▶ 0:25:56The 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 striking the right balance sheet. Without objection, all members will have five 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. Welcome to the first task force hearing of 2026.
▶ 0:26:27Our focus today is on the Fed's balance sheet, a record of its assets and liabilities that demonstrate its The Fed's balance sheet has undergone dramatic changes in the last 15 years, growing from less than $1 trillion in 2008, or 6% of GDP, to almost $9 trillion in 2022, or 35% of GDP.
▶ 0:26:51In 2008, the Fed moved from a quarterly system to a floor system, uh necessarily demanding an increase in the quality of reserves on the balance sheet. Despite that change, the Fed has continued to express the view that reserves should be at the smallest levels consistent with the effective implementation of monetary policy.
▶ 0:27:12We haven't always seen the Fed stick to that view, instead using its balance sheet to provide economic stimulus, not merely as a means to control rates. In 2008, the Fed engaged in four rounds of large-scale asset purchases or QEs. With its balance sheet standing at $6.5 trillion today, yet the academic literature shows mixed results on the effectiveness of QE at economic support.
▶ 0:27:42While the jury is out on the benefits of QE, we do know that it raises risks of inflation and market distortion. Fed should rely on conventional monetary policy tools under its ample reserves regime and avoid market operations that may have unintended and lasting Additionally, the Fed should clearly articulate under what conditions it uses its balance sheet for economic stimulus, economic contraction, and policy implementation in the future.
▶ 0:28:12This is particularly important now as the Fed engages in reserve management Finally, it may be tempting to allow the news of the day to distract us from the purpose of today's hearing. I will continue to emphasize that the importance the independence of the Fed is critical to ensuring it makes sound interest rate decisions that are essential to favorable economic We'll do well to remember that decisions made now have lasting implications, not just for the next Fed
▶ 0:28:42chair, but for the next 10 Fed chairs. That said, let's focus our discussion today on the proper use of the balance sheet and its impact on monetary policy implementation and market a treasury market I yield back. I now recognize the ranking member of the task force, Mr. Vargas, for 4 minutes for an opening statement.
▶ 0:29:05Thank you very much, Mr. Chairman, and I want to thank the witnesses being here today. Chairman, you have assembled a very distinguished group of witnesses today, and I was looking forward to discussing quantitative easing and quantitative tightening, the transition between scarce and ample reserve regimes, reserves regimes, and other aspects of the Fed's balance sheet. But, the development of the past few days have been incredibly alarming. I don't see them as a simple distraction. The Department of Justice has threatened Chairman Powell with a criminal indictment.
▶ 0:29:36The threats represent a full-frontal assault by President Trump on the independence of the Fed. Just 11 days ago, after the president said, quote, "We're going to probably bring a lawsuit against him," end quote, the Department of Justice served the Federal Reserve with grand jury subpoenas. This is not an isolated incident. In August, the president said he was considering allowing, quote, "considering allowing a major lawsuit against Powell to proceed," end quote.
▶ 0:30:03In November, he said that Chairman Powell, "He should be fired and he should be sued," end quote. These repeated threats are designed to pressure the Federal Reserve into Protecting the Fed's independence and credibility is critical to a stable economy. Credibility keeps mortgage rates low for home buyers. Credibility keeps borrowing costs predictable for small businesses. Credibility prevents credit card payments from spiking for working families.
▶ 0:30:31When monetary policy is guided by data and evidence, families can plan, save, and build financial security. When presidents attempt to interfere with the Fed, markets lose confidence, and Americans pay the cost. Congress imposed staggered 14-year terms to insulate monetary policy from political pressure. President Trump has shown he is willing to ignore that safeguard to reshape the Fed in his own image.
▶ 0:30:59Chairman Powell's professionalism, seriousness, and character have earned him respect across ideological and party lines. I agree with Chairman Hill when he says he knows Powell to be, quote, a man of integrity with a strong commitment to public service, end of quote. And Governor Cook's experience and academic background have made her a respected voice among economists and policy policy makers.
▶ 0:31:27Yet, the Department of Justice is threatening criminal prosecution. And next Wednesday, the Supreme Court will hear arguments on President Trump's attempt to remove Governor Cook. Let's be clear. This is not just about two individuals. It is about the future of the Federal Reserve, as the chairman That's why all three living former Fed chairs condemned this criminal inquiry.
▶ 0:31:52They wrote, quote, This is how monetary policy is made in emerging markets with weak institutions, with highly negative consequences for inflation and the functioning of their economies, end of quote. Congress cannot stand by and allow this to happen. That's why I'm I'm urging the Senate Banking Committee to follow Senator Tillis's lead and oppose the confirmation of any nominee for the Fed until this matter is resolved.
▶ 0:32:18The strength of our economy and our status as the world's reserve currency are on the line. And with that, Mr. Chairman, again, I thank you.
▶ 0:32:26Gentleman yields back. The chair now recognize the chairman of the full committee, Mr. Hill, for 1 minute for an opening statement.
▶ 0:32:31Thank you, Chairman Lucas. I appreciate your leadership and that of the ranking member. The Federal Reserve's balance sheet is a monetary policy tool that was once deemed unconventional some 15 years ago. Now it's regularly used as a tool intended to keep our economy steady and Since 2008 the Fed's balance sheet has grown significantly. What began as a modest tool used to support traditional monetary policy during times of stress appears to be the central way the Fed operates.
▶ 0:32:59Today we'll examine that whole Quickly before we turn to today's I do want to emphasize what Mr. Vargas talked about. Chair Powell is a man of integrity. This hearing today is not about these events that unfolded over the weekend. We have a good solid monetary policy topic before us today and I encourage all of our members to ask thoughtful questions about the direction of the Fed's balance sheet.
▶ 0:33:24Regarding the hearing on the Federal Reserve's semi-annual monetary policy report, the hearing is typically scheduled at this time of year and the committee is at work to get it scheduled. Thank you, Mr. Chairman, and I yield back.
▶ 0:33:36Gentleman yields back. Today we welcome the testimony of Dr. Jim Clouse, senior fellow at the Anderson Institute for Finance and Dr. Bill Nelson, executive vice president, chief economist, and head of research at the Bank Policy Institute. Dr. Allison Schrager, senior fellow at the Manhattan Institute, and Dr. Bill English, the Eugene F. Williams Jr.
▶ 0:33:58Professor of Practice at the Yale School of Each of you first off thank Thanks to each of you for taking the time to be here and each of you will be recognized for 5 minutes. You have an oral presentation of your testimony and without any objection, your written statements will be made a part of the record. Dr. Clouse, you may begin.
▶ 0:34:19Thank [snorts] you, Mr. Chairman, Ranking Member Vargas, and members of the task force. It is an honor to be with you here today to discuss issues related to the Federal Reserve's balance sheet. My name is Jim Clouse and I'm currently a senior fellow at the Institute Anderson Institute for Economics and Finance. Prior to joining Anderson, I
▶ 0:34:34Doctor, would you pull the microphone just a little closer to you, please? Thank you very much.
▶ 0:34:38Yes, sorry. Prior to joining Anderson, I I was on the Federal Reserve Board staff for many years, which with much of that time spent focusing on issues related to the Federal Reserve's balance sheet and monetary policy implementation. The Federal Reserve's balance sheet is a term used to refer to its assets and liabilities. The Federal Reserve Act specifies the types of assets the Fed can hold. Federal Reserve's assets currently consists largely of US Treasury securities and agency MBS securities.
▶ 0:35:04On the other side of the balance sheet, the Fed's primary liabilities include physical currency and reserve balances held by depository institutions. The Federal Reserve publishes a great deal of information on the balance sheet in a range of of reports. Prior to the global financial global financial crisis in 2008, the role of the balance sheet in the implementation of monetary policy centered around the use of open market operations to align the to align reserve supply with reserve demand at the targeted federal funds Reserve demand was driven largely by
▶ 0:35:34reserve requirements. Reserves did not earn interest, and banks sought to keep any excess reserves to a minimum. Fed assets at this time were almost entirely US Treasury securities with an average maturity of about 3 years. Over the last 20 years, the Fed the Fed's balance sheet has undergone a major transformation, largely reflecting the policy actions taken in response to the global financial crisis and the In both cases, the FOMC reduced the target federal funds rate to the effective lower bound and purchased large volumes of longer-term
▶ 0:36:04Treasury securities and agency securities in an effort to put downward pressure on longer-term interest rates and ease broad financial conditions. The expansion of the Fed's securities holdings during these episodes was accompanied by large increases in reserves in the banking system. Over time, it became apparent that the demand for reserves had dramatically changed from that in the period prior to the GFC.
▶ 0:36:27Surveys of banks suggested that changes in bank liquidity regulations and a cautious approach to liquidity risk management had contributed to higher reserve demand. Partly in recognition of these changes, the FOMC announced in early 2019 that it intended to continue to operate in a so-called ample reserves regime. The ample reserves regime has many attractive features. First and foremost, it delivers excellent interest rate control even in environments with very large quantities of reserves in the banking system.
▶ 0:36:56That said, there can be challenges in identifying with whether reserves remain ample, a point that was painfully illustrated by a period of severe stress in money markets in September of 2019. Following the period of balance sheet reduction over the last few years, the FOMC judged that reserves had returned to ample levels and announced that it would begin reserve management purchases of Treasury bills to maintain ample reserve conditions over time.
