the second thing it involves is
reducing the supply of longer-term Treasury securities in the
hands of the public. Those are two separate actions. The first
the Fed can do as a part of monetary policy by acquiring short-
term Treasury bills. The Treasury, should it so desire, can
acquire long-term securities through its buyback program and
thereby tilt the securities in the hands of the public. So,
that is an example of something where if the Fed just stuck to
pursuing monetary policy backed purely by bills only, it would
provide a clear boundary. People in the longer-term Treasury
market would know that it is up to Treasury, not the Treasury
and the Fed, as to whether intervention will take place and it
will take place on the terms that Treasury traditionally
intervenes, through sort of an announced program with well-
defined boundaries.
Chairman Lucas. Mr. English, I have a question for you, and
you may not have time to answer it, so responding in writing I
would appreciate. You note in your testimony that Treasury and
the Fed could improve decisionmaking by providing clarity about
their future plans and discussing the extent to which the Fed
actions implicate credit allocation. Would you support my view
that, should the accord be updated to reflect current
conditions, Congress should be an integral part of the process,
particularly given Congress' interest in both institutions
acting in accordance with congressionally authorized mandates?
You have 16 seconds. Sorry.
Mr. English. Yes, I mean, the short answer is sure. I think
if the Treasury and the Fed are going to get together and they
are going to discuss their respective roles and that will be a
substantive discussion that will have real implications for who
is doing what, Congress should have a hand in thinking about
who it wants to do what.
Chairman Lucas. Thank you, sir.
I now recognize the ranking member of the task force, Mr.
Vargas, for 5 minutes of questions.
Mr. Vargas. Thank you very much, Mr. Chair. Again, I thank
the witnesses for being here. I also welcome all the young
people that I see in the audience today.
As you know, the President has repeatedly called for the
Fed to lower interest rates, often citing the cost of our
interest payments on the national debt as a reason why. This
is, in effect, an ask for the Fed to monetize the debt. We, in
fact, heard from you the history--I do not remember exactly who
it was--of Truman basically doing the same thing and saying we
cannot continue to do this.
So is not this an explicit contradiction, though, of the
principles that were set out in the Treasury-Fed Accord? I
mean, it seems to be exactly what we said we will not do. Would
anyone like to handle it? Yes, Mr. Lacker. Dr. Lacker, I
apologize.
Mr. Lacker. Yes, no problem. We need money supplied by the
Federal Reserve. The logical way for the Fed to issue it is to
have it backed by Treasury securities. I have advocated bills
only, but there are other approaches. We have to monetize some
debt. The question is how much.
The call to make the path of overnight interest rates that
the Fed sets lower than it otherwise would be for reasons other
than the management of inflation and employment suggests the
resort to inflationary finance, which is depreciation of the
value of outstanding Federal debt and essentially inflicting
capital losses on them, which is a gain to the Treasury. After
major wars, major wars are typically financed in part through
inflationary finance, and that is what you want to avoid in
peacetime.
Mr. Vargas. Right. It also goes against, does it not, Mr.
English--does not that go against the accord, though? Is that
not exactly what we are trying to attempt not to do?
Mr. English. I am not so sure it goes against the accord
except in the sense that the accord took us back to the Banking
Act of 1935. I think it does go against the Banking Act of
1935. The point of that was the Fed should be independent of
the President. The concern there was--one of the main concerns
there was exactly monetization and that the President, if he
could, would be inclined to keep rates low and ease funding
pressures on the government.
Mr. Vargas. Now, you stated a premise that we all kind of
agreed on the independence of the Fed. I am not sure that is
true, but let us see, is that true? Do you think that the Fed
should be independent? Is anyone in disagreement?
Mr. Hoenig. Well, I think the Fed should be independent. I
also think the Fed should act independently. One of my concerns
is the Fed has, in a sense, under what I call the implicit
mandate of having very stable, liquid Treasury markets, has in
fact, shall we say, relinquished some of that independence to
make sure interest rates are stable and that the new Treasury
debt that is issued every month is easily absorbed without
spiking interest rates.
Now, if you have an independent Fed and you are worried
about inflation as something ahead, then you would say no to
that, and you would say to Congress and to others, to the
Treasury, we cannot do that without risking inflation. We need
to get an understanding here. The Fed has to do that and be
independent, not just say they are independent.
