Jerome H Powell: Coronavirus and CARES Act
Testimony of Mr Jerome H Powell, Chair of the Board of Governors of the Federal Reserve
System, before the Committee on Financial Services, US House of Representatives,
Washington DC, 30 June 2020.
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Chairwoman Waters, Ranking Member McHenry, and other members of the Committee, thank
you for the opportunity to testify today to discuss the extraordinary challenges our nation is facing
and the steps we are taking to address them.
We meet as the pandemic continues to cause tremendous hardship, taking lives and livelihoods
both at home and around the world. This is a global public health crisis, and we remain grateful to
our health-care professionals for delivering the most important response, and to our essential
workers who help us meet our daily needs. These dedicated people put themselves at risk day
after day in service to others and to our country.
Beginning in March, the virus and the forceful measures taken to control its spread induced a
sharp decline in economic activity and a surge in job losses. Indicators of spending and
production plummeted in April, and the decline in real gross domestic product, or GDP, in the
second quarter is likely to be the largest on record. The arrival of the pandemic gave rise to
tremendous strains in some essential financial markets, impairing the flow of credit in the
economy and threatening an even greater weakening of economic activity and loss of jobs.
The crisis was met by swift and forceful policy action across the government, including the
Coronavirus Aid, Relief, and Economic Security Act (CARES Act). This direct support is making
a critical difference not just in helping families and businesses in a time of need, but also in
limiting long-lasting damage to our economy.
As the economy reopens, incoming data are beginning to reflect a resumption of economic
activity: Many businesses are opening their doors, hiring is picking up, and spending is
increasing. Employment moved higher, and consumer spending rebounded strongly in May. We
have entered an important new phase and have done so sooner than expected. While this
bounceback in economic activity is welcome, it also presents new challenges-notably, the need
to keep the virus in check.
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. The rise in
joblessness has been especially severe for lower-wage workers, for women, and for African
Americans and Hispanics. This reversal of economic fortune has caused a level of pain that is
hard to capture in words as lives are upended amid great uncertainty about the future.
Output and employment remain far below their pre-pandemic levels. The path forward for the
economy is extraordinarily uncertain and will depend in large part on our success in containing
the virus. A full recovery is unlikely until people are confident that it is safe to reengage in a broad
range of activities.
The path forward will also depend on the policy actions taken at all levels of government to
provide relief and to support the recovery for as long as needed.
The Federal Reserve's response to these extraordinary developments has been guided by our
mandate to promote maximum employment and stable prices for the American people as well as
our role in fostering the stability of the financial system. Our actions and programs directly
support the flow of credit to households, to businesses of all sizes, and to state and local
governments. These programs benefit Main Street by providing financing where it is not
otherwise available, helping employers to keep their workers, and allowing consumers to
continue spending. In many cases, by serving as a backstop to key financial markets, the
programs help increase the willingness of private lenders to extend credit and ease financial
conditions for families and businesses across the country. The passage of the CARES Act by
Congress was critical in enabling the Federal Reserve and the Treasury Department to establish
many of these lending programs. We are strongly committed to using these programs, as well
as our other tools, to do what we can to provide stability, to ensure that the recovery will be as
strong as possible, and to limit lasting damage to the economy.
In discussing the actions we have taken, I will begin with monetary policy. In March, we lowered
our policy interest rate to near zero, and we expect to maintain interest rates at this level until we
are confident that the economy has weathered recent events and is on track to achieve our
maximum-employment and price-stability goals.
In addition to these steps, we took forceful measures in four areas: open market operations to
restore market functioning; actions to improve liquidity conditions in short-term funding markets;
programs, in coordination with the Treasury Department, to facilitate more directly the flow of
credit to households, businesses, and state and local governments; and measures to encourage
banks to use their substantial capital and liquidity buffers built up over the past decade to support
the economy during this difficult time.
Let me now turn to our open market operations. As tensions and uncertainty rose in mid-March,
investors moved rapidly toward cash and shorter-term government securities, and the markets
for Treasury securities and agency mortgage-backed securities, or MBS, started to experience
strains. These markets are critical to the overall functioning of the financial system and to the
transmission of monetary policy to the broader economy. In response, the Federal Open Market
Committee purchased Treasury securities and agency MBS in the amounts needed to support
smooth market functioning. With these purchases, market conditions improved substantially, and
in early April we began to gradually reduce our pace of purchases. To sustain smooth market
functioning and thereby foster the effective transmission of monetary policy to broader financial
conditions, we will increase our holdings of Treasury securities and agency MBS over the
coming months at least at the current pace. We will closely monitor developments and are
prepared to adjust our plans as appropriate to support our goals.