▶ 0:37:21While the size of the Fed's balance sheet has now apparently reached a new the composition of the balance sheet still has a long way to go. The FOMC has indicated that it intends to hold primarily Treasury securities in the longer run, but agency MBS holdings are still sizable and running off only slowly. Moreover, the maturity structure of the Fed's securities holdings is heavily weighted towards longer-term securities.
▶ 0:37:45The FOMC's desired long-run composition of the balance sheet could depend on a number of policy considerations, including potential implications for future policy actions, Treasury market functioning, and Federal Reserve net income. Regarding other balance sheet related issues, some observers have suggested that eliminating the Fed's authority to pay interest on reserves could be a way to boost Fed remittances to the US Eliminating interest on reserves would not boost Fed remittances remittances because the Fed's interest income would fall
▶ 0:38:15along with a decline in interest Moreover, eliminating interest on reserves would necess- necessitate very large and potentially disruptive sales of the Fed's securities holdings and would require wholesale changes in the framework for monetary policy implementation with attendant uncertainties about the Fed's ability to effectively manage the level of short-term interest rates. Thank you.
▶ 0:38:38Dr. Thank you, Dr. Klaus. Dr. Nelson, you are now recognized for 5 minutes for your oral remarks.
▶ 0:38:45Thank you. Chairman Lucas, ranking member Vargas, and members of the task force, thank you for the opportunity to testify. My name is Bill Nelson and I am chief economist and head of research at the Bank Policy I previously served at the Federal Reserve Board working on monetary policy analysis including balance sheet policy. The Federal Reserve's balance sheet matters because it shapes how monetary policy is implemented, how the Fed interacts with the financial system, and the risks ultimately borne by taxpayers.
▶ 0:39:14On the asset side, the Fed holds mainly Treasury securities and agency mortgage-backed securities. On the liability side, its largest item today is reserve balances, deposits of banks at the Fed, along with currency and the Treasury's general account. Because currency demand is set by the public and the Treasury controls its own account, the minimum size of the Fed's balance sheet is largely determined by banks' demand for reserve balances.
▶ 0:39:41Before the financial crisis, the Fed implemented policy in what is called a corridor system. In that system, the Fed only supplied the level of reserve balances that the banking system needed and private interbank markets actively distributed liquidity and imposed discipline.
▶ 0:39:56The Fed had good interest rate control even though its footprint in markets was After 2008, emergency lending, quantitative easing, and the authority to pay interest on reserves led the Fed to adopt a floor system in which a massive quantity of reserves pins money market rates to the floor created by the interest rate the Fed pays for reserves. In January 2019, the Fed formally chose to remain in that system.
▶ 0:40:25That decision has had serious First, the unsecured interbank market has withered. With an excess supply of reserves, banks no longer need to borrow from another from one another for liquidity management purposes. Second, an unconstrained balance sheet becomes an attractive source of funding for government initiatives.
▶ 0:40:44As FOMC participants warned at the time the Fed officially adopted a floor system, a large and unbounded balance sheet invites political pressure to use Third, the floor system may have encouraged complacency on the part of the Fed about interest rate risk. Quantitative easing transfers that risk from the private sector to the Fed and therefore to taxpayers.
▶ 0:41:08When short-term rates rose sharply in 2022 to 2023, that risk materialized in large Federal Reserve losses. Fourth, abundant reserves worsen discount window stigma. Borrowing becomes rare, it signals distress, preventing banks, supervisors, and investors from viewing the window as a normal backstop. Finally, there is a ratchet in the demand for reserves.
▶ 0:41:33Reserve demand rises easily but falls only with difficulty because bankers and bank examiners grow accustomed to abundant and cheap reserve balances and make adjustments to make use of them. In 2008, the Fed estimated that a floor system required about $35 billion in reserves. Today, that figure is roughly $3 trillion.
▶ 0:41:56The Bank of England, the ECB, the Bank of Canada, and the Reserve Bank of Australia have recognized these costs and are shrinking their balance sheets and seeking to revive private markets. If the Fed wants to do the same, it needs to take three steps. First, move overnight market rates modestly above the interest rate paid on reserves, creating an incentive for banks to economize on reserve holdings.
▶ 0:42:21Second, avoid repo market volatility by conducting temporary open market operations to manage easily predictable variations in reserve supply and demand, such as occur on quarter ends and days with large settlements of Treasury Third, reform liquidity regulations so that banks can count discount window borrowing capacity established with pre-positioned collateral as a source of This single change would reduce reserve demand, make
▶ 0:42:51liquidity regulations more accurate, encourage discount window preparedness, and boost economic growth and employment. It would support growth by allowing banks to make loans to households and businesses, which they would then pledge to the Fed, rather than forcing them to fill up their balance sheets with reserve balances.
▶ 0:43:10In closing, turning a large institution is never easy, but the experience of other central banks shows that a smaller Fed, one that acts as a backstop rather than a market replacement, is both feasible and desirable. Thank you. I look forward to your
▶ 0:43:26Thank you, Dr. Nelson. Dr. Schreger, Schreger, you are now recognized for 5 minutes for your oral
▶ 0:43:34Thank you for the invitation to discuss with you today the size and composition of the Federal Reserve's balance sheet. I'm a senior fellow at the Manhattan Institute, where I research fiscal monetary policy and financial markets. I'm also a columnist at Bloomberg The size of the Federal Reserve's balance sheet has grown exponentially since the start of the financial crisis. This has happened for two main reasons.
▶ 0:43:55The Fed switched from a scarce reserve system to an abundant reserves or an ample reserve system, where it sets policy rates by paying interest on Paying interest on reserves means banks keep more reserves at the Fed, which is naturally going to increase the size of the balance sheet. And there are some advantages to this. It makes it easier to control the policy rate, especially when rates are near And traditionally, the Fed bought mostly short-term Treasuries with bank reserves, which, like reserves, are highly liquid and have a very short duration.
▶ 0:44:23But this changed in November 2008 when the first of four rounds of quantitative easing commenced and the Fed used reserves to make large-scale purchases of longer-dated bonds and mortgage-backed securities. The size and scope of QE is the other reason why the balance sheet has grown as much as it has. Now, the ample reserves system, I guess, can be justified. Um it has made it easier in some ways to conduct monetary policy within reason without causing inflation.
▶ 0:44:48However, the growth of the Fed's balance sheet has not been completely benign because the compositions of its assets can have a profound impact on the Buying longer-term bonds and mortgage-backed securities not only introduce distortions into the economy, it might also threaten Fed the Fed's independence in the future. Now, when the pandemic arrived and we risked a severe recession and dis- great disruption in financial markets, the scale of the new QE program, QE4, was unprecedented.
▶ 0:45:16Cumulative purchases since 2020 exceeded $4.6 trillion, more than all three previous QE programs And my primary concern is the risk QE introduces the economy with very questionable benefits. The hope is when the Fed reduces the supply of long-duration assets in the hands of the private sector, long-term yields will fall, providing a stimulative effect on the economy.
▶ 0:45:39And when short-term rates are near zero and can't go much lower, this might offer the Fed another avenue to boost economic But whether the first three rounds of QE actually had a notable and long-term impact on interest rates is hotly debated amongst economists. One research paper found that, while Fed economists found that QE reduced short-term there's did reduce the rates yield on long-term on 10-year bonds. Academic economists found very little or maybe only a fleeting impact and take that for what you will.
▶ 0:46:08So, even if there is spotty evidence of QE's impact on long-term yields, it can still have a distortionary impact on the wider economy. Traditionally, bond markets are segmented. The Fed has a significant impact on shorter-term rates, say below 5 years, and less impact on longer-term rates, which are set in the market. And that market price conveys very important information about the price of risk in the economy and it's the makes the foundation of how many assets are priced throughout the economy.
▶ 0:46:35When the Fed attempts to alter this rate or simply just becomes a large and competitive buyer of longer-term bonds, all these prices then have less meaning. In that case, risk can be mispriced causing bubbles and financial It also poses a financial risk to taxpayers because longer longer-term bonds are more volatile or their price is more volatile cuz they have a longer duration than the Fed's liabilities.
▶ 0:46:58One estimate projects the cost of QE will be more than $760 The evidence is stronger that buying mortgage-backed securities has notable impact on the mortgage market by lowering the spread between mortgage rates and bonds. When the Fed resumed QE in March of 2020, there was apparent disparate stress in the mortgage market, but the Fed kept buying mortgage-backed securities for another 2 years when the housing market had not only fully recovered, but was extremely tight as many Americans moved homes, refinanced, and home prices hit record highs.
▶ 0:47:27We're still feeling the impact of this policy error. When the 50% of mortgage holders have mortgage rates below 4% and cannot afford to move and take on a higher rate, and this is constraining supply in the housing market making Americans less mobile and contributing to high housing costs. Another problem with QE, as well as relatively easy to implement, it is very hard to end. Ending QE too quickly, as we've seen, creates some major financial stability issues and this creates an inherent asymmetry.
▶ 0:47:53QE can be implemented very quickly when the economy is weak, but must be added very slowly when the economy is hot. Even more worrying, if QE becomes a regular feature of monetary policy, which it seems that has, this can pose grave risks for Fed independence. When this is a tool in the Fed's toolbox, it is just all too tempting to pressure the Fed to keep the entire yield curve low in order to reduce the cost of debt service or just lower the cost of mortgages to consumers.
