Task Force on Monetary Policy, Treasury Market Resilience, and Economic Prosperity

The Task Force on Monetary Policy, Treasury Market Resilience, and Economic Prosperity will come to order. Without objection, the chair is authorized to declare a recess of the committee at any time. This hearing is entitled Revisiting the Treasury-Fed Accord. Without objection, all members will have five legislative days within which to submit extraneous material or to the chair for inclusion in the record. I now recognize myself for four minutes for an opening statement. Welcome to today's task force hearing, Revisiting the Treasury-Fed Accord of 1951. Seventy-five years ago this month, the Department of the Treasury and the Federal Reserve System reached full accord with respect to debt management and monetary policies. What we know today as the Treasury-Fed Accord. This agreement clearly delineated the roles and responsibilities of the two institutions. That is, the Fed is responsible for monetary policy in accordance with its dual mandate, and the Department of the Treasury is responsible for funding the government at the least cost to the taxpayer over time. In the 81st Congress, and yes, I wasn't here for that session, just one year prior, the Joint Economic Committee expressed support for the Fed and Treasury to reach an understanding about the division of their authorities. It was appropriate for Congress to be a part of the conversation then, just as it is now. It is my intention for this Congress to similarly express the need for a formal dialogue between the Fed and Treasury on the appropriate boundaries of their authority, and where increased communication might bolster the strength, resilience, and depth of the Treasury market, while reinforcing monetary policy independence. I plan to introduce a resolution to do just that. This is because quite a few changes have occurred in the last 75 years. Our nation's deficit to GDP ratio has ballooned from less than 2 percent to nearly 6 percent. As we've discussed many times in this task force, the Treasury market cannot continue to function well if the supply of Treasuries outpace market capacity to absorb it. As Chairman Powell has said numerous times, the country is on an unsustainable fiscal path. He is not the first chairman to say so, but I hope he is the last. Rising debt servicing costs push all parties involved into tough choices. We can't let fiscal irresponsibility interfere with the Fed's ability to do its job. Additionally, the Fed has moved to an ample reserve regime to allow stronger monetary policy rate control and is engaged in four rounds of quantitative easing, thereby significantly increasing the size of the Fed's balance sheet. As the Fed adjusts the size of its balance sheet through QE, QT, and reserve management purposes, increased forward communication with the Treasury Department could improve coordination between the two entities without jeopardizing monetary policy independence or stoking inflation. In 2009, the Treasury and the Fed issued a joint statement outlining the Fed's role in financial and monetary stability, while leaving credit allocation to fiscal authorities. While we are in normal economic times, that's kind of an interesting thing to say about right now, isn't it? The two entities should discuss their appropriate bounds of responsibility and the risk encroachment imposes. I look forward to hearing from our expert witnesses today and engaging in a robust discussion. And I would note to the ranking member, this is really an amazing panel we have here, experience beyond measure, and I look forward to the insights that we're going to gain. And with that, I yield back and I recognize the ranking member of the task force, Mr. Vargas, for four minutes for an opening statement.

Thank you very much, Mr. Chairman. Again, I'd like to thank you for organizing this hearing, and I agree with you, this is a very important hearing and I think we're incredibly lucky to have the witnesses that we have before us today and I very much look forward to hearing from you. During World War II, the Federal Reserve agreed to keep interest rates low to help finance the war. In the years following the war, inflation concerns at the Fed grew, leading to a public dispute between the executive branch and the Fed. The result was the landmark agreement known as the Treasury-Fed Accord, which established a simple but critical principle. Monetary policy must remain independent and not be used to finance the country's debt. That principle has held for over 70 years, but has come increasingly under threat. A debate about the use of quantitative easing or the size of the Fed's balance sheet is a worthwhile discussion. In my view, the Fed's ability to quickly expand its balance sheet in 2008 and again in 2020 prevented what could have been a far worse economic catastrophe. And that capacity to act at scale during a crisis is not something any potential new accord should undermine. But the more pressing threat of fiscal dominance is the president's repeated interventions to try and bend the Fed to his will, including to assist in financing our debt. He has attempted to illegally fire Fed Governor Dr. Lisa Cook. His Department of Justice opened a criminal inquiry into Chairman Powell, and even after a federal judge struck down those subpoenas, the DOJ announced it will appeal. The president's intentions could not be any clearer. In a June Truth Social post, he wrote that if the Fed were, quote, "doing their job properly, our country would be saving trillions of dollars in interest costs," close quote. Interest payments on the debt are a serious issue, and no one disputes the fact that our debt is on an unsustainable trajectory, as the chairman noted and as the Fed chair noted. The numbers speak for themselves, at around 120 percent of GDP, it is near its highest level since World War II. And so far this fiscal year, interest payments on the debt surpassed defense spending, making them the third largest federal expense behind only Social Security and Medicare. But Congress set the Fed's dual mandate of maximum employment and stable prices. Fixing our deficit and our debt is Congress's job, it's not the central bank's. And pressing the Fed to cut rates to help clean up a fiscal situation this administration made worse through the big ugly bill, which is projected to add more than $3 trillion to the deficit over 10 years, is both reckless and sets a dangerous precedent. History gives us a clear warning. In Argentina and Zimbabwe, governments that used their central banks to finance debt triggered hyperinflation and economic collapse. In Turkey, a president who fired the central bank governors to force lower interest rates sent inflation to nearly 80 percent. And ordinary people pay the price every day. Protecting the Fed's independence from the dangers of fiscal dominance means protecting Americans from politically driven cycles of hyperinflation. And with that, Mr. Chair, I yield back.

