Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell told House lawmakers Tuesday that federal financial relief packages averted the worst economic consequences of the pandemic.
The economic recovery has moved faster than expected, though with 10 million jobs short of the pre-pandemic level there’s still a ways to go, Powell and Yellen said at a House Financial Services hearing on the Treasury and Fed's pandemic response.
“While the economic fallout has been real and widespread, the worst was avoided by swift and vigorous action,” Powell said. “More people held on to their jobs, more businesses kept their doors open, and more incomes were saved.”
Spending on goods has picked up and the housing sector has “more than fully recovered from the downturn,” Powell said, adding that business investment and manufacturing have also increased. The economy added 379,000 jobs last month, he noted.
Still, the pandemic and its economic consequences hit some harder than others. Unemployment remains high for low-wage service workers, African Americans and Latinos, Powell said.
“Recovery is far from complete, so, at the Fed, we will continue to provide the economy the support that it needs for as long as it takes,” he said.
Powell also said prices may increase as the economy reopens, though the effect of government spending on inflation would be slight.
“Now we might see some upward pressure on prices. Our best view is that the effect on inflation will be neither particularly large nor persistent,” Powell said in response to questions from Republican lawmakers.
Yellen said federal financial relief packages, especially the provisions included in the law President Joe Biden signed this month, would address the “very deep pockets of pain” that remain in the economy.
Tweaks to the Paycheck Protection Program that the Treasury Department and the Small Business Administration made will get forgivable federal loans to smaller businesses that are more likely to be owned by women and minorities, she said.
The Treasury also has $12 billion in aid for community development financial institutions and minority depository institutions under the law President Donald Trump signed in December. Those institutions can use the capital for loans to buy houses and start businesses in communities traditionally left behind by the financial services sector, she said.
“I am confident that people will reach the other side of this pandemic with the foundations of their lives intact,” Yellen said. “I believe they will be met there by a growing economy. In fact, I think we may see a return to full employment next year.”
Yellen faced questions from Financial Services Chairwoman Maxine Waters, D-Calif., and ranking member Patrick T. McHenry of North Carolina about the distribution of $25 billion in rental assistance provided through the March reconciliation law. State and local governments have been charged with delivering aid to renters under the oversight of the Treasury.
“We know that when the foundations of someone’s life fall apart — when they lose the roof over their head or the ability to eat dinner every night — the pain can weigh on them for years. Their earnings potential is permanently lowered,” Yellen said. The assistance will avert long-term financial damage, she said.
Waters said she had concerns about the leeway that states have in getting aid to renters.
“I am growing increasingly concerned with how the program is being implemented by grantees,” Waters said. “In particular, California just launched a program that greatly limits the amount of assistance renters can receive, even if they owe more.”
Yellen said the Treasury allowed states and cities distributing the aid the flexibility to structure programs to meet local needs and published guidance explaining statutory obligations attached to the aid.
“I am very concerned about that flexibility that the states have,” Waters said. “I'd like to know if you can think about any role that we can play to help straighten out confusion and stabilize this rental assistance.”
McHenry asked Yellen to explain the guardrails the Treasury has in place to make sure aid goes to those who are behind on rent because of pandemic lockdowns.
Yellen said the department issued guidance for the state and local entities distributing aid.
“It clarifies that grantees have flexibility, but also that there are requirements of the statute and that we will follow up to make sure that the payments are going to eligible households and that the guidelines of the program are being followed,” she said.
The regulators also faced questions about their approach to climate change.
“Climate poses very severe risks to the wellbeing of humanity. And it's a global problem that demands a global solution,” Yellen said. “It is a top priority of the Biden administration.”
Regulators are evaluating the risks climate change poses to businesses and financial institutions, and will share best practices through the Financial Stability Oversight Council that Yellen leads, she said.
“We need to focus on information, that is disclosure of information about the risks to companies that investors need to channel our capital in the right directions,” she said.
Powell said the Fed and banks it regulates are already examining climate change to better understand its long-term risks.
“Financial institutions are very much actively doing this on their own. It's not something we're forcing them to do at this point,” he said. “Many of the large banks are very active in trying to understand how climate change would affect their business over the long sweep of time — many or even all. And by the way, that's also true of large industrial companies in the United States.”
Republicans, including Rep. Frank D. Lucas of Oklahoma, pushed back against the focus on climate change by federal regulators, saying it could hurt industries, such as fossil fuel, by drying up their sources of capital.
“The 3rd Congressional District of Oklahoma is a commodity-driven economy. It's ag, and it's energy,” Lucas said. “There's concern in my district that the financial regulators may be moving toward regulation and supervision with environmental policy objectives, potentially discouraging banks from doing business with entire sectors of the economy.”
Yellen said banks and investors will remain able to loan or invest in the companies and sectors they want.
“We agree that financial regulators should be assessing the risks to financial institutions through stress testing and other techniques, and that investors need disclosure of risks,” she said. “But I have no plan to regulate what lending or investments can be done.”