▶ 0:48:20Japan attempted this at the cost of introducing major distortions into its economy. Firms stayed in business for years only because of the low cost of credit, and this misallocation of capital lowered economic growth and contributed to their lost decades. Listen, some increase in the Fed's balance sheet is not necessarily a concern. It can be part of a healthy and growing economy. But the reasons why the balance sheet has grown as much as it has and the changing composition of its assets should be a matter of grave concern for policy makers.
▶ 0:48:47There may be some justification buying assets other than short-term Treasuries in extreme instances of illiquidity in the spirit of fostering financial But any such program should only last a short amount of time, perhaps 6 months or less, after a liquidity event has passed and not used as a way to manage economic demand or influence asset prices. I'm happy to take your
▶ 0:49:08Thank you, Dr. Schreker. Uh Dr. English, you're recognized for 5 minutes for your oral testimony.
▶ 0:49:15Uh thank you, Chairman Lucas and Ranking Member Vargas for holding this hearing and inviting me to testify today about the Federal Reserve's balance The size and composition of the Federal Reserve's balance sheet reflect a range of policy decisions by the Fed. Uh for example, lending and quantitative easing have significant effects on the balance sheet. One important choice affecting the balance sheet is the method the Fed uses to implement its conventional interest rate policy.
▶ 0:49:43These policies can be implemented in a variety of ways. One possibility employed by the Fed prior to the financial crisis is to implement policy with a relatively small balance sheet. That is relatively low levels of securities and relatively low levels of reserve balances at the Fed. And then use securities purchases and sales to adjust the level of reserves to achieve the desired outcome for short-term interest rates. This approach is sometimes referred to as a scarce reserves or corridor system.
▶ 0:50:13This sort of implementation was no longer possible by late 2008 because of the huge increase in reserves resulting from the Fed's emergency lending and QE. As a consequence, the Fed began implementing policy using the interest rate it pays on reserves and other administered rates. Since leaving money at the Fed is completely safe and liquid, banks should not lend out funds at rates much below the rate paid on reserves, and so that rate should set a rough floor for market rates.
▶ 0:50:43This approach is sometimes referred to as an ample reserves or floor system. And it works even with a very high level of reserve balances. As the Fed shrank its balance sheet between 2017 and 2019, it considered whether it should return to a scarce reserves approach with a smaller balance sheet or stay with an ample reserves system and a larger balance sheet.
▶ 0:51:05In January 2019, the Fed announced it would stick with the ample reserves That decision reflected a balancing of a number of potential costs and benefits. One cost is Bill Nelson noted was the impact of a high level of reserves on overnight interbank markets.
▶ 0:51:22With banks holding very high levels of reserves at the Fed, they have little need to borrow and lend reserves to manage their holdings, and as a result, the overnight interbank funding market has become much smaller and On the other hand, the Fed viewed the high level of bank reserves under the ample reserves system as likely to contribute to financial In the event of a shock to the financial system, there'd be less need to add reserves as ample reserves would already be in place.
▶ 0:51:50Moreover, problems at large banks, the failure of which could cause systemic problems, can be managed better if those banks have a larger cushion of reserves to draw on. In addition, by 2019, the ample reserves system had been in place for more than a decade, had been working well to allow the Fed to set its policy rate, and there were presumably risks and risks associated with trying to transition back to a scarce reserves When policymakers assessed the overall costs and benefits
▶ 0:52:20of the two systems in 2019, they concluded that staying with the ample reserves system was Some have expressed the concern that the Fed, by operating with a larger balance sheet, may encourage the view that it will use its balance sheet to address other non-monetary policy concerns, or be willing to ease policy to address fiscal stresses by monetizing federal However, such concerns can arise regardless of the size of the Fed's balance sheet.
▶ 0:52:50Instead, these risks point to the importance of the Fed's monetary policy The Fed should implement monetary policy to foster the objectives given by Congress, maximum employment and price without regard for political or other pressures to use its tools for other Thank you. I look forward to our
▶ 0:53:11Gentleman yields back. We'll now turn the members' questions, and I recognize myself for 5 minutes for Dr. Nelson, the Fed maintains that a floor system provides more rate control, safer banking system, and more resilient Treasury market. Do you share that view, and what are the What are the downside risks of a large balance sheet?
▶ 0:53:34Thank you, Mr. Chairman. No, I don't share that view. There's in fact generally widespread agreement across uh folks that have studied this that both a scarce reserve system and an ample reserve system provide good interest rate control in normal times. Now, it's true that when the Fed has to expand its balance sheet in response to a crisis and reserve balances go up, what happens at that time is a corridor system naturally becomes a floor system.
▶ 0:53:59And the ECB indeed moved in and out of a corridor and floor system with no difficulty during the European banking And that demonstrates that it's not necessary for the [clears throat] Fed to operate a floor system all the time with the attendant costs in order to be able to handle times of a crisis. Moreover, it's not true that banking system is more resilient under a floor system. In fact, as we saw, one of the things that a floor system does is it increases discount window stigma and it reduces the incentive for banks to be prepared to use the window.
▶ 0:54:29And as we saw in August 2023, the banking system is much less resilient if the banks are not prepared to use the discount window.
▶ 0:54:38Continuing with you, Dr. Nelson. Banking regulations like the liquidity coverage ratio, resolution requirements, and liquidity stress test incentivize financial institutions to hold reserves, growing the Fed's balance sheet. Should the regulators contemplate the impacts of liquidity requirements have on the size of the Fed's balance sheet and what regulations need to be adjusted?
▶ 0:55:02Yes, they should. Um so, last week we conducted a survey of our member banks and published the results of that survey this morning on what leads to banks to demand reserve balances and what policies could change the things that the banks listed was first and foremost their own risk management, but then also needing to pass liquidity requirements as well as discount window stigma.
▶ 0:55:26And they indicated that the things that would most effectively allow them to reduce their demand for reserve balances was to recognize discount window capacity in their in the liquidity requirements to which they're subject.
▶ 0:55:39Dr. Klaus, if the balance sheet gets too aren't we in danger of markets becoming dependent on the Fed for proper functioning? In a crisis, Fed intervention may be necessary, but in normal times, is the Fed unnecessarily distorting market behavior?
▶ 0:55:57Thank you. I think that that is possible and certainly was a concern at the time when large-scale asset purchase programs were in in in initiated uh that the growth of the balance sheet could be too rapid and there could be problems in the in the in market functioning. Uh in the event the FOMC carefully calibrated its pace of purchases and also tried to spread its holdings of Treasury securities across a range of CUSIPs to address those issues.
▶ 0:56:26At present, my own sense is that the balance sheet is not exerting any particular distortions in the Treasury market. An interesting fact is that the Fed's Treasury holdings now as a share of the total Treasury market are below those in prior to the GFC.
▶ 0:56:40Dr. English, in uh my view, the primary benefit of QE is the strong signal it sends to the market that the Fed is committed to easy policy and supporting the economy through dramatic and unconventional actions. Can you talk about the importance of clear communication from the Fed as it manages its balance sheet, given that reserve management purchases are not intended to stimulate the economy? How can the Fed clearly communicate that to the market and differentiate it from QE? Hit your button. Doc
▶ 0:57:09I think I agree with you uh that QE works in part by just signaling resolve of the central bank. I think we may disagree over other possible channels through which QE can affect uh can affect interest rates in the economy, but certainly communication about asset purchases is very important.
▶ 0:57:25And uh and elsewhere, I've I've argued that uh the Fed should be clear about what the intended purpose of purchases is and uh and and then the purchases should be designed and calibrated to meet that And and I think that that's important for clarity on the part of the Fed for the understanding of financial markets and and so on.
▶ 0:57:48In the in the current situation, I actually think the Fed's done a very good job of explaining the reserve management purposes purchases which it started this month. It it has said in its post-meeting statement that purchases of shorter-term Treasury it will purchase short shorter-term Treasury securities as needed to maintain an ample supply of reserves on an ongoing basis. So, it was clear it was buying short-term Treasuries, not long-term Treasuries as it would for QE aimed at easing policy.
▶ 0:58:19And it was clear that the aim was to supply reserves and not to provide accommodation.
▶ 0:58:24Thank you, doctor. My time's expired. I now recognize the ranking member of the House Force, Mr. [clears throat] Burgess, for 5 minutes for questions.
▶ 0:58:30Thank you very much, Mr. Chairman. Appreciate it. Again, I want to thank the witnesses. In fact, I don't want to violate any confidences here, but the chairman did lean over to me a second ago and say that we have a really excellent group that's testifying today. If you don't mind me saying that, but I agree.
▶ 0:58:46And I did hear the admonishment from the chair of the full committee that we should focus on the balance sheet today and not talk about the issues that have happened in the last few days, but I think for me that would be irresponsible not to talk about the possible criminal prosecution I mean, I don't see how I cannot do that. I I'm going to.
▶ 0:59:04In fact, in Chairman Powell's statement, he said This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions or whether instead monetary policy will be directed by political pressure or intimidation.
▶ 0:59:20He went on and yesterday the Wall Street Journal reported that Janine Pirro, the US attorney for the District of Columbia, was at a White House event last week with other US attorneys where President Trump called them weak and said he felt betrayed. The next day, the very next day, her office sent out grand jury subpoenas to the Federal So, I think it's outrageous.