Gentleman yields back. Today we welcome the testimony of Mr. Thomas Hoenig, a distinguished senior fellow at the Mercatus Center at George Mason University. Dr. Jeffrey Lacker, a senior affiliated scholar at the Mercatus Center at George Mason University. Dr. Jeffrey Huther, an adjunct professor at Georgetown University. And Mr. William English, a Eugene F. Williams, Jr. Professor of the Practice at Yale School of Management. I want to thank each of you for taking time to be here. Each of you will be recognized for five minutes to give an oral presentation of your testimony, and without objection, any written statements will be added to a part of the record. Gentlemen, I very much look forward to today's testimony. And Mr. Hoenig, you are now recognized for five minutes for your oral remarks.

Chairman Lucas and Ranking Member Vargas, and members of the task force, thank you very much for this opportunity to discuss I think a very important issue of a Treasury-Fed Accord. The purpose of the 1951 Treasury-Fed Accord, as you've already described, I think was to define the relative responsibilities of both the Treasury and the Federal Reserve at a time when the debt levels were excessive and had to be dealt with. So I want to begin my comments with my conclusion, a new accord I think is needed, but I would emphasize that to be successful, it will need the help of Congress. The Fed's legislative mandate is to conduct monetary policy so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates. Over time, however, the Fed has broadened this mandate to deepen its role in funding the nation's debt. This evolution follows from a repeated use of large purchases of government debt, QE, following the Great Financial Crisis of 2008. So much so that the Treasury and the markets I think have come to rely on the Fed as a ready buyer of federal debt. Between 2010 and 2015, the Fed's balance sheet increased from $2.3 trillion to $4.5 trillion. In 2019 and following the COVID, it increased to $9 trillion. And I think following that, it is worth noting that the national debt has increased by five times from $8 trillion to $38 trillion that you talked about, and exceeds 100 percent of GDP. Last experienced after World War II. Also over that time, the CPI index has nearly doubled, with asset prices having risen sometimes as much or more. But looking ahead, which is the important part, gross federal debt will reach $40 trillion this year. The nation's deficit will be $2 trillion this year and for many years to come, as now projected. And the Fed will be expected to help fund this debt. This past fall, for example, the secured overnight financing rate rose above the Fed's target rate of the Fed funds rate, reflecting in part tightening liquidity conditions in the ever-larger Treasury market. Not long after that, the Fed restarted, my words, QE by purchasing automatically $40 billion per month of government securities, about 25 percent of the average monthly increase of the nation's debt at this time. So stable prices cannot be achieved without fiscal and monetary policy discipline. The history of the Fed's actions has left in its wake, I think, a less independent central bank, a less accountable market, and a less constrained government budgeting process. Thus, it is worth studying the 1951 Accord to guide us for solving the current challenge. So after World War II, like now, the federal debt exceeded 100 percent of GDP, and Treasury expected the Fed to keep interest rates and the cost of the federal debt low. Inflation was also increasing, however, and the Fed could no longer both suppress interest rates on Treasury debt and control inflation. The conflict between these competing goals was tense, but ultimately a compromise was reached which confirmed the Fed's right to manage bank reserves and set interest rates independent of Treasury demands. Given current circumstances, a new Treasury-Fed Accord I think is needed, as I said. And like then, such an accord does not have to shock the economy. It can be implemented over multiple years, allowing time for the government to reduce its deficits and for the Fed to concentrate on price stability. Reduction in the deficit from its current 6 percent of GDP would reduce pressures on interest rates, facilitate private investment, and enable the economy to grow out of its current debt dilemma. Consider, for example, the 10 years following the 1951 Accord. The debt-to-GDP ratio fell from 90 percent to 55 percent of GDP. The average growth rate was near 4 percent in this country, and the interest rates were moderate by most standards. There is, however, one important difference between then and now. While the fundamental problem of too much debt is the same, the 1950s deficits over that decade were far less severe, with surpluses in some years. Current projections show only large deficits ahead through the next decade. Thus, a workable accord must have the help of Congress in reducing the debt. Without that, I think achieving a lasting accord will be nearly impossible. Finally, assuming the deficit problem also goes unaddressed and inflation accelerates, the last option would be for the Fed to unilaterally pull back on monetizing the debt. This would slow growth of bank reserves, interest rates would rise, perhaps substantially. Such an option I think would mirror the policies of the FOMC in late '79 under Paul Volcker's leadership, significantly disrupting the Treasury market and plunging the economy into recession. Such an action might cause Congress to reduce the deficit, but it also I think would raise the challenge of Fed independence even more severely than it is today. Thank you.

Thank you. Dr. Lacker, you are now recognized for five minutes for your oral remarks.