Mr. Vargas. Right, right. No, I agree. That is what I am
saying.
Mr. Hoenig. Yes, I agree.
Mr. Vargas. That is exactly what we want, though----
Mr. Hoenig. Right.
Mr. Vargas [continuing]. the independent--yes, Doctor?
Mr. English. Sorry, if I may.
Mr. Vargas. Yes, go ahead.
Mr. English. I think the Fed has shown considerable
independence in the last few years. As Tom said, the Fed's
balance sheet reached $9 trillion. It is now about 6.5.
Mr. Vargas. Yes.
Mr. English. It has actually shrunk the balance sheet a
fair amount. The Treasury has had to issue more securities----
Mr. Vargas. There has been tremendous pressure----
Mr. English [continuing]. into the market----
Mr. Vargas [continuing]. on the Federal, and the chairman
there, I think, has acted incredibly nobly and admirably to
keep the independence of the Fed going. So yes, I agree.
Since I have less than a minute, I do want to ask, as you
have talked about history here, in 1950 something, under
Eisenhower, what was the top marginal tax rate? Dr. Huther, you
go ahead because I think you probably know the answer.
Mr. Huther. I am not sure I could put specific numbers on
it, but it would probably be close to 90 percent.
Mr. Vargas. Ninety percent, yes, and that was under a
Republican government. What was the effective tax rate for the
top 1 percent, effective tax rate?
Mr. Huther. Effective, I guess----
Mr. Vargas. I think it was in the 40s to the 50s. Anyway, I
just bring that out because we do have a fiscal problem in our
country, and people continue to cut taxes for the wealthy, and
we are not going to balance our budget by doing that. Thank
you.
I yield back.
Chairman Lucas. The gentleman has interesting economics.
The gentleman from Indiana, Mr. Stutzman, is recognized for 5
minutes.
Mr. Stutzman. Thank you, Mr. Chairman, and thank the panel
for being here.
Folks in Indiana know full well that Federal spending is
far beyond reasonable levels. This spending not only has severe
consequences for everyday Hoosiers but also poses risks to the
independence of the Fed's monetary policy decisions.
I would like to begin by discussing the idea of fiscal
dominance. As our government persistently runs deficits and
increases our national debt, the government must pay interest
to service that debt. Should spending continue on its current
pace, investors will eventually demand a higher interest rate
to purchase government debt, which as a result increases the
cost of issuing new debt.
I would like to ask Mr. Hoenig and also Mr. English, would
you say that the United States is currently in or near a state
of fiscal dominance? I will start with Mr. Hoenig.
Mr. Hoenig. I think, given the size of the deficit that has
to be funded each year and the fact that if it fails to do
that, interest rates would, I think, spike, I think the Fed is
near fiscal dominance because when it says no, we will have, I
think, a crisis of some sort. It will be a hard choice for them
to make to say to Congress, no, we are not going to monetize
this debt as you would like. We are going to increase according
to what the growth rate of the economy is, but we are not going
to do more than that. If interest rates begin to spike, I think
there will be enormous pressure on the Fed to fund it.
Mr. Stutzman. Thank you. Mr. English?
Mr. English. At the moment, I think not. The reason for
that is that if there were serious fiscal dominance, the result
would be monetary policy that is too easy. I think the Fed is
engaged in monetary policy over the last few years. It is aimed
pretty firmly at maximum employment and stable prices. Its
objective is set by Congress. As I said earlier, it shrank its
balance sheet by a considerable amount. Interest rates were
raised by 5 percentage points plus when inflation surged, and
the Fed has been moving inflation back down toward target and
has done that quite well without a big recession. So I think at
the moment, the Fed is operating as it should in pursuit of its
objectives.
I guess I do not want to speculate on what would happen if
there were a huge fiscal catastrophe down the road. I am hoping
all of you will address that. As Tom said, I think it would
take----
Mr. Stutzman. Well, it will definitely be----
Mr. English [continuing]. a significant change in the
fiscal trajectory.
Mr. Stutzman. Yes, but it will be a lot of these young guys
sitting here in the room that are going to have to deal with a
long path out of debt and deficits.
Dr. Huther, I would like to ask, how would being in a state
of fiscal dominance potentially influence monetary policy
decisions at the Federal? What would that mean for my
constituents and Americans across the country?