▶ 0:59:43And it's interesting, too, that even in all of your testimonies today, you all talked about the balance sheet being able to be used for policy or political purposes. Interestingly, Dr. English, you mentioned whether it was smaller whether it was big, they could be used either way. It doesn't matter the size, it could still be used politically. And I think that that's the problem when we don't have an independent Fed. I mean, I The reason the Fed was set up in the in the first place was to bring it out of the politics.
▶ 1:00:12That's why they have the 14-year staggered terms. Could you comment on that, Dr. English? Cuz I I think that that's important for the discussion to hear. You know, it it's impossible just simply to talk about this and not say, "Well, well, there's the balance sheet's important whether we shrink it, whether we grow it, whether it's in times of emergency or we need it or not." When it could be used politically this whole time if the president has captured it.
▶ 1:00:38So, uh Congressman, uh when Congress set up the current structure of the Federal Open Market Committee and the and the Federal Reserve Board in 1935, uh they were they were trying to ensure that the Fed could operate independently, could operate in the public interest. There's a a very interesting paper by Gary Richardson and David Wilcox looking at this that came out last year.
▶ 1:01:02Uh in particular, Congress wanted to ensure the Fed was independent of the president who might have political and personal incentives that would affect policy in ways that would not be uh good for uh the public interest. Uh there are there are several pieces of the structure that help ensure this independence. As you say, uh 14-year terms for board members, they only turn over every 2 years. That limits the number of people that a particular president in a particular term can nominate to the board. Um in addition to
▶ 1:01:32Unless he gets them removed by a a compliant court, right? I mean, as he's attempting to do with Lisa Cook.
▶ 1:01:39Let let let me come to that in a moment. Um the the votes of Reserve Bank presidents on the FOMC uh mean that there are voters who aren't subject to presidential nomination at all. Uh and that provides additional independence. And Congress intentionally put in place the arrangement that the president could only fire board members with cause uh to protect the Fed from being used by the president to accommodate fiscal needs. So so this was the structure that Congress intended.
▶ 1:02:04As you say, we'll see in some sense what the courts decide about this, but but the the intent I think at at the time was was clear that Congress intended an independent Federal Reserve for the public good.
▶ 1:02:17And I and I think it's functioned fairly well with exception. I mean, we did see an exception when Nixon, I think, uh pushed very hard politically to change the rates. I mean, it I don't think it worked well. I mean, I don't think it worked well in Turkey. I don't think it worked well in other places when the when the the central bank is not independent from the politics, the particular politics of the president or whomever the leader is of the country at that time. Isn't that correct?
▶ 1:02:43I I think I think that's right. Um as you say, in Turkey in recent years, there was uh uh strong political pressure put on the central bank to leave policy easy for too long. They ended up with very high inflation there. And I think you mentioned uh Richard Nixon and Arthur Burns. That's another famous example where uh Burns was uh was an advisor and confidant of Nixon. He wanted Nixon to be successful.
▶ 1:03:10And uh and Nixon put a lot of pressure on Burns to keep policy easy. We see that in the Nixon tapes. We see that in Burns' diary, for example. And I think that did contribute only contributed. There are many factors at play, but it contributed to the high inflation that
▶ 1:03:25My time is up and I and I thank you and I think that's very dangerous what's going on right now. Thank you. I I yield
▶ 1:03:31has expired. The chair now recognizes the gentleman from Michigan, Mr. Huizenga, vice chairman of the full
▶ 1:03:38Well, thank you, Mr. Chairman. And I too am going to divert a little bit from my prepared questions because I just need to point out a couple of facts. Um This is my third Fed chairman since I've come into Congress in 2010, Ben Bernanke, Janet Yellen, and now Jay I was chair of something called the Monetary Policy and Trade Subcommittee, which doesn't even exist anymore.
▶ 1:04:04In fact, I have I have a article from 2016 of a much thinner and slightly less gray Bill Huizenga chairing a very similar John Taylor was one of our one of our witnesses, Dr. Eisenbeis, also somebody from Cato. So, we've been dealing with this and I will tell you at the time there was friends of mine on the other side who were very critical of Ben Bernanke and his relationship with George W.
▶ 1:04:34Bush. There was a lot of us very critical of Janet Yellen and her relationship with Barack Obama. In fact, we were debating whether we were going to have to subpoena meeting logs, not notes, but logs of how often Janet Yellen was meeting directly with President Barack Obama. Interestingly enough, that was because people suspected collusion between the the Fed chair and the president. And now we're seeing sort of the opposite.
▶ 1:05:04We're seeing a disagreement between the Fed chair. So, this notion that there's ever been that there's never been political pressure and that there's always been an independent Fed and it's it it's somehow sterile and completely independent is is just a fool's errand to to pursue that. Um the question that I have on this is dealing really with sort of with the with the balance sheet and reserve regime.
▶ 1:05:32Banks hold plenty of reserves and don't have many incentives to trade with each other at in the Fed funds market. However, Fed funds market can be more susceptible to experiencing sharp changes when conditions change. Dallas Fed President Lorie Logan suggested that the Fed should move away from this market instead target a repo rate for monetary policy implementation. Dr. Klaus, Dr.
▶ 1:05:54English, I'm curious do either of you believe this change do either of you believe this change something the Fed ought to consider and what would the benefit or challenge in doing so? Dr. Klaus.
▶ 1:06:05Thank you. That's a very interesting proposal my own and I do agree that the federal funds market is different now than it was in the past. I think of it as largely a deposit market. I think it's maybe more stable than many people think but there are good arguments for shifting to a broader concept of banks marginal funding rate. I personally I'm a little uncomfortable with you the use of a repo rate because I think that ties monetary policy more closely to treasury financing needs, large non-bank financial institutions. Um so that that that's my view.
▶ 1:06:36Real quickly, Dr. English.
▶ 1:06:37I I I think I basically agree with Jim. I I don't see a need for that and I don't think it's desirable and I think the current system operates pretty effectively. So I'm not sure I see need to make a change.
▶ 1:06:49Dr. Schreger, why does the Fed still use quantitative to stimulate an economy when the economic community has not agreed whether the QE is actually even effective in the first place? I actually I was one of my first meetings with Ben Bernanke in my office. I'm a former realtor. I I I watch interest rates all the time and I had no other way of other than an artificial lowering of the interest rates. He literally came out of his chair. He was so angry. He was like we didn't have a choice.
▶ 1:07:20Seems like we were in a different position now, but why are we still using
▶ 1:07:24Well, certainly when you know, we started with QE interest rates were at a you know, very near zero and we were in the midst of a very deep recession and I think the Fed was under a lot of pressure to feel like it was doing something and it was something. You know, so I think as well it got revived. It was supposed to just be an extraordinary situation because this was you know, an extreme financial crisis a very deep recession, but I think the concern is is one it went on for a really long time because it's very hard to get out of QE.
▶ 1:07:55very if I don't if you don't mind, I I would say it's very hard to break ourselves of an of the low interest rate sugar high. And then during the pandemic, um you know, it got revived even bigger. So I again going into the pandemic interest rates were also near zero. So I think um anyway, um as I mentioned and I cited a paper that found that well, Fed economists do find it effective academic economists less so.
▶ 1:08:23Well, I would I would note one benefits professionally the other may not.
▶ 1:08:27Well, you know.
▶ 1:08:28I'm just citing the paper. Um but I I think it is very tempting for the Fed to use it just because I said it needs to do something and it is well
▶ 1:08:37So I I referenced Dr. Taylor as having testified would Taylor rule make sense or any sort of rule? And my I know the chairman's having by the love to get it The gentleman's time has expired. I'd love to get it in writing. Can you respond in writing?
▶ 1:08:51Uh yeah, I mean I think I think definitely I I'm more of a fan of a rules-based framework rather than discretion and I think that that is a sort of an issue with QE is it does also leave open more discretion.
▶ 1:09:00The chair now recognizes the gentlewoman from California, the ranking member of the full committee, Ms. Waters, for 5
▶ 1:09:06Thank you so very, very much. Um I appreciate so very much Mr. Vargas and Mr. Luois and um this hearing that uh you have put together and I would love to engage with you about the balance sheet. We should not be talking about anything about but the independence of the Fed. Our central bank. A few days ago, President Trump again escalated his tax on the Federal Reserve.
▶ 1:09:34This time through grand jury subpoenas, threatening criminal prosecution of the Fed's chair, Jerome Powell. This comes after months of Trump bringing baseless accusations against Fed Governor Lisa Cook to remove her from position. Next week, Cook's case will be before the Supreme Court and I expect they will reject Trump's power grab. That's because Trump's attacks are not about transparency or accountability.
▶ 1:10:02It's about his desire to control the Fed interest rate and our money supply to serve his agenda and not to fulfill the Fed's statutory mandates. I commend Chairman Hill and others for speaking up. But this committee with its clear authority over the Fed must take a bigger role in defending the Fed's Can I just keep talking? No, I yield back.
▶ 1:10:31Gentlewoman yields back.
▶ 1:10:33I'm going to give me the whole 5 Well, let me just say this. I'm thinking that I'm doing the um
▶ 1:10:38For the ranking member, yes, please finish your 5 minutes, of course.
▶ 1:10:42Okay, we're going to get to some questions here.
▶ 1:10:44If you can yield it to me, I'll take it.