Amid the tensions and uncertainties of mid-March and as a more adverse outlook for the
economy took hold, investors exhibited greater risk aversion and pulled away from longer-term
and riskier assets as well as from some money market mutual funds. To help stabilize
shortterm funding markets, we lengthened the term and lowered the rate on discount window loans to
depository institutions. The Board also established, with the approval of the Treasury
Department, the Primary Dealer Credit Facility (PDCF) under our emergency lending authority in
section 13(3) of the Federal Reserve Act. Under the PDCF, the Federal Reserve provides loans
against good collateral to primary dealers that are critical intermediaries in short-term funding
markets. Similar to the large-scale purchases of Treasury securities and agency MBS that I
mentioned earlier, this facility helps restore normal market functioning.
In addition, under section 13(3) and together with the Treasury Department, we set up the
Commercial Paper Funding Facility, or CPFF, and the Money Market Mutual Fund Liquidity
Facility, or MMLF. Millions of Americans put their savings into these markets, and employers use
them to secure short-term funding to meet payroll and support their operations. Both of these
facilities have equity provided by the Treasury Department to protect the Federal Reserve from
losses. After the announcement and implementation of these facilities, indicators of market
functioning in commercial paper and other short-term funding markets improved substantially,
and rapid outflows from prime and tax-exempt money market funds stopped.
In mid-March, offshore U.S. dollar funding markets also came under stress. In response, the
Federal Reserve and several other central banks announced the expansion and enhancement of
dollar liquidity swap lines. In addition, the Federal Reserve introduced a new temporary Treasury
repurchase agreement facility for foreign monetary authorities. These actions helped stabilize
global U.S. dollar funding markets, and they continue to support the smooth functioning of U.S.
Treasury and other financial markets as well as U.S. economic conditions.
As it became clear the pandemic would significantly disrupt economies around the world,
markets for longer-term debt also faced strains. The cost of borrowing rose sharply for those
issuing corporate bonds, municipal debt, and asset-backed securities (ABS) backed by
consumer and small business loans. In effect, creditworthy households, businesses, and state
and local governments were unable to borrow at reasonable rates and other terms, which would
have further reduced economic activity. In addition, small and medium-sized businesses that
traditionally rely on bank lending faced large increases in their funding needs as measures taken
to contain the spread of the virus forced them to temporarily close or limit operations,
substantially curtailing revenues.
To support the longer-term financing that is critical to economic activity, the Federal Reserve, in
cooperation with the Department of the Treasury and using equity provided for that purpose
under the CARES Act, announced a number of emergency lending facilities under section 13(3)
of the Federal Reserve Act. These facilities are designed to ensure that credit would flow to
borrowers and thus support economic activity.
On March 23, the Board announced that it would support consumer and business lending by
establishing the Term Asset-Backed Securities Loan Facility (TALF). The TALF is authorized to
extend up to $100 billion in loans and is backed by $10 billion in CARES Act equity. This facility
lends against top-rated securities backed by auto loans, credit card loans, other consumer and
business loans, commercial mortgage-backed securities, and other assets. The TALF supports
credit access by consumers and businesses and provides liquidity to the broader ABS market.
The facility made its first loans on June 25, and, to date, has extended $252 million in loans to
eligible borrowers. Since the TALF was announced, ABS spreads have contracted significantly.
Thus, the facility might be used relatively little and mainly serve as a backstop, assuring lenders
that they will have access to funding and giving them the confidence to make loans to
households and businesses.
To support the credit needs of large employers, the Federal Reserve also established the
Primary Market Corporate Credit Facility (PMCCF) and the Secondary Market Corporate Credit
Facility (SMCCF). These facilities primarily purchase bonds issued by U.S. companies that were
investment grade on March 22, 2020. The two facilities have a combined purchase capacity of up
to $750 billion and are backed by $75 billion in CARES Act equity. Final terms and operational
details on the PMCCF were announced on June 29, and it stands ready to purchase newly
issued corporate bonds and syndicated loans, serving as a backstop for businesses seeking to
refinance their existing credit or obtain new funding. The SMCCF buys outstanding corporate
bonds and shares in corporate bond exchange-traded funds (ETFs) to facilitate smooth
functioning of the secondary market. The SMCCF complements the PMCCF, because
improvements in secondary-market functioning associated with the SMCCF facilitate access by
companies to bond and loan markets on reasonable terms. The SMCCF launched with ETF
purchases on May 12. Earlier this month, the facility began gradually reducing purchases of
ETFs as it started buying a broad and diversified portfolio of individual corporate bonds to more
directly support smooth functioning and market liquidity in the secondary market. Purchase
volumes are tied to market functioning and are currently at very low levels. The facility currently
holds a total of about $10 billion in bonds and ETF shares.
Following the announcement of the two corporate credit facilities in late March, conditions in the
corporate bond market improved significantly. Credit spreads on investment-grade bonds
retraced much of the widening experienced in February and March, and issuance in the primary
market rebounded strongly. In the secondary market, liquidity also improved, and by mid-April,
1
flows out of mutual funds and ETFs specializing in corporate bonds reversed.