Mr. Huther. Well, to the extent that Federal dominance
leads to greater debt purchases by the Fed, leading to higher
reserves, those reserves are loans from your local banks to the
Fed that could otherwise be lent to your local community, so
there is a cost there. Those conditions that would create
fiscal dominance in terms of high Federal debt are also likely
to be associated with higher interest rates for everyone.
Mr. Stutzman. Dr. Lacker, do you have any thoughts on that?
I have got another question for you if you want me to throw it
at you, too. Okay. What are some areas for improvement in the
current accord, and how should the Treasury and Fed be
approaching this process?
Mr. Lacker. I think that the--I outlined five elements of a
new accord. I think limiting the Fed to short-term Treasurys
securities. I think a narrower role, a more prescribed role for
the Fed in terms of intervention in markets would help
strengthen the resilience of the private sector. It would help
encourage market making by brokers and dealers and others that
want to get in. It would help encourage private investors to
take positions to buy on the dip in the Treasury market. I
think it would just make for a more liquid and deep market. I
think that is the objective they should have in mind, and I
think it will lead them toward deciding that there should be a
more prescribed role for the Fed.
Chairman Lucas. All right. Thank you. Mr. Chairman, I will
just yield back.
Chairman Lucas. The gentleman yields back.
The chair now recognizes the gentleman from Illinois, Mr.
Casten, for 5 minutes.
Mr. Casten. Thank you, Chair Lucas. I must say it is so
nice to see so many young people coming out here today.
Monetary policy is not usually something that you think of as
having a lot of ``rizz,'' but, here we are, so I appreciate you
all showing up.
What you may want to know--and I have made this point to
the Chairman--every time we have a monetary policy hearing, it
is after some major event in executive branch Fed relations,
and this meeting is no exception. We had a monetary policy
hearing after the Liberation Day tariffs. We had a monetary
policy hearing after the efforts to fire Lisa Cook. We had a
monetary policy hearing after the criminal investigation was
announced of Jay Powell. Of course, Friday, Mr. Powell was--the
DOJ was--their case was rejected against him. They said he had
an improper motive. I do not know how you do it, Mr. Chairman,
but somebody is making a bunch of money on your inside
information.
In any event, moving on, I am, it is maybe appropriate
because I think we are seeing in this administration the
unbelievable importance of having an independent Fed, having
independent monetary policy. It is really hard to have--I think
there is an--we should always be asking whether policies passed
in 1951 are still appropriate, but it is hard to have those
conversations right now where simply saying, should the Fed be
independent of the executive branch is a partisan idea. Do
raising the price of inputs lead to inflation? That is a
partisan idea. Does slashing the U.S. workforce by millions of
people in a tight labor market lead to inflation? That is a
partisan idea. These things should not be partisan, but we are
in this moment right now, and so it is a--I appreciate we are
doing this. It also feels like a dangerous time to have the
conversation.
I want to ask some questions, get a little bit nerdy here.
There are all the dynamics of 1951 and coming out of World War
II and deficit spending that hopefully we will not have again.
Although for those of us who were here through COVID or 2008,
we know that there have been times when it is useful to have
massive politically unpopular flexes of the balance sheet. One
of the differences that strikes me going back to that period is
that in the 1950s, almost all U.S. debt was held by American
citizens. Like 90 percent was American citizens. We then--the
rise, the strength of the U.S. dollar, the world's reserve
currency, some more and more foreign ownership getting almost
half of U.S. debt. Then, of course, a combination of QE and
foreigners deciding to invest in U.S. equity markets instead of
treasuries took us back down where we are at about 30 percent.
I guess maybe, Mr. English, I am wondering if you think
that as we think about Fed independence and monetary policy, it
seems to me there is a fundamental difference between the
United States owing a lot of money to foreigners and the United
States owing a lot of money to Americans. Should we think about
that mix as we think about these issues?
Mr. English. I think not. I think the point is that the
central bank independence provides better outcomes for the
American people. The central bank independence allows the Fed
to avoid pressures from short-term political considerations,
from fiscal dominance and so on, and gives you low and stable
inflation, and that is a good backdrop for employment and
growth. I do not think that it matters for those better
outcomes what fraction of Treasury debt is held abroad versus
domestically.