Chair Lucas, Ranking Member Vargas, and members of the task force, thank you for the opportunity to discuss the Treasury-Fed Accord. The time is ripe to revisit the 1951 Accord given the evolution of monetary, financial, and fiscal conditions since then. A reexamination should be grounded in the goals Congress has set out for the Fed: maximum employment, stable prices, and moderate long-term interest rates. This third goal means minimizing the premium that the U.S. Treasury pays to compensate debt holders for potential future inflation and other avoidable macroeconomic risks. The relationship between the Fed and the market for Treasury securities is thus central to the terms on which the United States government can fund itself. The 1951 Accord restored the Fed's control over its balance sheet and established modern a monetary policy independence. Chairman William McChesney Martin understood that a robust market for Treasury securities required reining in discretionary intervention by the New York Fed to avoid discouraging private investment in market making. A 1952 FOMC subcommittee warned that, quote, "the development of special institutions and arrangements that serve to provide the market with natural strength and resilience and to give it breadth and depth tend to be greatly inhibited by official mothering," unquote. The Martin Fed's policy of holding only Treasury bills arguably contributed to the tremendous growth in depth and liquidity in the U.S. sovereign debt market. The Fed's stance towards the Treasury market, however, is quite ambiguous right now. Before the Great Financial Crisis, the Fed maintained strict neutrality, holding only the Treasury securities that it needed for monetary control and carefully balancing its holdings across the curve. Since then, the Fed has purchased large quantities of long-term Treasuries, sometimes to stimulate growth and sometimes to preserve what they call market functioning, a term that they have yet to define satisfactorily. Both types of interventions essentially aim to offset shifts in market assessments of the fundamentals underlying Treasury returns. The haziness of the distinction between the two makes Fed intervention more difficult to predict and discourages private investors from positioning themselves to take advantage of buying opportunities when they arise. Market resilience suffers. A recalibrated accord should reflect each entity's particular attributes. The Fed has sole control of the monetary instruments that constitute its liabilities, that would be currency and bank reserves, and these form the monetary base through which it influences monetary conditions. Once a given quantity of monetary liabilities, monetary base, has been set, any asset the Fed acquires or any loan it extends requires selling Treasury securities and thus could equally well be performed by the Treasury. The Fed's independence is essential for setting the terms on which it supplies monetary liabilities, including the interest rate on reserve account balances, but activities beyond that, beyond monetary policy, such as credit allocation or attempting to manipulate the maturity structure of federal debt, are fiscal in nature and are better assigned to the Treasury and subject to congressional oversight. At least that's how I read constitutional principles that apply here. These principles suggest five key elements for a restated accord. First, the Fed's balance sheet should be no larger than needed for monetary policy. Monetary conditions can be managed entirely adequately by setting the interest rate on reserve balances and supplying just a few hundred billion dollars of reserves, not trillions. The Fed should commit to a predictable path towards such a minimal level of reserves and not reverse course at the slightest widening of spreads. Second, the Treasury should have sole responsibility for debt management. The maturity structure of publicly held federal debt, that is outside the Federal Reserve, should reflect Treasury decisions alone rather than the obscurely coordinated actions of two distinct institutions with distinct objectives. Third, the Fed should return to a bills-only portfolio. This would clarify that Treasury is accountable for debt management. The Treasury would itself remain free to intervene as it sees fit through its recently reactivated buyback program. Fourth, the Fed should set just one interest rate, the rate on reserve account balances. Its current practice of managing five interest rates amounts to pegging several money market spreads. This is unnecessary and tangential to monetary policy. Congress could usefully clarify governance by assigning authority over the interest rate on reserves to the FOMC. Fifth, a new accord should include a framework for credit policy. Credit market interventions are fiscal in nature, as I said, and should be conducted by the Treasury with congressional authorization. A Treasury-Fed credit accord would reduce expectations of ad hoc investor rescues and thereby strengthen market resilience. Thank you.

Thank you. Dr. Huther, you're recognized for five minutes for your oral testimony.

Okay, thank you. It can be hard to visualize the Treasury market at the time of the original accord. Most securities were offered at fixed exchange at fixed rates. Maturities were offered based on the views of officials.

Doctor, would you spin your microphone around a little closer to you there, please? Right there, okay. Thank you.

Ah. Offerings might not be marketable, they might be sold with early repayment options, they might be exchangeable for other Treasury securities rather than cash, and so we didn't really have an open auction system that we have today. In addition, market participants were accustomed to Treasury leadership on interest rate policy through its choice of interest rates on the securities it did issue. Economic conditions are even harder to fully appreciate over the previous six years prior to 1951. Obviously the World War II had ended, businesses were still transitioning from military to consumer production. We had had sharp spikes in unemployment and inflation that were accompanied the transition. And post-war memories were still haunted by the pre-war depression. At the time of the accord, we were in the midst of another war and inflation was high. The accord gave the Fed the freedom to focus its policy decisions on economic conditions rather than Treasury financing needs, while agreeing to support Treasury offerings as long as they were brought at market yields as the Fed determined. Financial and economic and financial market pressures over the following decades led to a Fed portfolio that at the beginning of the financial crisis was mostly Treasury securities unevenly distributed across the maturity spectrum. On a mostly separate track, the Treasury market had slowly evolved to the market we have today: regular issuance of predictable quantities priced through transparent auctions. The evolution is important context. The government as a whole is much less involved in price setting for its debt than it was in 1951. The current path of projected deficits, if realized, will eventually lead to a Treasury market instability, and that will force the Fed to intervene. The level of debt at which this instability occurs is unknown. While the Treasury market is lauded for its depth and resiliency, it is not immune to shocks that are inherent in financial markets that stem from human nature, not institutional structure. In the context of fiscal dominance, a shock would result in the Fed buying large quantities of Treasury securities paid for with bank reserves that in the traditional view would be inflationary. I'm not sure there's evidence anymore that that's the relationship between reserves and inflation will will hold, but I'd characterize the credit accord proposals as constraining the Fed's use of balance sheet to limit the risk that the Fed assets go on too long, are too concentrated in long-dated securities, or detrimentally include MBS. In dire situations, as the financial crisis and the pandemic have shown, we have seen that rules, regulations, and even laws are set aside in the name of expediency. So when we think about constraints on the Fed, we have two areas of focus: normal operating conditions and conditions somewhere between normal and dire. To me, the normal times seem like an easy lift. For most people on the FOMC agree that the Fed's balance sheet should contain Treasury securities and little else. We can also likely get agreement that those Treasuries should have maturities that are at the very least tilted towards the short end of the curve. One difficult question that remains, though, is whether we can have clear guidance for the Fed when the economy is between normal and dire. Ideally guidance would offset the market and political forces that can push the Fed to a larger, more diverse balance sheet. It's not entirely clear to me what that guidance would look like. The closer we are to a dire situation, the more important the judgments of Fed and Treasury officials are. The closer we are to a normal situation, the more likely that those same officials become complacent about policies that should be limited to dire events. That's...

