During a hearing Tuesday, several members of the House Committee on Financial Services commended the Treasury and the Federal Reserve’s response to the COVID-19 pandemic as they discussed next steps in response to the pandemic’s economic impact, including additional aid and further stress testing of financial institutions.
Federal Reserve Chairman Jerome Powell and Treasury Secretary Steven Mnuchin testified before the committee, discussing their separate and joint actions during the pandemic and future steps in economic aid.
Mnuchin was optimistic about the state of the economy moving forward, while Powell portrayed the future of the economy as “extraordinarily uncertain,” noting that it “will depend in large part on our success in containing the virus” as well as on the “policy actions taken at all levels of government to provide relief to support the recovery for as long as needed.”
“While recent economic data offer some positive signs, we are keeping in mind that more than 20 million Americans have lost their jobs, and that the pain has not been evenly spread,” Powell said, noting that women, African Americans, and Hispanics have been disproportionately impacted.
Mnuchin said the economy is “in a strong position to recovery.” He focused on recent positive signs for the economy, especially the May employment report, which included a gain of 2.5 million jobs.
“While the unemployment rate is still historically high, we are seeing additional signs that conditions will improve significantly in the third and fourth quarters this year,” Mnuchin said.
He highlighted the positive impact of the Paycheck Protection Program.
Mnuchin said he believes any additional aid should be earmarked for the businesses and industries hardest hit by the crisis, including restaurants, with a focus on “jobs and putting all American workers who lost their jobs, through no fault of their own, back to work.”
“We will be beginning to have conversations about supplemental relief legislation. We look forward to working with Congress on a bipartisan basis in July on any further legislation that may be necessary,” Mnuchin said.
Powell spoke on the issue of stress testing at financial institutions saying that the pandemic materialized during the stress tests. As such, the Fed added three new scenarios to its tests. The 33 institutions tested all proved adequately capitalized.
Powell said the Fed would be asking banks to submit more information with another round of potential stress scenarios as the impacts of the pandemic continue to unfold.
When asked why the Fed is requiring additional stress testing and “why lock up additional capital now,” Powell responded, “We’re not looking to raise capital standards during a crisis. That’s not what’s going on here.”
Also, during the hearing, Powell highlighted the Federal Reserve’s actions to stabilize markets during the pandemic. When the markets for Treasury securities and mortgage-backed securities began to “experience strains” in mid-March, the Fed purchased Treasury securities and agency MBS.
With markets more stable, the Fed began to ease their purchases, but Powell said the Fed “will increase our holdings of Treasury securities and agency MBS over the coming months at least at the current pace” while continuing to monitor markets.