Mr. Casten. Well, let me push--and I am not sure that I
agree or disagree with you, but it strikes me that as we have a
lot of U.S. holders--we have had a lot of foreign holders,
interest rates are an expense, and there is only one side of
that. We do not want to pay the interest. We owe them the
interest, and that is how we think about it.
When we have U.S. holders, we have, on the one hand, people
like my grandma, who used to always get me a savings bond for
Christmas where I would like the interest rate to be high but
then you have also got a lot of institutional investors and
private equity and hedge funds who have learned how to make
money in a zero-interest-rate world. All of a sudden, that
becomes a political question about whether interest is good or
bad with domestic investors in the ways that does not happen
with foreign investors.
As we think about the politics of this, it feels like the
politics is an easier question when debt is held by foreigners,
and the answer is more confusing when it is held by Americans.
Would you agree, disagree?
Mr. English. You would have to tell me about the political
ramifications of this but on the economic ramifications, I
really do think you basically want to get low and stable
inflation and maximum employment. That is the way you maximize
the welfare for American people, and I do not think that
monetary policy should be different because you have more
Treasury debt held abroad or held domestically.
Mr. Casten. Well, fair--and we are out of time, but when
the President is calling for lower rates and he is creating
inflation----
Chairman Lucas. The gentleman's time has expired.
Mr. Casten [continuing]. that is a political problem. I
yield back.
Chairman Lucas. The chair now recognizes the gentlelady
from Texas, Ms. De La Cruz, for 5 minutes.
Ms. De La Cruz. Thank you, Chairman Lucas, for holding this
hearing today, and thank you to our witnesses once again for
being here.
As our task force meets today and discusses a relationship
between the Federal Reserve and the Treasury, I want to start
by highlighting the impact of these policies on the average
household.
My question is for Mr. Hoenig. We have seen studies that
show that even a permanent primary deficit increase of 1
percent of GDP leads to nearly a 20 basis point increase in
core personal consumption expenditure prices 5 years out that
equal about $330 of disposable income per household. Knowing
this, sir, how would you describe where we are today in terms
of government spending as impact on inflation?
Mr. Hoenig. Well, I think from where we are today, we are
going to incur $2 trillion of new debt, and that has to be
financed, and that puts strain on the markets and does put
upward pressure on interest rates depending on what the Fed
does to intervene, which then risks inflation down the road. So
I think it is mostly going to be harmful in terms of what it
does to inflation, and I think that is where the Congress and
the Fed and the Treasury should be concerned. I think ignoring
it, we are saying that we can just divide our activities
without a clear message that we are going to control our
domestic fiscal deficits I think is not beneficial in the long
run for the American consumer, and this is somewhat said for
those who are sitting behind me----
Ms. De La Cruz. So----
Mr. Hoenig [continuing]. so it is very important we get
this under control.
Ms. De La Cruz. You know what, there is a group of young
men that walked in behind you, I am guesstimating about 19 to
21, 22 years old, and eager to learn about the government,
probably excited to be here on Capitol Hill. So welcome young
men. Thank you for being courageous to come to a hearing today.
My son is about their age. What does that mean to those young
men sitting behind you right now? What does their future look
like if we do not get this under control?
Mr. Hoenig. Well, I think we will have a higher
inflationary issue. Perhaps just one example of that is, I hear
over and over again how hard it is for young individuals to buy
their first home because the price of housing has doubled over
the last decade and a half or so. So, if we continue with $2
trillion plus a year, and if you look at the Congressional
Budget Office's (CBO's) projection, they are going to be every
bit that much, then I think we need to be very mindful.
There are only two choices in my mind. The Congress gets
the debt under control. The Fed otherwise says, no, we will not
monetize the excess amount of debt more than what the real
economy can grow at. If you do that, then you are going to
really shoot interest rates up and put us into, I think, a slow
growth period ahead and that is really the difficult choices
that lie ahead, but they need to be addressed.
Ms. De La Cruz. Thank you.
Dr. Lacker, following up on the same topic, you have
recommended some principles for a new accord, especially in an
era of large deficit spending and balance sheets. If the
Federal Reserve and the Treasury were encouraged to create a
new accord with your principles, how does that impact the
balance sheet, the deficit, and ultimately the taxpayers?
Mr. Lacker. Thank you. I think a Fed more narrowly focused
on monetary policy, the way I have described it, would leave
the Treasury and Congress a clean playing field to face
markets, get feedback on the course they have set on fiscal
policy without the perceptions of market participants being
clouded by the possibility of the Fed inflating away the debt.