Mr. English, you are recognized for five minutes for your oral remarks.

Thank you, Chairman Lucas and Ranking Member Vargas, for holding this hearing and inviting me to testify on the Treasury-Fed Accord. The accord of March 1951 was a watershed event in Federal Reserve independence. Such independence is critical to effective monetary policy and improved economic outcomes. Fortunately, there seems to be general agreement on this point, I think on this panel, and also when I testified before this task force in January on your task force, there seemed to be general bipartisan support for monetary policy independence. The Fed's monetary policy independence is undergirded by key features of the Banking Act of 1935. That act removed the Secretary of the Treasury and the Comptroller of the Currency from the Board of Governors, established overlapping 14-year terms for the governors, and provided that the President could only remove governors for cause. In addition, the act established the modern Federal Open Market Committee, which includes the members of the board as well as five Reserve Bank presidents. The inclusion of the Reserve Bank presidents supports Fed independence because they're not nominated by the President, but rather are chosen by the boards of directors of their banks and approved by the Board of Governors. The historical record shows that Congress put these protections in place because it wanted to ensure that the Fed could operate independently in the public interest and remained independent of the President, who might have political and personal incentives that would affect policy in ways that would harm the public good. During World War II, policymakers at the Fed focused monetary policy on the maintenance of low interest rates to ease the financing of the war effort. After the war, the Fed continued to maintain low interest rates, and as rationing and wage and price controls were withdrawn, inflation rose dramatically before falling back. As demand picked up in 1950, the Fed judged that low rates would lead to excessive inflation, but the Truman administration wanted the Fed to maintain low rates in order to ease funding pressures. After a lengthy debate, the Fed and the Treasury announced that they had reached full accord with respect to debt management and monetary policies to be pursued in furthering their common purpose, that is the accord. Importantly, the accord was a return to the status quo ante. After the accord, the Fed returned to the independence created for it by the Congress in 1935. In recent years, some have called for a new accord. It's not always clear to me what the purpose of such an agreement would be. One issue appears to be the relationship between Treasury debt management and the Fed's monetary policy implementation, particularly quantitative easing. Put simply, the Treasury decides on the baseline maturity structure of government debt, while the Fed, if constrained by the zero lower bound on its policy rate, can use quantitative easing, that is large purchases of government securities, to provide additional monetary stimulus and improve economic outcomes. As one would expect, the Treasury and the Fed consult regularly on these topics, and it's not clear to me that any new formal agreement is needed at this time. However, both the Treasury and the Fed could improve decision-making by the other institution by providing as much clarity as they can about their future plans. A second issue is the extent to which Federal Reserve policy actions have implications for credit allocation. That was a concern after the financial crisis, but Congress in the Dodd-Frank Act required Fed emergency lending programs to be approved by the Secretary of the Treasury, providing for clearer democratic oversight. Another concern is related to Fed purchases of agency mortgage-backed securities as part of its QE programs. But Fannie Mae and Freddie Mac have been in conservatorship since 2008, making them effectively part of the government. And in the face of disruptions in mortgage markets, such purchases can help to limit distortions rather than cause them. That said, the Fed should bear in mind the potential effects on credit allocation of such purchases when considering the benefits and costs of QE. Any new accord must take account of the separate objectives, tools, and responsibilities of the Treasury and the Fed. In particular, the agreement must not impinge on the Fed's ability to use its tools provided by the Congress to foster its objectives, also provided by the Congress, independent of short-term political considerations. In particular, any new accord needs to ensure that monetary policy will not be targeted at financing government debt. Fiscal policy is the responsibility of the administration and the Congress, not the Fed. Thank you, I look forward to our discussion.

Thank you. Thank you. We now turn to member questions, and I recognize myself for five minutes for questioning. Mr. Hoenig, it's great to see you again. You assert in your testimony that over time, the Fed has expanded beyond its congressionally mandated goals of price stability and maximum employment. In your view, is the Fed at risk of becoming polarized if they are seen as financing government spending, and how can Congress ensure that the Fed stays on track?