▶ 1:10:46Okay, I think this first question is um it is imperative that our committee does everything in its power to defend the Fed's independence for the benefit of our constituents. Chair Hill, Mr. Lucas, I would like to yield to you for a question.
▶ 1:11:06What actions will the committee take to fight back against these efforts to undermine the Fed's independence, including stopping this latest attack on Chair Powell from continuing? Will you commit to holding a full committee hearing and a bipartisan investigation?
▶ 1:11:25Will you issue subpoenas to the DOJ, FHFA and Treasury Secretary Yellen regarding their role in this latest attack?
▶ 1:11:38Will the gentlelady yield?
▶ 1:11:43Thank you for yielding.
▶ 1:11:44Uh Mr. Hill is not here. And so, I expect that Mr. Lucas will answer for him.
▶ 1:11:51The [laughter] task force held a hearing in September entitled Less Mandates, More Independence, where we discussed Fed It has been, I believe, the goal of myself and the full committee chairman to address these issues. I cannot speak for the full chairman of the committee, but I much appreciate the lady's points.
▶ 1:12:09Thank you very much. I take back my time. Miss Dr. English, time and again over the past year, President Trump has taken extraordinary actions to attempt to control the Federal Reserve. For example, his administration manufactured mortgage fraud allegations uh fire again Governor Lisa Cook and seize more control over the Federal Reserve. And last week, his administration threatened Chair Powell with criminal charges.
▶ 1:12:36From your perspective as a former Federal Reserve official for 25 years, how does this political interference with the from the White House undermine the Fed's ability to make objective and sound monetary policy decisions?
▶ 1:12:52Well, I I trust that it won't. Uh that the Fed will will stand tough. I think uh the statement by Chair Powell over the weekend was clear that he's not going to change his behavior as a result of this. So, I think the the Federal Reserve has uh legal protections for its independence, and we'll see what the courts say. But but I'm hopeful that that the Federal Reserve will continue to use its tools to get uh to to foster its objectives set by the Congress.
▶ 1:13:23Uh excuse me, Dr. Do you remember was it Mr. Trump uh that nominated and got um Mr. Powell the chairmanship, the presidency of the um governing board?
▶ 1:13:36Yes, he he was the one who nominated Chair Powell. That's correct.
▶ 1:13:40And is it your experience uh that uh Chairman Powell has been able to work effectively on both sides of the aisle?
▶ 1:13:49Uh Certainly, that's my impression. Yes, he uh he has talked to people on both sides of the aisle. We know that because his calendar is public. And uh and I think he is uh a very uh smart, talented uh public servant who's done done a very good job. basically, he has the respect of both sides of the aisle, and hopefully the courts will see this and understand this. Is that right?
▶ 1:14:14I I would hope so, yes.
▶ 1:14:16Thank you. I yield back.
▶ 1:14:17Gentlewoman yields back. The chair now recognizes the gentleman from Wisconsin, uh Mr. Fitzgerald, for 5 minutes.
▶ 1:14:25Thank you, Mr. Chair. Since 2008 financial crisis, the Federal Reserve's balance sheet has expanded dramatically and remains historically large even after a period of quantitative tightening. Uh Dr. Klaus, uh from your perspective, how does a persistently large Fed balance sheet affect private market intermediation, particularly dealer balance sheet capacity, and does it risk crowding out banks and market participants that would otherwise provide liquidity in the Treasury
▶ 1:14:56Thank you for that question. You know, I think that that was an important question particularly on the earlier rounds of quantitative easing that the additional reserves and bloating bank balance sheets could cause capital constraint to buy more closely, but we didn't actually find that to be the case. I actually think Bill understood a major study at the time.
▶ 1:15:12More recently as I tried to indicate earlier, the Federal Reserve's balance sheet in dollar terms is quite large, but it's holdings of Treasury securities while large in dollar terms are actually modest relative to the size of the overall Treasury market on on the order of actually prior to the crisis. So my assessment right now is that the Treasury the Fed's holdings of Treasuries are not having meaningful distortionary effects in markets.
▶ 1:15:38Very good. Thank you. Dr. English argues, I don't want to put words in your mouth, but I I think this is where you're at, that the Fed's large balance sheet and ample reserve system impose little long run cost while Dr. Nelson and Dr. Schreger warn that it distorts markets could ratchet it upward and expose taxpayers to risk ultimately. Uh so Dr.
▶ 1:16:03English, what concrete metric should Congress use to decide when the Fed's balance sheet is too large uh in size relative to GDP, reserve balances relative to bank assets, um market functioning indicators maybe, or taxpayer expo exposure. Uh and if none of these work, what measurable limits should should replace them, I guess is the
▶ 1:16:33Uh Congressman, I I think there are uh several issues here. Uh one is the question of distortions. I think as Jim just said, if the Fed's holdings of Treasuries got very large, that could distort the Treasury market, but at the moment holdings are not that large relative to the Treasury market. I think it's unlikely there are serious distortions there.
▶ 1:16:54You could look at things like bid-ask spreads and things like that in the market, but but I don't think that indicators of market functioning are particularly showing signs of concern. Uh it is true that when the Fed does QE, it purchases longer-term securities, it takes interest rate risk onto its balance sheet. That's intentional. That is the way QE works.
▶ 1:17:18It takes interest rate risk out of private hands, reduces risk premiums in private markets, lowers longer-term interest rates because those risk premiums are lower. uh whether that ends up with losses for taxpayers or not or gains depends on whether interest rates after those purchases end up being higher or lower than were expected at the time of the And on average over time, those gains and losses you would expect to uh
▶ 1:17:48to roughly offset. So so I'm not sure there are big problems here. I would worry if the size of reserve balances got so big that it began to impede the ability of banks to do their job. But by creating the overnight RRP program, the Fed provided a safety valve where extra reserves can move out of the banking system.
▶ 1:18:11And uh what what we have seen in the last year or so is as the Fed's balance sheet shrank, that overnight RRP program shrank and is now essentially And I think that's an indicator that the level of reserves is is now manageable for the banking system.
▶ 1:18:28Mr. Congressman, may I offer a view on the distortions? Uh
▶ 1:18:32Yeah, go ahead, sir.
▶ 1:18:33Thank you. Uh so while it's uh one way that the Federal Reserve's large balance sheet does distort Treasury markets is through the creation of reserve balances, which tends to make leverage ratio requirements more binding on the part of the banking system. Because leverage reserve balances are a low-risk, zero-risk weighted asset, when they're very high, leverage ratios tend to be more binding.
▶ 1:18:54That discourages banks and the and the bank holding and the broker-dealers owned by bank holding companies from intermediating in Treasury markets because that requires them to take on similar low-risk assets. Now, the banking agencies have addressed that to some extent recently by adjusting the supplementary leverage ratio requirement, but there remains the Tier 1 leverage ratio requirement, which is binding on other banks and continues to discourage Treasury market intervention intermediation.
▶ 1:19:20Very good. Thank you so much. I yield
▶ 1:19:23Gentleman's time's expired. Gentleman yields back. Does the ranking member seek recognition for unanimous consent request?
▶ 1:19:35Um, I have a unanimous consent request to enter into the record a series of documents relating to Trump's attacks on the Fed's independence, Chair Powell's statement on Sunday about extraordinary subpoenas and criminal threats from the administration, court documents relating to Trump's attempted barring of Governor Lisa Cook, and [clears throat] statements from myself, Chairman Hill, and other Republicans, Treasury Secretary of Ascent, all Wall Street executives,
▶ 1:20:06foreign central bankers, and all living former Fed chairs strongly opposing Trump's latest attack on the Fed's independence.
▶ 1:20:15Seeing no objection, so ordered. The lady yields back. The chair now recognizes the gentleman from Illinois, Mr. Casten.
▶ 1:20:23Thank you, Mr. Chairman.
▶ 1:20:24amazing minutes.
▶ 1:20:26I I it's always a pleasure, Chairman. I'm going to channel my inner X-Files here for a moment. I was looking back over the history and I love this task force and the chairman's done a wonderful job of leading it. Um, we had a task force hearing just after Trump's first tariffs announcement. We had a task force hearing just after his attempt to fire uh Governor Cook. And we're now having a task force hearing just after uh the threats of criminal prosecution of J. I don't think these things are connected.
▶ 1:20:57But if you're watching out
▶ 1:21:00watch when Mr. Lucas announces our next hearing, that's probably a good time to short the bond market. Um More seriously Um, I want to be clear. I completely stand with Secretary Powell. It is absolutely critical that the Fed be independent that the uh from the executive. They have to be able to make hard decisions especially when they're politically unpopular.
▶ 1:21:23Uh I can't believe we need to say that, but I hope that everybody in a position of power, public or private sector takes the chance to make that statement because he he needs to hear that now and our economy needs to hear that now. Mr. Chair, in addition to the uh extensive list that our ranking member just entered into the record, I'd ask unanimous consent to enter a statement from the European Central Bank.
▶ 1:21:44Gentleman asked by unanimous consent to enter into the record, seeing no objection so ordered. Uh this is [clears throat] a statement from the leaders of the Central Bank and its counterparts in the UK, Sweden, Denmark, Switzerland, Australia, Canada, South Korea, and Brazil standing quote in full solidarity with Chair Powell and stating that the Central Bank independence is a cornerstone of price, financial, and economic stability.
▶ 1:22:04I want to take a little bit of issue with what Mr. Huizenga suggested that this is normal. Those leaders are not compelled to make those statements.