If the fiscal path is unsustainable or is getting too large for
the economy to handle, real interest rates will have to rise.
The government will have to pay up, and that will affect----
Ms. De La Cruz. I reclaim my time.
Mr. Lacker [continuing]. consumer resolve.
Ms. De La Cruz. Thank you so much. I yield back.
Chairman Lucas. The gentlelady's time has expired.
The chair now turns to the gentleman from Wisconsin, Mr.
Fitzgerald, for 5 minutes.
Mr. Fitzgerald. Thank you, Chairman.
Dr. English, in your testimony you said the Dodd-Frank and
the Coronavirus Aid, Relief, and Economic Security (CARES) Act
requires the Secretary of the Treasury to approve the Federal
Reserve emergency lending operations and provide oversight over
the Fed credit allocation. In an effort to reduce the red tape
and safeguard the Fed from making bad political decisions,
would it not make more sense to just have Treasury provide
emergency lending instead of the Federal Reserve?
Mr. English. Congressman, I think that would not be as
effective. The Federal Reserve has considerable information
about the economy, about financial markets and financial
institutions, so it can understand better, faster what may be
going wrong in the economy or in markets. It also has a great
deal of experience in doing market operations and in lending
because of its responsibility for the discount window, so it
can ramp up and take action very quickly. When necessary, it
can also lend by creating reserves to lend, and that can be a
very valuable thing to do at times when markets are disrupted,
and it may be slower for the Treasury to raise money to do
that. The increase in reserves can also just be a benefit in a
time when there is every demand for liquidity.
So I think these are responsibilities that are lodged with
the Fed for a good reason and that is why most central banks, I
think, have authorities along these lines.
Mr. Fitzgerald. Very good. Thank you. Any of the other
panelists have a thought on that?
Yes, sir, Mr. Lacker.
Mr. Lacker. Yes, I have given this a lot of thought over
the years. I think that lodging discretionary emergency lending
authority with the Fed has had some benefits at times, but it
has had a tremendous cost as well. Over the course of the last
50 years, since the mid-'60s, repeated instances of lending to
failing institutions and letting uninsured claimants get their
money out have tilted the incentives of our financial markets
and made them much more fragile than they otherwise would be.
It has induced a dependence on short-term funding in
wholesale markets, which is exactly the kind of funding that
Fed interventions are designed to relieve pressure from. I
think that has to be reckoned on the tally sheet of assigning
emergency lending authority to a discretionary body, as
technocratically capable as it might be. I think also that the
pandemic experience showed that Congress is capable of enacting
emergency legislation on a short timeframe if the need is
urgent enough and there is the political will.
Mr. Fitzgerald. So, Dr.----
Mr. Hoenig. May I give you one quick answer?
Mr. Fitzgerald. Yes, sir, go ahead.
Mr. Hoenig. That is I cannot tell you, sir, how many times
I have heard the Fed has to do this because they are the only
game in town. They are not the only game in town. Congress is
here and giving credit to non-banking institutions. Even an
emergency can be handled, I think, very effectively by
Congress.
Mr. Fitzgerald. I appreciate your confidence in the
Congress. Let me just continue with that, Dr. Lacker. You
testified that Treasury instead of the Fed could just as easily
have facilitated any lending programs. If there was a crisis in
the future, would it be prudent for a new accord to reassign
those responsibilities away from the Federal Reserve and
delegate those to Treasury, or do you think that would not make
much difference, a decision would have to be made in the
moment?
Mr. Lacker. There is a less extreme approach to shutting
the Fed off entirely, but one which would, in an accord,
establish the principle that the Fed, after a certain number of
days, say five or ten, a short number of days, transfers the
position to the books of the Treasury in exchange for short-
term Treasury bills.
Mr. Fitzgerald. Okay.
Mr. Lacker. The Fed could do that lending subject to the
approval of the Secretary of the Treasury but get it off its
books and have it managed by the Treasury.
Mr. Fitzgerald. Would placing emergency lending programs
like those set up during the financial crisis and the pandemic
that were set up in Treasury instead of the Fed, is there a
negative impact associated with that, or some type of market
instability caused by that?