I think frankly that over time, as the Fed has not only engaged in QE during the emergency but has continued its purchase of government securities long past the immediate crisis, it has set up an expectation that it will buy government securities as they are issued and keep that market stable and liquid. And I think that does put the Fed at risk of becoming subservient to Congress. And so what has to happen is the Fed has to have a conversation not just with Treasury, but there has to be help from Congress to control the growing deficit, otherwise the pressure to finance that deficit will be the Fed's, and I think it will be very hard for the Fed to resist that. And I'm not talking about where we are, because if you look back, we've been, the Fed has been doing that. But looking forward, the projections are new debt deficits every year of $2 trillion or more, so who's going to fund that? And I think they'll be looking to the Fed, and if the Fed chooses not to do that, I think you'll see interest rates spike, and then the tension will rise quickly. So they need, the Congress needs to help.

Dr. Huther, I remain concerned that the market's capacity to absorb all the debt that the Treasury is issuing is becoming constrained. In your view, what are the risks of dependence on the Fed's intervention for market functioning, and would it be helpful for the Fed to define the conditions that warrant market intervention?

Yeah, I'd say it'd be helpful to define what those rules are. I don't see us at this juncture anyhow of having concerns about actual debt issuance being received by the markets. I think we're still in the depth part of the Treasury story. Can we get to a point where it's harder to absorb new Treasuries? Absolutely. And as I said in my testimony, it's just you can't tell where that point is where things go off the rails.

Dr. Lacker, your testimony states that a modernized Treasury-Fed Accord should restore clear institutional boundaries between the two entities. Can you describe where those lines may currently be blurred and how Congress can ensure that the Fed actions are squarely within the boundaries of monetary policy?

Yes, Chair Lucas. So as I noted, quantitative easing involves two things. It involves increasing the monetary liabilities of the Fed, and the second thing it involves is acquiring, reducing the supply of longer-term Treasury securities in the hands of the public. Those are two separate actions. The first, the Fed can do as a part of monetary policy by acquiring short-term Treasury bills. The Treasury, should it so desire, can acquire long-term securities through its buyback program and thereby tilt the securities in the hands of the public. So that's an example of something where if the Fed just stuck to pursuing monetary policy backed purely by bills only, it would provide a clear boundary, and people in the longer-term Treasury market would know that it's up to Treasury, not the Treasury and the Fed, as to whether intervention will take place, and it'll take place on the terms that Treasury traditionally intervenes through sort of an announced program with a well-defined boundary.

Mr. English, I have a question for you, and you may not have time to answer it, so responding in writing I would appreciate. You note in your testimony that Treasury and the Fed could improve decision-making by providing clarity about their future plans and discussing the extent to which the Fed actions implicate credit allocation. Would you support my view that should the Accord be updated to reflect current conditions, Congress should be an integral part of the process, particularly given Congress's interest in both institutions acting in accordance with their congressionally authorized mandates, and you have 16 seconds. Sorry.

So yes, I mean the short answer is short. I think if the Treasury and the Fed are going to get together and they're going to discuss their respective roles and they're going to have, you know, that'll be a substantive discussion that will have real implications for who's doing what, Congress should have a hand in thinking about who it wants to do what.

Thank you, sir. I now recognize the ranking member of the task force, Mr. Vargas, for five minutes of questions.

Thank you very much, Mr. Chair, and again, thank the witnesses for being here, and I also welcome all the young people that I see in the audience today. As you know, the President has repeatedly called for the Fed to lower interest rates, often citing the cost of our interest payments on the national debt as a reason why. This is in effect an ask for the Fed to monetize the debt, and we in fact heard from you the history, I remember exactly who it was, of Truman basically doing the same thing and saying we can't continue to do this. So isn't this an explicit contradiction though of the principles that was set out in the Treasury-Fed Accord? I mean, it seems to be exactly what we said we wouldn't do. Would anyone like to handle that? Yes, Mr. Lacker. Dr. Lacker, I apologize.

No problem. So we need money supplied by the Federal Reserve. The logical way for the Fed to issue it is to have it backed by Treasury securities. You know, I've advocated bills only, but there's other approaches. So we have to monetize some debt, the question is how much. The call to make the path of overnight interest rates that the Fed sets lower than it otherwise would be for reasons other than the management of inflation and employment suggests the resort to inflationary finance, which is depreciation of the value of outstanding federal debt and essentially inflicting capital losses on them, which is a gain to the Treasury. After major wars, major wars are typically financed in part through inflationary finance, and that's what you want to avoid in peacetime.

Right. But it also goes against, doesn't it, Dr. Mr. English, doesn't that go against the Accord though? Isn't that exactly what we were trying to attempt not to do?

So I'm not so sure it goes against the Accord except in the sense that the Accord took us back to the Banking Act of 1935. I think it does go against the Banking Act of 1935. The point of that was the Fed should be independent of the President. The concern there was one of the main concerns there was exactly monetization and that the President, if he could, would be inclined to keep rates low and ease funding pressures on the government.

Now you stated a premise that we all kind of agreed on the independence of the Fed. I'm not sure that that's true, but let's see, is that true? Do you think that the Fed should be independent? Does anyone in disagreement?

Well, I think the Fed should be independent. I also think the Fed should act independently. And one of my concerns is the Fed has, in a sense, under what I call the implicit mandate of having very stable, liquid Treasury markets, has in fact, shall we say, relinquished some of that independence to make sure interest rates are stable and that the new Treasury debt that's issued every month is easily absorbed without spiking interest rates. Now, if you have an independent Fed and you're worried about inflation as a something ahead, then you would say no to that, and you would say to Congress and to others, to the Treasury, we cannot do that without risking inflation, we need to get an understanding here. And the Fed has to do that and be independent, not just say they're independent.