▶ 1:22:10Will will the gentleman yield?
▶ 1:22:11Um no, I will not. I want to finish my comments here. Um Mr. Nelson, your organization represents the nation's leading banks, manage trillions in assets. Um do you agree that the Federal Reserve that Federal Reserve independence is central to the strength of the US economy and the US dollar. Yeah. Yeah. Yeah. And do you would And do you agree that threats of a criminal investigation into a sitting Federal Reserve chair could undermine the institution's independence? Yes or no?
▶ 1:22:38I'm sorry, I'm not prepared to answer that question.
▶ 1:22:40Okay. Well, I I just would note that Jamie Dimon, who sits on your board, has said that those threats will likely raise inflation expectations and raise interest rates over time. Do you agree with Jamie Dimon?
▶ 1:22:51I'm sorry, I think it's best that I stick to the Fed's balance sheet, which is the topic of today's
▶ 1:22:55Well, I will just read a quote from someone who's not here. "Thank you, Jamie Dimon, for stating reasonable facts about the undermining of our Fed chair, Powell. Thanks for standing up to the administration for their bullying. I salute you, sir. Sad that the politicians are scared of our leader." That was from the great Reggie Jackson, Mr. October. I want to move to our balance sheet. And I want to start with how QE started, Dr. English. There's a lot of talk about Leaving aside Fed independence, although Fed independence certainly makes this worse.
▶ 1:23:25When's the next rate cut going to come? How far is, you know, what's it the size going to be? How should we think or how should the Fed think about a lower bound so that they don't end up out of ammunition, which was of course what happened last time? Do Do you Where should rate cuts stop if they indeed keep going forward?
▶ 1:23:44So, if what you mean is that the Fed should hesitate to cut rates, say after they get to 1%, uh in order to keep their powder dry to cut later on, I think that's a bad idea. I think if the economy is weak and you think there's a real risk that you're going to end up at the zero lower bound, if anything, you want to cut rates because you want to stay away from the zero lower bound if you can cuz that constraint, when it binds, is extremely painful.
▶ 1:24:12You can't provide as much accommodation as you would like. So, so I I would disagree with that. I think it if anything, I'd do the reverse. As I get close to the lower bound, I'd cut a little bit more.
▶ 1:24:22Okay. Well, I Let me maybe shift then, and this is I guess for Mr. Schrager. There's this tension that the Fed will say publicly, as they should, that managing the assets on their balance sheet should only be dealt with from a balance sheet perspective. That's not done to affect monetary policy. Wink, wink, nudge, nudge, we all know it affects rates.
▶ 1:24:46Um there's been research suggesting that the the MBS purchases uh in 20 20 22 had the practical effect of making house prices go up, which of course we're now grappling with that on the other side. How should we be thinking about Polte and Trump putting pressure on Fannie and Freddie to buy mortgage-backed securities right now? Is that not an intentional distortion of of of interest rates?
▶ 1:25:14Well, I mean, Fannie and Freddie in a sense are a distortion of interest rates, but um you know, yeah, I mean, that is I guess you could argue that is serving a similar role, but I guess the difference is is is at least it's happening in different branch of government that is, you know, the the the you know, the Fed's independence largely exists by keeping its narrow mandate. And, you know, cuz it's not democratically elected in the same way other parts of the government are. So, I mean,
▶ 1:25:43I'm not really here to comment about whether or not, you know, uh Trump's
▶ 1:25:47functionally different than Treasury
▶ 1:25:49Gentleman finds his
▶ 1:25:50expired. Doctor can proceed forward a written response. The chair now recognizes the gentleman from Louisiana, Mr. Fields, one of my old colleagues from the 103rd session of Congress for 5 minutes.
▶ 1:26:02Thank you, Mr. Chairman, and let me thank all the witnesses for being here Um we're here today to um to talk about balance sheets and monetary policy. Uh important stuff, no doubt. Uh but there is an elephant in the room uh that we cannot ignore. Uh just a few days ago the Department of Justice sent grand jury uh subpoenas to the Federal Reserve threatening criminal prosecution of Chairman Jerome Powell.
▶ 1:26:30And it raises a far more pressing uh uh than banks' balance sheets uh for the Under the guise of uh testimony that uh Chairman Powell gave uh to a Senate Banking Committee last June, uh the president has chosen to uh strong-arm the Federal Reserve by putting forward unconscionable allegations against uh the long-standing bipartisanship uh practice that we've
▶ 1:27:00had uh with the Federal Reserve. Uh since the since being elected uh his second term, President Trump has failed to recognize uh any form of diplomacy when dealing with people who won't do whatever he says.
▶ 1:27:16Uh why should uh Chairman Powell or anyone else, for that be subject to criminal prosecution solely for choosing not to engage in the president's partisan politics? Uh now, I've been in I've been in public service um for a long time, and I've never ever uh seen anything like this. Chairman Powell said it best.
▶ 1:27:44Uh this is not about whether the Fed will be able to uh continue to set interest rates based on evidence and economic conditions, it's about political pressure and If a person as non-partisan as Chairman Powell can be subject to these is there anyone in our government who is truly safe from similar pros- prosecution.
▶ 1:28:16Uh that's what we're really dealing with Uh so on that I ask I have my first uh direct my first question to Mr. English. Dr. English, I appreciate you being here and I know you have spent a good uh part of your career at the Federal Reserve.
▶ 1:28:34In all of your years studying the Feds in all 112 years of its uh history, uh has the Department of Justice ever uh threatened to criminally prosecute a sitting Federal Chair?
▶ 1:28:52Not that I'm aware of,
▶ 1:28:56Uh now Dr. English, my second question to you would be I want you to help me explain something to the folk uh back home in Louisiana. When a president goes after the Federal uh the Feds like like like this one, uh when he threatens the Federal Chair with prison, uh what does that actually mean for our families in Baton Rouge uh trying to buy their first home?
▶ 1:29:25Uh what what does it mean to a senior citizen in Shreveport uh living on a fixed income? Uh break it down for me. What happens to regular people when you shake the confidence in the Federal Reserve?
▶ 1:29:41So I think the risk, Congressman, is if the president were successful in undermining the Fed's independence, then monetary policy would be made in the interest of short-term political gain and not in the interests of the objectives set by the US Congress, maximum employment and stable prices. The likely effect is that monetary policy will be too easy. Uh, presidents often call for monetary policy to be easier.
▶ 1:30:10They rarely call for monetary policy to be tighter. And so, the result would be uh, higher inflation over time. There's a lot of empirical evidence that less independent central banks deliver higher average inflation over time, also more volatile inflation over time, I think. Uh, so granting central banks uh, brings inflation helps keep inflation low and relatively stable.
▶ 1:30:37So, so everyday Americans as they look at uh, this issue about central bank independence, they should be concerned that if independence is undermined through effect will be higher inflation, higher cost of living, and more uncertainty, more volatility around the cost of living over time.
▶ 1:30:55And my last question uh, to to you, Mr. Nelson. you your member banks need uh, stable monetary policy to do business. They uh, they need predictability. Uh, so with that said, um, what's your feeling about the attacks on uh, the Feds?
▶ 1:31:16The witness will need to respond to that in writing. The gentleman's time has
▶ 1:31:21I think the chair now yields back to the
▶ 1:31:22Thank you.
▶ 1:31:23The chair now recognizes the gentleman from Nebraska, Mr. Flood, who is chair of the subcommittee on housing for 5
▶ 1:31:31Thank you, Mr. Chairman. The subject of today's hearing is exceptionally important. The Federal Reserve's balance sheet grew exponentially after the recession of 2008, and then grew again after the COVID-19 pandemic. This is part of a trend in Federal Reserve monetary policy over the last 20 In harsh economic times, the Federal Reserve purchases assets, whether it be treasuries, mortgage-backed securities, or other assets.
▶ 1:31:57Then in fairly stable economic times, the Reserve lets those assets roll off the balance sheet slowly as they mature. We've seen this escalation play out once back before the financial crisis in 2008. The Federal Reserve's balance sheet was only around $900 million. However, before the Federal Reserve began purchasing assets in 2020 to combat economic instability from the COVID-19 shutdowns, uh the balance sheet was already around $4 trillion.
▶ 1:32:28Today, the Federal Reserve's balance sheet is at 6.5 trillion, which is still higher than where the balance sheet was prior to 2020.
▶ 1:32:37If the Federal Reserve already has a 6 trillion-dollar balance sheet when the next recession hits, the Federal Reserve will be more will be being more assets on top of their already elevated holdings. My concern is whether this is sustainable long term.
▶ 1:32:54If quantitative easing remains a tool in the Federal Reserve's toolbox in the event of economic turbulence, wouldn't a balance sheet in good times blunt the economic impact of that tool when things get tough? My first question, Dr. Klaus, Dr. Nelson, Dr. Schreger, would you mind reacting to that sentiment? How do How should we be thinking about the implications of a larger Federal Reserve balance sheet for future bouts of quantitative easing?
▶ 1:33:24Thank you. I'll offer my comments. I, as you indicated, the Federal Reserve has embarked on those QE programs in response to very severe adverse shocks. I would not anticipate balance sheet expansion beyond just what was necessary to a top accommodate the trend growth in currency and other technical factors in in normal times. It's true that the dollar magnitude of the Fed's current balance sheet is sizable, but it has the Reserve through the last few years has reduced the the size of the balance sheet relative to to nominal GDP quite quite quite substantially. So,
▶ 1:33:54Mr. Olson.
