February 23, 2021

Toomey: In the Midst of Robust Economic Rebound, Congress and Fed Must Not Distort Economy

Toomey: In the Midst of Robust Economic Rebound, Congress and Fed Must Not Distort Economy

Washington, D.C. – In his opening statement at today’s U.S. Senate Banking Committee hearing, Ranking Member Pat Toomey (R-Pa.) warned both his colleagues in Congress and Federal Reserve Chair Jerome Powell that more spending and accommodative monetary policy could further overheat the economy and distort financial markets.

You can watch the video of Ranking Member Toomey’s opening statement here, and watch his questioning of Chair Powell here.

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

“Thank you, Chairman Brown. And Chairman Powell, welcome back to the Banking Committee. I look forward to your testimony.

“Roughly one year ago, the U.S. economy was entering an unprecedented economic contraction as a result of COVID 19 and the ensuing shutdowns. Credit markets seized up, and were on the verge of shutting down. Second quarter GDP in 2020 fell by over 30 percent. Unemployment rate reached nearly 15 percent in April, the highest since the 1930s. The economy was in dire straits to say the least. Many economic forecasters, including the CBO and the Federal Reserve, did not anticipate reaching this point of the recovery until well into 2021 or 2022.

“Thankfully, the worries of a long, drawn-out recovery appear to have been unfounded. In response to the economic collapse, Congress and the Federal Reserve took bold and decisive action. The Fed quickly lowered interest rates, launched a quantitative easing program of an unprecedented scale, and helped facilitate market function through a variety of emergency programs.

“Congress passed almost $4 trillion in relief through five overwhelmingly bipartisan bills. Today, due in part to these actions, the economy is rebounding robustly, and is on pace to reach pre-pandemic levels by this summer. The unemployment rate is now 6.3 percent, roughly where it was in July 2014. 18 states have unemployment rates below 5 percent.

“The average household is in a better place than it was before the pandemic. Personal savings up by over $1.6 trillion. Total consumer credit down by over $100 billion. Some groups have been hit harder than others, particularly those in the hospitality and leisure. And yet, Congress is in deliberations to hastily pass another $1.9 trillion in fiscal stimulus.

“We are well past the point of needing to hastily respond to an economy that was quickly buckling, and must be cautious of further distorting our economy and financial markets. Equity markets are at or near all-time highs, encouraged by the economy’s recovery and fueled by low interest rates and abundant liquidity. In many asset classes, the word bubble is being used to describe valuations that appear detached from reality. Both Congress and the Federal Reserve must be cautious not to contribute to such dynamics unnecessarily.

“We must also be cognizant that the recent fiscal spending has not come without costs. It has been funded by a growing federal debt, a burden that will be passed down to future generations. In 2020, debt held by the public rose by $4.5 trillion, reaching 100 percent of GDP. The CBO forecasts that over the next 10 years, net interest costs will amount to over $4.5 trillion. That is given an optimistic forecast of rates and in absence of the proposed $1.9 trillion package being considered by Congress

“Furthermore, the threat of overheating is real, and the possibility of unwanted inflation should not be quickly dismissed. There are over $11 trillion in personal savings deposits. The country is in the process of reopening and we are administering nearly 1.5 million doses of the vaccine per day. The economy is poised to grow substantially in the near term. Recent data seems to build the case for exercising caution with regards to inflation. We just witnessed a 70 year record expansion of M2. Intermediate and long-term interest rates have started to rise, and commodity prices are rallying.

“This is occurring while the Fed continues to engage in quantitative easing at a pace of $120 billion per month. Short term interest rates are near-zero, and Congress is considering yet another massive fiscal package. I am interested to learn what the Fed thinks about this new set of data points that point at inflationary pressures.

“As much as the Federal Reserve has done to stimulate the economy and ensure market function in times of unprecedented stress, it must not lose sight of the bounds of its authority. Although the Federal Reserve was created to be independent of partisan politics, it does not operate without unaccountability. It must not stray from its statutory mandate, by acting outside of its authority or pursuing unrelated causes. As noble as the aim might seem, addressing issues such as climate change or racial inequality are simply not in the purview of the Federal Reserve.

“During this hearing, I look forward to learning about how the Federal Reserve is thinking about current and future states of the economy, markets, and regulation.”