Right, right. No, I agree. That's what I'm saying. That we do want, that's exactly what we want though, the independent. Yes, Dr. Sorry, if I may.

I think the Fed has shown considerable independence in the last few years. As Tom said, the Fed's balance sheet reached $9 trillion, it's now about six and a half. It's actually shrunk the balance sheet a fair amount. The Treasury's had to issue more debt.

And there's been tremendous pressure on the Fed and the chairman there, I think, has acted incredibly nobly and admirably to keep the independence of the Fed going. So yeah, I agree. Since we, I have less than a minute, I do want to ask, because you've talked about history here, what was the in 1950 something under Eisenhower, what was the top marginal tax rate? Dr. Huther, you go ahead because I think you probably know the answer.

I'm not sure I could put a specific numbers on it, but it'd probably be close to 90 percent.

90 percent. Yeah. And that was under a Republican government. What was the effective tax rate for the top one percent? Effective tax rate.

Effective, I guess...

It was in the 40s to the 50s. Anyway, I just bring that out because we do have a fiscal problem in our country and people continue to cut taxes for the wealthy and we're not going to balance our budget doing that. Thank you. I yield back.

Gentleman has interesting economics. The gentleman from Indiana, Mr. Stutzman's recognized for five minutes.

Thank you, Mr. Chairman, and thank the panel for being here. Folks in Indiana know full well that federal spending is far beyond reasonable levels. This spending not only has severe consequences for everyday Hoosiers, but also poses risks to the independence of the Fed's monetary policy decisions. I'd like to begin by discussing the idea of fiscal dominance. As our government persistently runs deficits and increases our national debt, the government must pay interest to service that debt. Should spending continue on its current pace, investors will eventually demand a higher interest rate to purchase government debt, which as a result increases the cost of issuing new debt. And I'd like to ask Mr. Hoenig and also Mr. English, would you say that the United States is currently in or near a state of fiscal dominance? And I'll start with Mr. Hoenig.

I think the, I think given the size of the deficit that has to be funded each year and the fact that if it fails to do that, interest rates would, I think, spike, I think the Fed is near fiscal dominance because when it says no, we will have, I think, a crisis of some sort. And it'll be a hard choice for them to make to say to Congress, no, we're not going to monetize this debt as you would like. We are going to increase according to what the growth rate of the economy is, but we're not going to do more than that. And if interest rates begin to spike, I think there'll be enormous pressure on the Fed to fund it.

Thank you. Mr. English?

So at the moment, I think, I think not. The reason for that is that if there were serious fiscal dominance, the result would be monetary policy that's too easy. And I think the Fed is engaged in monetary policy over the last few years that's aimed pretty firmly at maximum employment and stable prices, its objectives set by Congress. As I said earlier, it shrank its balance sheet by a considerable amount. Interest rates were raised by five percentage points plus when inflation surged, and the Fed has been moving inflation back down towards target and has done that quite well without a big recession. So I think at the moment, the Fed is operating as it should in pursuit of its objectives. I guess I don't want to speculate on what would happen if there were, if there were a huge fiscal catastrophe down the road. I'm hoping all of you will address that as, as Tom said. I think it would take a significant change in the fiscal outlook.

Well, it'll definitely be, it'll have to be us, but it'll be a lot of these young guys sitting here in the room that are going to have to deal with it. Well, it'll definitely be, it'll have to be us, but it'll be a lot of these young guys sitting here in the room that are going to have to deal with a long path out of debt and deficits. Dr. Huther, I'd like to ask, how would being in a state of fiscal dominance potentially influence monetary policy decisions at the Fed, and what would that mean for my constituents and Americans across the country?

Well, to the extent that federal dominance leads to greater debt purchases by the Fed leading to higher reserves, those reserves are loans from your local banks to the Fed that could otherwise be lent to your local community. So there's, there's a cost there. Those conditions that would create fiscal dominance in terms of high federal debt is also likely to be associated with higher interest rates for everyone.

Dr. Lacker, I don't know if you have any thoughts on that. I've got another question for you if you want me to throw it at you too. Okay. What are some areas for improvement in the current accord, and how should the Treasury and Fed be approaching this process?

I think that the, you know, I outlined five elements of a new accord. I think limiting the Fed to short-term Treasuries securities, I think a narrower role, a more prescribed role for the Fed in terms of intervention in markets would help strengthen the resilience of the private sector, would help encourage market making by brokers and dealers and others that want to get in. It would help encourage private investors to take positions to, you know, buy on the dip in the Treasury market. And I think it would just make for a more liquid and deep market. And I think that's the objective they should have in mind, and I think it'll lead them towards deciding that there should be a more prescribed role for the Fed.

All right. Thank you. Mr. Chairman, I'll just yield back.

Gentleman yields back. The chair now recognizes the gentleman from Illinois, Mr. Casten, for five minutes.

