Jerome H Powell: Coronavirus and CARES Act
Testimony by Mr Jerome H Powell, Chair of the Board of Governors of the Federal Reserve
System, before the Committee on Banking, Housing, and Urban Affairs, US Senate, Washington
DC, 19 May 2020.
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Chairman Crapo, Ranking Member Brown, and other members of the Committee, thank you for
the opportunity to discuss the extraordinary steps the Federal Reserve has taken to address the
challenges we are facing.
I would like to begin by acknowledging the tragic loss and tremendous hardship that people are
experiencing both here in the United States and around the world. The coronavirus outbreak is,
first and foremost, a public health crisis, with the most important responses coming from those
on the front lines in hospitals, emergency services, and care facilities. On behalf of the Federal
Reserve, let me express our sincere gratitude to those individuals who put themselves at risk
day after day in service to others and to our nation.
The forceful measures that we, as a country, are taking to control the spread of the virus have
substantially limited many kinds of economic activity. Many businesses remain closed, people
have been advised to stay home, and basic social interactions have been greatly curtailed.
People have put their lives and livelihoods on hold at significant economic and personal cost. All
of us are affected, but the burdens are falling most heavily on those least able to carry them.
It is worth remembering that the measures taken to contain the virus represent an investment in
our individual and collective health. As a society, we should do everything we can to provide relief
to those who are suffering for the public good.
Available economic data for the current quarter show a sharp drop in output and an equally sharp
rise in unemployment. By these measures and many others, the scope and speed of this
downturn are without modern precedent and are significantly worse than any recession since
World War II. Since the pandemic arrived in force just two months ago, more than 20 million
people have lost their jobs, reversing nearly 10 years of job gains. This precipitous drop in
economic activity has caused a level of pain that is hard to capture in words, as lives are
upended amid great uncertainty about the future. In addition to the economic disruptions, the
virus has created tremendous strains in some essential financial markets and impaired the flow
of credit in the economy.
The Federal Reserve's response to this extraordinary period has been guided by our mandate to
promote maximum employment and stable prices for the American people, along with our
responsibilities to promote stability of the financial system. We are committed to using our full
range of tools to support the economy in this challenging time even as we recognize that these
actions are only a part of a broader public-sector response. Congress's passage of the
Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was critical in enabling the
Federal Reserve and the Treasury Department to establish many of the lending programs that I
discuss below.
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 monetary policy, 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
allow and encourage banks to use their substantial capital and liquidity levels built up over the
past decade to support the economy during this difficult time.
Let me now turn to our open market operations and the circumstances that necessitated them.
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 undertook purchases of
Treasury securities and agency MBS in the amounts needed to support smooth market
functioning. With these purchases, market conditions improved substantially, and thus we have
slowed our pace of purchases. While the primary purpose of these open market operations is to
preserve smooth market functioning and effective policy transmission, the purchases will also
foster more accommodative financial conditions.
As a more adverse outlook for the economy associated with COVID-19 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 short-term 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
largescale purchases of Treasury securities and agency MBS 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. Both of these facilities have equity provided by the Treasury Department to
protect the Federal Reserve from losses. 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 after the announcement and implementation of these
facilities.
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
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 across 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. Effectively, creditworthy households, businesses, and state
and local governments were unable to borrow at reasonable prices, 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 they struggled with possible
closure or substantially curtailed revenues.
To support the longer-term, market-based financing that is critical to economic activity, the
Federal Reserve took a number of bold steps. These steps were designed to ensure that credit
would flow to borrowers and thus support economic activity. With credit protection provided by
the Treasury Department, on March 23 the Board announced that it would support consumer and
small business lending by establishing the Term Asset-Backed Securities Loan Facility (TALF).
The TALF will lend against ABS backed by newly issued auto loans, credit card loans, and other
consumer and small business loans. In turn, these loans will support consumers seeking to
obtain these important types of credit.
The Federal Reserve also took action with the Treasury Department under section 13(3) to
support the credit needs of large employers through the Primary Market Corporate Credit Facility
and the Secondary Market Corporate Credit Facility. These facilities primarily purchase bonds
issued by U.S. companies that were investment grade on March 22, 2020. By purchasing these
bonds, the Federal Reserve is able to lower the borrowing costs for investment-grade
companies and thus facilitate economic activity.
The Federal Reserve is also preparing to launch 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. Importantly, with these and other facilities that the Federal
Reserve has not employed before, public input has been crucial in their development. For
example, in response to comments received, we lowered the minimum loan size and raised the
maximum loan size across the three lending facilities within the program; in addition, we
expanded the size of firms allowed to borrow under the program to companies with up to 15,000
employees. These changes should help the program meet the needs of a wider range of
employers that may need bridge financing to support their operations and the economic
recovery. We will continue to adjust facilities as we learn more.
To bolster the effectiveness of the Small Business Administration's Paycheck Protection
Program (PPP), the Federal Reserve is supplying liquidity to lenders backed by their PPP loans
to small businesses. And 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 under section 13(3) authority to purchase short-term debt directly from U.S. states,
counties, cities, and certain multistate entities. The two corporate credit facilities, the Main Street
Lending Program, and the Municipal Liquidity Facility all have equity provided by the Treasury
Department to protect the Federal Reserve from losses. The passage of the CARES Act by
Congress was critical in enabling the Federal Reserve and the Treasury Department to establish
these real economy emergency lending programs that have the capacity to make more than $2.6
trillion in loans.
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 instance they have greatly expanded loans to customers. Federal Reserve Board
Vice Chair for Supervision Randal Quarles spoke to you about these topics last week.
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. We are deeply
committed to transparency, and recognize that the need for transparency is heightened when we
are called upon to use our emergency powers. This is particularly the case when Congress
appropriates taxpayer funds to back lending programs that the Fed administers. In connection
with the CARES Act facilities-including the two corporate credit facilities, the Main Street
Lending Program, the Municipal Liquidity Facility, and the TALF-we will be disclosing, 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 facility.
Thank you, I'd be happy to take your questions.