Mr. Lacker. No, I do not think there are consequences for
financial market stability. If anything, they would be
beneficial in encouraging private market participants to be
more careful stewards of their own risk. The one----
Chairman Lucas. The gentleman's time has expired.
Mr. Lacker. Okay.
Chairman Lucas. The chair now recognizes the gentleman from
California, Mr. Sherman, for 5 minutes.
Mr. Sherman. Thank you.
A lot is at stake in the independence of the Fed. We look
at what has happened in Turkey or Argentina, for example, and
we see that you can do tremendous damage to a country's economy
when the central bank lacks that independence.
Perhaps there is no greater pressure that can be put on
anyone in government than to say, if you screw up, you are
going to face criminal penalties. Now, that is kind of the
North Korean model. You have a project, Kim Jong Un says you
screwed it up, you get shot. I think our government works
better, although I guess there are a few that I might--well--
and I think Chairman Powell said it right. Potential criminal
charges arise from the Federal Reserve's decisions on interest
rates rather than not aligning with the President's
preferences. Does it? I mean, there is a building project. I
guess it has not gone well. So the President says that Powell
should face criminal charges. I am sure that there will be some
projects in the Trump Administration that do not go well, and
ultimately, I guess you could hold Donald Trump responsible for
that. I do not think that we should say, well, some project
came in late and over budget, so we will put Donald Trump in
jail or Chairman Powell in jail.
I want to focus a bit on, first, the dual mandate. Is there
any reason for us to tamper with the dual mandate and to ignore
unemployment in the process of setting interest rates? Does
anybody--Mr. English?
Mr. English. I do not think so. I think that the dual
mandate makes a lot of sense. Much of the time, those two
mandates point in the same direction. If the economy is
overheating, inflation is high, you type monetary policy. When
they are not, I think it is appropriate to try to balance those
risks and costs, and so I am a fan of the dual mandate. I would
not see any reason to change it.
Mr. Sherman. I am going to throw in a third possible
mandate or a less important mandate, and that is the Federal
Reserve can have a tremendous effect on the U.S. budget
deficit. First, we are the biggest debtor in the history of the
world. Second, when they expand their balance sheet, they are
quite capable of making an enormous profit, which they turn
over to the Federal Government.
We are putting together community projects, and every
$100,000 matters, and yet the Fed has at times remitted nearly
$100 billion to the U.S. Government, and Fed shares have been
embarrassed by it, saying, do not look at that. Should we be
looking--can the Fed, in addition to meeting its dual mandates,
also help reduce the Federal deficit? Does reducing the Federal
deficit matter? I do not know which witness wants to respond.
Yes, go ahead.
Mr. Lacker. I just want to comment on that. As I pointed
out at the beginning of my remarks, you may have missed it, the
third mandate, there are actually three. The third one is
moderate long-term interest rates, and one can view that as a
mandate to minimize the risk premium that the U.S. Treasury has
to pay in the market for the premium on expected inflation and
the premium on risks to the U.S. Fiscal situation, risks to a
macroeconomic situation that are avoidable. In some sense, we
already have something like that but to aim policy at reducing
just the nominal interest expenditure in the debt, that is a
different matter entirely, and that is a road to
hyperinflation.
Mr. Sherman. Well, there are also the remittances. That is
to say, a larger balance sheet means, in effect, you monetize
the debt, and the Fed ``earns an interest'' on that money and
remits it to the Federal Government. As they say, it can be
$50, $100 billion of Federal deficit reduction. Does that
matter?
Mr. Lacker. I recommended that the Fed stick to Treasury
bills only. The losses that the Fed has incurred have been due
to its long-term holdings. In addition, there is an unrealized
capital loss on the Fed's balance sheet that is going to affect
it for years to come. Sticking to bills only would greatly
reduce the risk involved in the flow of remittances. That
effect on remittances reflects the fact that the Fed is taking
on fiscal risk, in some sense, apart from Congress' approval.
Chairman Lucas. Thank you. The gentleman's time has
expired.
The chair now recognizes the gentleman from Nebraska, Mr.
Flood, for 5 minutes.
Mr. Flood. Thank you, Mr. Chairman.
Dr. English, you mentioned in your written testimony that
the Fed and the Treasury could improve decisionmaking by the
other institution, providing as much clarity as possible about
their future plans. Can you expand on what should be provided
by these institutions?