Thank you, Chair Lucas. And I must say, it's so nice to see so many young people coming out here today. Monetary policy does not usually something that you think of as having a lot of rizz, but, you know, here we are. So appreciate you all showing up. The, what you may want to know, I've, and I've made this point to the chairman, every time we have a monetary policy hearing, it is after some major event in executive branch federal relations. And this meeting is no exception. We had a monetary policy hearing after the liberation day tariffs. We had a monetary policy hearing after the efforts to fire Lisa Cook. We had a monetary policy hearing after the criminal investigation was announced of Jay Powell. And of course, Friday, Mr. Powell was, the DOJ was, their case was rejected against him. They said he had an improper motive. I don't know how you do it, Mr. Chairman. But somebody is making a bunch of money on your inside information. In any event, moving on. I am, it's maybe appropriate because I think we are seeing in this administration the unbelievable importance of having an independent Fed, having independent monetary policy. And it's really hard to have, I think there's a, we should always be asking whether policies passed in 1951 are still appropriate. But it's hard to have those conversations right now where simply saying should the Fed be independent of the executive branch is a partisan idea. Do raising the price of inputs lead to inflation? That's a partisan idea. Does slashing the U.S. workforce by millions of people in a tight labor market lead to inflation? That's a partisan idea. These things should not be partisan, but we're in this moment right now. And so it's, I appreciate we're doing this. It also feels like a dangerous time to have the conversation. I want to, I want to ask some questions, get a little bit nerdy here. There's all the dynamics of 1951 and coming out of World War II and deficit spending that hopefully we won't have again, although for those of us who were here through COVID or 2008, we know that there's been times when it's useful to have massive politically unpopular flexes of the balance sheet. But one of the differences that strikes me going back to that period is that in the fifties, almost all U.S. debt was held by American citizens. Like 90 percent was American citizens. We then the rise, the strength of the U.S. dollar as the world's reserve currency saw more and more foreign ownership, getting to almost half of U.S. debt. And then of course, a combination of QE and foreigners deciding to invest in U.S. equity markets instead of Treasuries took us back down where we're at about 30 percent. And I guess maybe Mr. English, I'm wondering if you think that as we think about Fed independence and monetary policy, it seems to me there's a fundamental difference between the United States owing a lot of money to foreigners and the United States owing a lot of money to Americans. Should we think about that mix as we think about these issues?

I, I think not. I think the, the point is that the central bank independence provides better outcomes for the American people. That central bank independence allows the Fed to, to avoid pressures from short-term political considerations, from fiscal dominance and so on, and gives you low and stable inflation, and that's a good backdrop for employment and growth. I don't think that it matters for those better outcomes what fraction of Treasury debt is held abroad versus domestic.

Well, let me, let me push, and I'm not sure that I agree or disagree with you. But it strikes me that as we have a lot of U.S. holders, as we have a lot of foreign holders, interest rates are an expense and there's only one side of that. We don't want to pay the interest. They, we owe them the interest and that's how we think about it. When we have U.S. holders, we have on the one hand, you know, people like my grandma who used to always get me a savings bond for, for Christmas, where I'd like the interest rate to be high. But then you've also got a lot of, you know, institutional investors and, you know, private equity and hedge funds who have learned how to make money in a zero interest rate world. All of a sudden that becomes a political question about whether interest is good or bad with domestic investors in the ways that doesn't happen with foreign investors. And so as we think about the politics of this, it feels like the politics is an easier question when debt is held by foreigners and the answer is more confusing when it's held by Americans. Do you, would you agree, disagree?

So you'd have to tell me about the political ramifications of this. But on the economic ramifications, I really do think you basically want to get low and stable inflation and maximum employment. That's the way you maximize the welfare for American people. And I don't think that monetary policy should be different because you have more Treasury debt held abroad or held domestically.

Well, fair. And we're out of, we're out of time. But when the president is calling for lower rates and is creating inflation...

Gentleman's time is expired.

That's a political problem. Yield back.

Chair now recognizes the gentlelady from Texas, Mrs. De La Cruz, for five minutes.

Thank you, Chairman Lucas, for holding this hearing today. And thank you to our witnesses once again for being here. As our task force meets today and discusses the relationship between the Federal Reserve and the Treasury, I want to start by highlighting the impact of these policies on the average household. My question is for Mr. Hoenig. We have seen studies that show even a permanent primary deficit increase of one percent of GDP leads to nearly a 20 basis point increase in core personal consumption expenditure prices five years out. That equal about $330 of disposable income per household. Knowing this, sir, how would you describe where we are today in terms of government spending's impact on inflation?

Well, I think from where we are today, we're going to incur $2 trillion in new debt and that has to be financed and that puts strain on the markets and does put upward pressure on interest rates depending on what the Fed does to intervene, which then risk inflation down the road. So I think it can be, it's mostly going to be harmful in terms of what it does to inflation. And I think that's where you ought to, that's where the Congress and the Fed and the Treasury should be concerned. And I think ignoring it or saying that we can just, we'll divide our activities without a clear message that we're going to control our deficits, our domestic fiscal deficits, I think is, is not beneficial in the long run for the American consumer and as someone said, for those who are sitting behind me. So it's very important we get this under control.

And and you know what, there is a group of young men that walked in behind you. I'm guestimating about 19 to 21, 22 years old and eager to learn about the government, probably excited to be here on Capitol Hill. So welcome, young men. Thank you for being courageous to come to hearing today. My son is about their age. What does that mean to those young men sitting behind you right now? What does their future look like if we don't get this under control?

Well, I think we're going to have a, we will have a higher inflationary issue. And perhaps just one example of that is I hear over and over again how hard it is for young individuals to buy their first home because the price of housing has doubled over the last decade and a half or so. And so if we continue with $2 trillion plus a year and if you look at the CBO's projections, they're going to be every bit that much, then I think we need to be, we need to be very mindful. And there's only two choices in my mind. The Congress gets the debt under control. The Fed otherwise says no, we won't monetize the excess amount of debt more than what the real economy can grow at. And if you do that, then you're going to really shoot interest rates up and put us into, I think, a slow growth period ahead. And that's, that's really the difficult choices that lie ahead, but they need to be, they need to be addressed.