The Federal Reserve also launched the Main Street Lending Program, which is designed to
provide loans to small and medium-sized businesses that were in good financial standing before
the pandemic; such firms generally are dependent on bank lending for credit because they are
too small to tap bond markets directly. Under the Main Street program, banks originate new loans
or increase the size of existing loans to eligible businesses and sell loan participations to the
Federal Reserve. The facility is backed by $75 billion in CARES Act equity and can purchase up
to $600 billion in loan participations. The Federal Reserve has published all of the legal
documents that borrowers and lenders will need to sign under the program and lender
registration began on June 15. Loan participations will be purchased soon. Additionally, the
Federal Reserve recently sought feedback on a proposal to expand the Main Street program to
include loans made to small and medium-sized nonprofit organizations, such as hospitals and
universities. Nonprofits provide vital services around the country, and the program would likewise
offer them support.
While businesses in certain sectors that were particularly hard hit by the pandemic have reported
continued difficulty in accessing credit, the Small Business Administration's Paycheck Protection
Program (PPP), which draws from existing bank lines, has apparently met the immediate credit
needs of many small businesses. In the months ahead, Main Street loans may prove a valuable
resource for firms that were in sound financial condition prior to the pandemic.
To bolster the effectiveness of the Small Business Administration's PPP, on April 16, the Federal
Reserve launched the Paycheck Protection Program Liquidity Facility. The facility supplies
liquidity to lenders backed by their PPP loans to small businesses and has the capacity to lend
up to the full amount of the PPP. As of last week, the facility held over $65 billion in outstanding
term loans to participating financial institutions. The most recent monthly survey from the
National Federation of Independent Business released in May indicates that small businesses
2
have been able to meet their funding needs in recent months largely due to the PPP.
To help state and local governments better manage cash flow pressures in order to continue to
serve households and businesses in their communities, the Federal Reserve, together with the
Treasury Department, established the Municipal Liquidity Facility (MLF). The MLF is backed by
$35 billion of CARES Act equity and has the capacity to purchase up to $500 billion of short-term
debt directly from U.S. states, counties, cities, and certain multistate entities. The facility became
operational on May 26, and, to date, the MLF has purchased $1.2 billion worth of short-term
municipal debt. With the MLF and other facilities in place as a backstop to the private market,
many parts of the municipal bond market have significantly recovered from the unprecedented
stress experienced earlier this year. Municipal bond yields have declined considerably, issuance
3
has been robust over the past two months, and market conditions have improved.
The tools that the Federal Reserve is using under its 13(3) authority are for times of emergency,
such as the ones we have been living through. When economic and financial conditions improve,
we will put these tools back in the toolbox.
The final area where we took steps was in bank regulation. The Board made several
adjustments, many temporary, to encourage banks to use their positions of strength to support
households and businesses. Unlike the 2008 financial crisis, banks entered this period with
substantial capital and liquidity buffers and improved risk-management and operational resiliency.
As a result, they have been well positioned to cushion the financial shocks we are seeing. In
contrast to the 2008 crisis when banks pulled back from lending and amplified the economic
shock, in this crisis they have greatly expanded loans to customers and have helped support the
economy.
The Federal Reserve has been entrusted with an important mission, and we have taken
unprecedented steps in very rapid fashion over the past few months. In doing so, we embrace
our responsibility to the American people to be as transparent as possible. With regard to the
facilities backed by equity from the CARES Act, we have conducted broad outreach and sought
public input that has been crucial in their development. For example, in response to comments
received, the Treasury and the Federal Reserve have made a number of changes to expand the
scope of the Main Street Lending Program to cover a broader range of borrowers and to increase
the flexibility of loan terms. And we are now disclosing and will continue to disclose, on a monthly
basis, names and details of participants in each facility; amounts borrowed and interest rate
charged; and overall costs, revenues, and fees for each of these facilities.
We recognize that our actions are only part of a broader public-sector response. Congress's
passage of the CARES Act was critical in enabling the Federal Reserve and the Treasury
Department to establish many of the lending programs. The CARES Act and other legislation
provide direct help to people, businesses, and communities. This direct support can make a
critical difference not just in helping families and businesses in a time of need, but also in limiting
long-lasting damage to our economy. We understand that the work of the Federal Reserve
touches communities, families, and businesses across the country. Everything we do is in
service to our public mission. We are committed to using our full range of tools to support the
economy and to help assure that the recovery from this difficult period will be as robust as
possible.
Thank you. I'd be happy to take your questions.
1
See Nina Boyarchenko, Richard Crump, Anna Kovner, Or Shachar, and Peter Van Tassel (2020), " The Primary
and Secondary Market Corporate Credit Facilities," Federal Reserve Bank of New York, Liberty Street Economics
(blog), May 26.
2
William C. Dunkelberg and Holly Wade (2020), NFIB Small Business Economic Trends (Washington: National
Federation of Independent Business, May), assets.nfib.com/nfibcom/SBET-May-2020.pdf.
3
See Board of Governors of the Federal Reserve System (2020), Financial Stability Report (Washington: Board of
Governors, May).