▶ 1:33:55Dr. Nelson.
▶ 1:33:56Thank you. So, I think the big challenge the particular challenge is that once every time the Fed increases its size, that size gets locked in and it has to increase it further. So, for example, as I noted in 2008, the the staff judged 30 billion was needed to to conduct policy of the floor system. Now it's 3 trillion. But importantly, at when the Fed decided to adopt a floor system, the staff estimated that it would require 1 trillion in reserves.
▶ 1:34:26And at that time, in large part because Chair Powell wanted to be able to demonstrate that QE could be reversed, he indicated that while 1 trillion I I I will support it at that level, but if it turns out to be 1.5 trillion, then I'll have buyer's remorse. 11 months later, the staff revised its estimate of the amount needed to 1.5 trillion. So, I think that that's that the fundamental tendency for the balance sheet to just have to keep growing is part of the severe problem with the approach. Dr.
▶ 1:34:57Yeah, I I agree with all of that. And I I think what we're seeing as well as financial markets become very dependent on this. And I mean that's one of the reasons why they've even had to end quantitative tightening already. Is, you know, it's already sort of maintaining the ability to do the ample reserve system is sort of sort of really limits the size to even strengthen balance sheet. And this is one of the reasons why it just seems to be growing and growing and growing.
▶ 1:35:19The minutes of the Federal Open Market Committee meeting in December suggested that they would stop quantitative tightening, which would have continued to shrink the size of the Federal Reserve's budget over time. Dr. Klaus, Dr. Nelson, Dr. Schreger, with the Federal Reserve's balance sheet still at 6.5 trillion and the end of quantitative tightening, how large can we expect the balance sheet to get after the next round of quantitative easing? And this is kind of a speed round because I have 50 seconds. Dr. Klaus.
▶ 1:35:46It's hard to say because the quantitative easing episodes are really largely restricted to severe adverse economic shocks. So, it would depend on how adverse those shocks are.
▶ 1:35:55Dr. Nelson.
▶ 1:35:57Right. And and the Federal Reserve can't get any smaller than the sum of banks' demand for reserves and the Treasury's general account and the currency. Those things are going to be growing over time, which is why the Fed is currently purchasing securities in order to hold the level of reserve balances relatively constant. So, it's going to grow over time and as Jim noted, really the amount of quantitative easing that might be necessary if again they reach zero, would depend upon the circumstances.
▶ 1:36:22Dr. Schrager.
▶ 1:36:24Yeah, again, it would depend on the nature of the shock and where the shock was, if it was in the mortgage market or even maybe corporate bond market or you know, what have you. Um but I think as we're seeing this it's going to be bigger each time.
▶ 1:36:37Thank you very much for your testimony. I yield back.
▶ 1:36:40The chair now recognizes the ranking member for a unanimous consent request.
▶ 1:36:48Thank you very much. Um I have a unanimous consent uh to request to enter into the record a set of documents relating to the Trump administration's radical theory about the Federal Reserve lacking authority to transfer CFPB funds that was rebutted uh that was rebutted by former Fed officials including one of our witnesses by Democratic uh committee members and
▶ 1:37:18by Federal judge.
▶ 1:37:20Seeing no objection, so ordered. The chair now recognizes the gentleman from for 5 minutes.
▶ 1:37:27Good afternoon, Chair Lucas and Ranking Member Vargas. Thank you for holding this important meeting today on the balance sheets. Um and I'd like to thank our witnesses for being here today to discuss this very important issue. I will say um I can't sit here and pretend that this is business as usual because it's not.
▶ 1:37:45The Fed, which our committee oversees, I believe, is under attack by the Trump administration, and the American people cannot afford for us to sit around talking about our balance sheets and pretend that this is not happening.
▶ 1:38:00When I'm home in my district, people ask me, "What do I believe?" And I tell them, "Believe what you see right in front of your very eyes." And this is what I am This attack on the Fed threatens to raise costs, hurt retirement accounts, and mess with our entire financial As you know, the Fed is mandated to be independent of the president, and that independence has meant over the last year that the Fed has done what's best, I believe, for the American people, not catering to President
▶ 1:38:30Trump. And now the Trump administration is threatening criminal investigations into Jerome Powell, the Fed's chair, and attempting to use the Fed to play political games. Now, I would argue that this is not some partisan attack on Trump by Democrats. Global central bank chiefs and top Wall Street bank CEOs are supporting Chair Powell. Senior Republican senators on the Senate Banking Committee have come out against the investigation.
▶ 1:39:00Even Chairman Hill, the chair of this said it, quote, "creates an unnecessary distraction." I'm a moderate Democrat, so I believe my Republican colleagues from time to time. This is unusual, um but it is necessary for us to tell the truth about what is happening. And let me tell you what happens if the president can bully or threaten the Fed chair.
▶ 1:39:25Interest rates become a political tool, inflation becomes a campaign strategy, and your mortgage and your job and your savings become collateral So, let's be clear here. This isn't the first time the president has done some foolishness that hurts our economy. In his first term, unemployment has risen that the highest rate since the Great Depression. And since he's taken office this time, businesses have had to pay over $1 trillion in tariff costs.
▶ 1:39:53That affects my state and the people of Oregon. Today, everyday items are still too expensive. And President Trump needs to stop playing games with our economy and our wallets and focus on making things cheaper. Attacking the Fed does not do So, make no mistake. This attempt to intimidate the Fed isn't about justice or the American people. According to my staff, it's about the president's ego. You could argue about that.
▶ 1:40:21But I can't and I won't stand by and let that happen. I'll continue fighting to make sure that the Fed works for Oregonians and not our president, Thank you, and I yield back.
▶ 1:40:33Gentlewoman yields back. The chair now recognizes the gentleman from from Texas, Mr. Green, for 5 minutes.
▶ 1:40:42Thank you, Mr. Chairman. I thank the ranking member as well. And I concur with something the ranking member said at the genesis of his statement, or perhaps it was at the closing. Maybe it was at revelations. He talked about the dollar as the reserve currency. It is the reserve currency of choice And as such, it affords us such some preeminent privileges that many other countries don't enjoy.
▶ 1:41:14I would like for you to indicate to me whether you think that losing its independence would have some impact on the dollar as a reserve currency of choice. Mr. English, would you kindly start and we'll move from your left down the line.
▶ 1:41:34Yeah, Congressman, I I think that's that's correct. If if the Fed were seen as not independent, and uh you know, that that would lead to real concerns about high inflation. Uh I think longer-term interest rates would probably rise, and people would pull back some from holding dollar assets.
▶ 1:41:53So, it would hurt the the dollar's role as as a world's reserve The extent of that would depend some on how bad people thought monetary policy was going to be with less Fed I think there also is a a problem because there isn't a good alternative uh reserve currency. There isn't another market that is as big and as liquid as the Treasury market. So, I don't know kind of how far that would go, but at the margin it would surely reduce the use of the dollar as reserve currency,
▶ 1:42:22Thank you. Let me uh continue with Mr. English for just a moment more. Um Mr. English, uh there's a war for currency supremacy. You caused me to come into this line of thinking with your commentary. And uh there are other countries that would dearly enjoy having the prominence that our country has with its currency. the dollar is used in many ways.
▶ 1:42:53Uh when we sanction countries, uh we can deal with them by way of uh manipulating the dollar, our currency. Does that concern you, our ability to impose sanctions uh because we have allowed somehow our supremacy with the dollar to erode?
▶ 1:43:16I think it would depend a great deal on what the alternative reserve currency was that emerged. I think if it were uh you know, euro-denominated securities, if there were EU bonds that were issued, for example, I'm not sure it would actually make a a huge difference. If there was a big shift to the RMB, for example, then then, of course, there would be.
▶ 1:43:42On the other hand, I think I think the RMB is a long way from being a global reserve currency because there isn't there isn't capital market openness in China, and so there are real limits to how much people want to to hold their reserves in in the Chinese currency.
▶ 1:43:57Thank you for this. next point. As a magistrate, I conducted many probable cause I practiced law for a good many years. And it is a very basic fundamental that you do not investigate without some cause.
▶ 1:44:24You just don't decide one morning that you're going to investigate the chair of the Fed. To do so without some cause, where is the cause?
▶ 1:44:37Where's the transparency that would lead the American people and, in fact, the world to believe that this is a legitimate as opposed to a vindictive means by which a president can acquire control of the Fed. Where's the probable cause? By the way, this is rhetorical. I don't expect any of you to answer this. Okay?
▶ 1:45:02And don't don't please don't Th- This is, without question, creating an erosion in the confidence that we will have in the Fed. Saving one thing, President Powell. He has stood his ground. He's not a man who's going to allow the president to just walk over him. Mr. Powell Mr.
▶ 1:45:29Chairman, if you hear this message, I thank you for what you're doing to stand your ground. Continue to have courage to take on this reckless, ruthless president who ought to be impeached. I'll yield back.
▶ 1:45:46Gentleman's time has expired. The chair now recognizes the gentleman from Montana, Mr. Downing for 5 minutes.
