March 24, 2021

Toomey: Congress, Federal Reserve Must Resist Urge to Permanently Expand Size of Fed. Govt.

Washington, D.C. – U.S. Senate Banking Committee Ranking Member Pat Toomey (R-Pa.) today cautioned against Congress using this pandemic as an excuse to permanently increase the size and role of the federal government. He also cautioned against the Federal Reserve’s continuing purchases of government debt.

In his opening statement during today’s Senate Banking Committee hearing with Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell, Senator Toomey argued that the economy is well on its way to a complete recovery. Further expansion of the size and role of government will lead to reduced productivity and diminished economic growth, which in turn would mean a lower standard of living for all Americans.

Ranking Member Toomey’s opening remarks, as prepared for delivery:

Thank you Mr. Chairman. And thank you to Chair Powell and Secretary Yellen for appearing today.

A year ago, our economy and markets were roiled by the COVID-19 pandemic and government ordered business shutdowns. We saw extraordinary turmoil in credit markets that threatened the ability of households, businesses, states, and municipalities to obtain credit. This turmoil presented the very real threat of a full-blown depression that could have taken years to recover from.

In response, Congress passed the CARES Act to provide temporary relief to help the country weather a temporary storm. It was an extraordinary response to an extraordinary situation. Thankfully, it proved effective and we are now well on the way to a complete recovery. The vaccine is being administered at a rate of over 2 million doses a day, states are reopening, and GDP is set to reach pre-pandemic levels as soon as this month—far earlier than CBO or the Fed originally projected.

The economy has been in full recovery mode since last summer when we saw 38% GDP growth in the third quarter—well before Democrats enacted a $2 trillion spending blowout that had little to do with COVID. Needless to say, we have weathered the storm and the skies are clearing.

Congress must not use this pandemic as an excuse to permanently increase the size and the role of the federal government. Congress certainly made this clear for the CARES Act’s emergency lending facilities. These facilities were established to stabilize turbulent credit markets so households, businesses, states, and municipalities could access credit. Congress’s intent was clear—facilities funded by the CARES Act were to be temporary, to provide liquidity, and to cease operations no later than the end of 2020. These facilities were extremely successful in achieving their intended purpose. In the December COVID relief bill, Congress ensured these facilities were wound-down by year-end, as Congress intended and the law required, and they cannot be restarted or replicated in the future without congressional approval.

In addition to Congress’s swift response, the Fed’s response last spring was significant, and played a crucial role in our ongoing economic recovery. But as is the case with Congress, the Fed must fight the urge to continue this response beyond its original purpose.

Last March, the Fed lowered interest rates to nearly zero, and initiated a record expansion of its balance sheet. This accommodation has remained, and by both official forecasts and market expectations, will continue well beyond the point of full recovery. This raises two concerns.

The first concern is that the Fed’s increased footprint is a permanent feature. If this is the case, and there’s no eventual reduction in the size of its portfolio, the Fed’s quantitative easing to date would amount to a monetization of government debt. I truly hope that this is not the case.

The second concern is that such an accommodative stance leaves our economy vulnerable to inflation. The Fed has signaled that its dovish monetary policy is here indefinitely. Its March Summary of Economic Projections does not forecast any rate hikes until 2024 at the earliest, and the Fed appears to have no plans of reducing its pace of monthly purchases.

Given the current economic recovery and recent increases in commodity prices, inflation expectations, and Fed communications, I worry that the Fed will be behind the curve when inflation picks up.

A final point and a warning. It’s been pointed out that very little of the Democrats’ recent $2 trillion spending bill had anything to do with COVID. It was a mad dash to claim credit for a recovery well underway, and authorize as much money as possible to try to fundamentally remake our society to be one where the State is at the center of life for many more Americans.

This partisan, bloated spending bill contained: stimulus checks for people with six-figure salaries who had no loss of income; expanded welfare benefits that eliminate incentives to work and minimize personal responsibility; “reparations”—as the Chairwoman of the Senate Ag Committee called a loan forgiveness program based on race and ethnicity; bailouts for chronically mismanaged states and cities, despite record revenues and half a trillion in already provisioned federal aid; and a plus-up in unemployment insurance that pays people more not to work than to work.

In the long run, this bill will reduce productivity and diminish economic growth, which in turn means a lower standard of living for all Americans. And it will exacerbate societal fractures. Fewer people will be paying taxes to support an ever-growing government, and those who do work will increasingly resent those who choose not to and enjoy the same standard of living. It’s unhealthy for the body politic, for our economy, and for our society writ large.