Mr. English. Sure, Congressman. I think what I had in mind
was, on the one hand, for the Treasury to provide greater
information about its intentions regarding future issuance and
the future distribution of their outstanding debt across
maturities, so the Fed would understand what was the backdrop
against which it was doing monetary policy and for the Federal
Reserve to provide greater information about what it views as
its steady state balance sheet. What is it aiming for? Is it
aiming to hold, as Jeff was saying earlier, Treasury securities
that are tilted a bit toward the short end, all the way, as
Jeff Lacker would have it, to bills only, or what? Just what is
their intent?
That matters for the Treasury because the Treasury is
trying to decide on its issuance. What the Fed is holding is
not being held by the public, and what matters in some sense is
what is held by the public. So the Treasury will adjust what it
is issuing depending on where it thinks the Fed is going. I
think the Fed could provide more information on that.
Mr. Flood. Based on that answer, Mr. Hoenig, Dr. Lacker,
Dr. Huther, as former Federal Reserve or Treasury officials,
could Dr. English's recommendation for the Fed and Treasury to
provide as much clarity as possible about future plans be
beneficial to those institutions? Is this possibly something
worth exploring when potentially creating a new accord? Let us
start with Mr. Hoenig first.
Mr. Hoenig. Well, I think any time you clarify what your
intentions are, you are going to improve the outcomes. There is
no question about it, but I want to emphasize to you that the
main issue is how much debt has to be monetized to keep the
Treasury market stable and liquid because the Treasury, because
of the debt, has to issue so much additional debt, and someone
has to buy it. If that debt is growing much too quickly, if the
Fed monetizes it, you are going to have inflation and that is
the real problem. If you have an ongoing--enough liquidity into
the market for the economy to grow at its 3, hopefully 4
percent growth rate, fine. Clarity will only make that go
better but you have to have the debt under control for that to
really make a long-term difference, in my opinion.
Mr. Flood. Dr. Lacker?
Mr. Lacker. I take your question to be taking a path of the
deficit as given, how to finance it, how debt management ought
to work. I think absent a clear assignment of debt management
to the Treasury, as I advocated, I think under the current
arrangements, communication could be better between the two and
to the market, more importantly. Now we get these refunding
announcements from the Treasury. Separately, there is some so-
called monetary policy announcement about quantitative easing
or the path of the Fed's holdings. Why is that not a joint
announcement? Why do they not just--why is there not a joint
communique about what that debt in the hands of the public is
going to look like?
Mr. Flood. Thank you. Dr. Huther?
Mr. Huther. I think the challenge for additional policy
clarity really revolves around the uncertainty that we face
going forward, and it is really hard for policymakers to
provide a great deal of clarity when they do not know anything
more than the rest of us in some degree. While clarity is
great, the best we can do is try to frame where we are going.
It is really hard when it comes down to specifics, given just
the way the world is.
Mr. Flood. With my remaining time, Dr. English, do you want
to react to that?
Mr. English. I wanted to react to something Jeff Lacker
said, I think. He said, ``Why should this not be a joint
announcement?'' I think even if that joint announcement was in
some sense benign, each institution is making its own
decisions, and they are just stapling the papers together. I
think doing that could likely be seen as a step toward Treasury
dominance of the Fed and toward fiscal dominance. Given our
unsustainable fiscal path, people will be suspicious. They will
be worried that the Treasury will be dominating the Fed, that
the Fed will be generating higher inflation in order to ease
the fiscal pressures. The President has called for lower rates
explicitly on that basis.
Mr. Flood. I will have to stop you there----
Mr. English. I think it is better actually to have these
things separated so it is clear that the Fed is independent, is
making its own decisions.
Mr. Flood. I am out of time, so I have got to stop you
there. I yield back.
Chairman Lucas. The gentleman yields back.
Seeing no other requests for time, I want to thank all of
our witnesses for their testimony today.
I must say, in good faith, in a world, in a society, in a
Congress where we live 10 minutes at a time based on the last 5
minutes, the experience and the insight and the willingness of
this panel to discuss the near and far future is really quite
refreshing. I just hope we have the ability and the discipline
to listen to what you have said.
With that, 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 22, 2026.
[The information referred to was not received prior to
printing.]
This hearing is adjourned.
[Whereupon, at 3:15 p.m., the task force was adjourned.]
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