▶ 1:45:51Thank you, Chairman Lucas. Uh since the 2008 financial collapse, we've seen the Fed's balance sheet increase substantially as we've we've talked about here today. And I really appreciate the discussion we've had to evaluate the effectiveness of the Fed's balance sheet targets in promoting economic stability. Uh I'm going to start my questioning uh with uh Dr. English.
▶ 1:46:14What would it look like if we if the Fed shrank its balance sheet to pre-2008 levels, both a dollar amount or as a percentage of GDP, and would that be a wise decision?
▶ 1:46:29So, I think we don't know exactly what that would look like. I think one of the reasons why the Fed has been hesitant to move to a smaller balance sheet is they don't know how that would play out. We don't really know what the demand for reserves would look like in a system like the one that we had before before the financial crisis. And uh and we don't know what stumbles there would be along the way back to that that smaller balance sheet. So, I think it's just very hard to say.
▶ 1:46:56The The point I would emphasize, and here I'm going to disagree with with Bill Nelson for sure, so you should ask him these questions, too, but but uh I I think it doesn't matter as much as as you perhaps would think. The Fed can implement policy with a bigger balance sheet or a smaller balance sheet. What's important is that it can successfully implement policy, and it it can. I used to travel around a lot and talk to central bankers from other countries.
▶ 1:47:22They all implemented policy in different They all thought their way was the right and obvious way and everybody else was crazy. And I think the the way that you implement policy is less important and that it simply be an effective way to implement
▶ 1:47:38Thank you. I appreciate that. Uh Mr. Klaus, do you believe that be a wise decision?
▶ 1:47:44No, I don't believe it would be a wise decision partly for the reason Bill just described that we don't really know what reserve demand looks like. And also, I think the world is quite different now than it was in 2007. Notably, the federal debt outstanding is much, much larger than it was. And then there are linkages now between repo markets and overnight funding markets and money markets now that are just much larger than they were in the past. And we don't really understand those as well as we would need to in order to be able to make make that that sort of move.
▶ 1:48:10So, so we're not clear on the effect it would have if we brought the balance sheet growth too quickly or too much. What effect that have on the market?
▶ 1:48:21That's my That's my view. I mean, we all like to have nice smooth reserve demand curves, but the truth is we don't really have a good sound understanding of what this looks like.
▶ 1:48:29Thank you. There's been a lot of discussion this Congress about maintaining the independence of the Fed, which I strongly support. This question is for Dr. Shrager and and for Dr. Nelson. Is it easier for the Fed to lose its independence if its balance sheet is too large? And if so, are there policy recommendations that you have for Congress to consider? You know, I'll start with Dr. Shrager.
▶ 1:48:54Um yeah, I mean, it depends what you mean by too large. As I said, it's not only the size of the balance sheet, it's also its composition. And you know, is it buying assets other than short-term treasuries, you know, certainly long-dated treasuries or mortgage-backed securities or you know, briefly corporate bonds, which other countries have gotten into or even stocks, then you really do have a serious threat to Fed independence because it becomes all too easy for the president to say, "I want lower mortgage rates, more buy more mortgage back securities." Or as we've seen
▶ 1:49:25in Latin America often, you know, cost of servicing the debt is way too high. We want the Fed to lower rates. I mean, large debt is traditionally the biggest threat to Fed independence and that's certainly a a a um a risk where we've been playing with for a long time.
▶ 1:49:40Thank you. Dr. Nelson.
▶ 1:49:43I do think that it puts risk to the Fed's independence. Uh back the way the Fed used to conduct policy, reserve balances were extremely low. So, the Fed could get no bigger than the public's demand for currency and the Treasury's general account. But uh if the Fed tried to get bigger, it would lose control of monetary policy under the old regime. Under the current regime, the Fed's balance sheet is effectively unbounded and that makes it a more attractive target as several FOMC participants have indicated for political manipulation.
▶ 1:50:10And we've seen that with the CARES Act, which in which directed the Fed to fund uh to to to extend credit to middle market firms rather than Congress doing so itself and the Fed did. We see it with we saw it with the FDIC borrowing from the Fed rather than the Treasury, which was bound by the debt limit at that time, to fund its bailouts of uninsured depositors in the spring of 2023.
▶ 1:50:32All right, thank you. Uh in my last second uh actually I Mr. Chair, I I don't have time for next questions. I I'll yield back.
▶ 1:50:39Gentleman yields back. The chair now recognizes the gentleman from Illinois, Mr. Foster, who's ranking member of the Financial Institutions Subcommittee for 5 minutes.
▶ 1:50:48Uh thank you, Mr. Chairman and to our witnesses. You know, I I I take it all of you have probably had a chance to read the statement on the Federal Reserve independence from, you know, all of the luminaries, you know, Ben Bernanke, Bernstein, Jason Furman, Tim Geithner, Phil Gramm, Alan Greenspan, Glenn Hubbard, Jacob Lew, Greg Mankiw, Hank Paulson, Ken Rogoff, Christina Romer, um Robert Rubin, and Janet Yellen. Have you all had a chance to read that, I presume.
▶ 1:51:15And so my question to you is if you'd been asked to sign where in the position there, if you'd been asked to put your name on that, would you have put your name on that statement and why or why not? Just start from the right. Dr. English.
▶ 1:51:28Yes, I would have.
▶ 1:51:31Dr. Schreger.
▶ 1:51:33I mean, I I I don't like to sign statements, but I'm supportive of of the spirit. Yeah.
▶ 1:51:40I'm sorry, I haven't read the statement, but I do think Fed independence is a national asset, a precondition for low inflation and prosperity. And I think if the Fed is subject to congressional oversight and this task force is an outstanding example of that
▶ 1:51:55I haven't read those particular statements either, but I'm certainly a strong supporter of Fed independence. Thank
▶ 1:52:01Well, I urge you to, you know, take a while to to read it. I mean, it was a very eloquent thing. There's a similar statement from international central bankers, from everywhere from you know, Korea to to Canada to the Bank of England. And and you know, they understand what's at stake and they see they look on in sympathy when you see third world countries find their central bank come under assault and you see the damage that does to the citizens of those countries.
▶ 1:52:28And we don't want to go down that road and So, let's say there number One of the things that's come up here is the Taylor rule, you know, up there on the wall is for many, many years we sat there and had endless debates about whether you could replace the entire Federal Reserve with the Taylor rule, which is little formula that has, I think, one or two free coefficients in it.
▶ 1:52:51And and you know, just for example, one of its many shortcomings, it doesn't have anywhere in it the balance sheet of the Federal Reserve, which is obviously a big player in this. So, it it is, you know, Albert Einstein has a famous quote that your the of the world of the universe should be as simple as possible, but no simpler. And it always struck me that the the monomania by the former chair about let's just get rid of the Federal Reserve and follow the Taylor rule.
▶ 1:53:18It it just seems like that can't possibly work and and it's sort of um mind-numbing to me to find that from going to having, you know, no freedom at all when the Federal Reserve be the position of the Republican Party and now we have oh, everything the Federal Reserve does should be at the whim of one man is now the current position. I just find that is hard hard to actually Um do you you know, there is I I find myself in the middle.
▶ 1:53:43I you know, from time to time you know, will go and download one of these macro models and make a few few experiments. I'm very pleased that people have transitioned away from MATLAB to Python um in those. But it you know, and and so there's a lot to learn, but there's also got to be a human part of that, too. It's not just the models. And and so I was just wondering what um you know, why why we've been so proud for so long and now we seem to have have gone off course on this.
▶ 1:54:12Uh did any of you have comments on that
▶ 1:54:15I'm sorry. I missed the last sentence
▶ 1:54:18oh, just the, you know, why you know, what is it that that's really at stake here? Um when when you say that instead of instead of having thoughtful debate, partly quantitative and partly, you know, gut feeling for where markets are moving. And and which is I think the only way that you'll have a workable monetary policy. And now all of a sudden we're sitting there just talking about um you know, whether just some guy trying to run a gang should order people. You you're all familiar with countries where that's happened.
▶ 1:54:48And and why is it we we've not decided to fight for that as a country?
▶ 1:54:53So so if you're asking whether I think monetary policy should be done in a deliberative way based on data and judgments and assessment, Sure.
▶ 1:55:03Partly and then there's a there's a gut feeling part of it, too.
▶ 1:55:08I'm sorry.
▶ 1:55:09And there's a there's a gut feeling part of it, too. You know, you you run all the models you can, you average all the models in your brain, and then in the end, you know, you're sitting
▶ 1:55:17Well, there's an element of judgment to all of these things, right?
▶ 1:55:20And and so that seems to be the only way it'll work. And I was just wondering now, you know, when you find that all of that hard work by brilliant people is just being run roughshod over. Uh it it's just it it's amazing that every every credential economist in the country isn't standing up and yelling. you know, at least as as as as clearly as, you know, those ladies and gentlemen on that list I just read off.
▶ 1:55:47Anyway, I I just want to, you know, you you have important voices. You know, you're up in front of a of an important committee of Congress and it matters that we all stand up and in this together.
▶ 1:55:59Gentleman's time has expired. Seeing no other request for time, the chair would like to thank all the witnesses for your written and oral testimony today. Your input is invaluable as we as a task force try to address these questions of independence and the Fed balance sheet. Without objection, all members have five legislative days to submit additional written questions for the witnesses to the chair.
▶ 1:56:25Questions will be forwarded to the witnesses for their response, and witnesses, please respond no later than February 18, 2026. This hearing is