Thank you. Dr. Lacker, following up on the same topic, you've recommended some principles for a new accord, especially in an era of large deficit spending and balance sheets. If the Federal Reserve and the Treasury were encouraged to create a new accord with your principles, how does that impact the balance sheet, the deficit, and ultimately the taxpayers?

Excuse me. Thank you. So I think a Fed more narrowly focused on monetary policy the way I've described it would leave the Treasury and Congress a clean playing field to face markets, get feedback on the course they've set on fiscal policy without the market perceptions of market participants being clouded by the possibility of the Fed inflating away the debt. If the fiscal path is unsustainable or is, you know, is getting too large for the economy to handle, real interest rates will have to rise. The government will have to repay, will have to pay up. And that will affect consumers all...

I reclaim my time. Thank you so much. I reclaim my time. Thank you so much. I yield back.

Gentlelady's time has expired. The chair now turns to the gentleman from Wisconsin, Mr. Fitzgerald, for five minutes.

Thank you, Chairman. Dr. English, in your testimony, you said that Dodd-Frank and CARES Act requires the Secretary of the Treasury to approve the Federal Reserve emergency lending operations and provide oversight over the Fed credit allocation. In an effort to reduce the red tape and safeguard the Fed from making bad political decisions, wouldn't it make more sense to just have Treasury provide emergency lending instead of the Federal Reserve?

Congressman, I, I think that that would not be as, as effective. The Federal Reserve has considerable information about the economy, about financial markets and financial institutions. So it can understand better, faster what may be going wrong in the economy or in markets. It also has a great deal of experience in doing market operations and in lending because of its responsibility for the discount window. So it can ramp up and take action very quickly. And when necessary, it can also lend by creating reserves to lend, and that can be a very valuable thing to do at times when markets are disrupted and it may be slower for the Treasury to raise money to do that. And the increase in reserves can also just be a benefit in a time when there's every demand for liquidity. So I think these are responsibilities that are lodged with the Fed for a good reason. And, and that's why most central banks, I think, have, have authorities along these lines.

Very good. Thank you. Any of the other panelists have a thought on that? Yes, sir, Mr. Lacker.

Yes, I've given this thought over the years. I, I think that the lodging discretionary emergency lending authority with the Fed has had some benefits at times, but it's had a tremendous cost as well. Over the course of the last 50 years, since the mid-sixties, repeated instances of lending to failing institutions and letting uninsured claimants get their money out has tilted the incentives of our financial markets and made them much more fragile than they otherwise would be. It's induced a dependence on short-term funding in wholesale markets, which is exactly the kind of funding that Fed interventions are designed to relieve pressure from. And I think that, I think that has to be reckoned on the tally sheet of assigning emergency lending authority to a discretionary body as technocratically capable as it might be. I think also that the pandemic experience showed that Congress is capable of enacting emergency legislation on a short time frame if the need is urgent enough and there's the political will.

May, may I give you one quick answer? And that is...

Yes, go ahead.

I can't tell you, sir, how many times I've heard the Fed has to do this because there's no, they're the only game in town. Well, they're not the only game in town. The Congress is here and giving, giving credit to non-banking institutions, even in an emergency, can be handled, I think, very effectively by Congress.

I appreciate your confidence in the Congress. Let me just continue with that, Dr. Lacker. So you, you testified that Treasury instead of the Fed could just as easily have facilitated any lending programs. So if there was a crisis in the future, would it be prudent for a new accord to reassign those responsibilities away from the Federal Reserve and delegate those to Treasury, or, or do you think that wouldn't make much difference, a decision would have to be made in the moment?

So there's, there's a less extreme approach to shutting the Fed off entirely, but one which would in an accord establish the principle that the Fed after a certain number of days, say five or 10, a short number of days, transfers the position to the Treasury, the books of the Treasury in exchange for short-term Treasury bills. So the Fed could do that lending with the subject to the approval of the Secretary of the Treasury, but get it off its books and have it managed by the Treasury.

So would placing emergency lending programs like those set up during the financial crisis and the pandemic that were set up in Treasury instead of the Fed, do you, is there a negative impact associated with that or some type of market instability caused by that?

No, I, I don't think there's consequences for financial market stability. If anything, they'd be beneficial in, you know, encouraging the private market participants to be careful, more careful stewards of their own risk.

Gentleman's time has expired.

Okay.

Chair now recognizes the gentleman from California, Mr. Sherman, for five minutes.

Thank you. A lot is at stake in the independence of the Fed. We look at what's happened in Turkey or Argentina, for example, and we see that you can do tremendous damage to a country's economy when the central bank lacks that independence. Perhaps there's no greater pressure that can be put on anyone in government than to say if you screw up, you're going to face criminal penalties. Now, that's kind of the North Korean model. You have a project, Kim Jong Un says you screwed it up, you get shot. I think our government works better, although I guess there are a few that I might rec... well. And I think Chairman Powell said it right, potential criminal charges arise from the Federal Reserve's decisions on interest rates rather than not aligning with the President's preferences. Does it, I mean, there's a building project, I guess it hasn't gone well, and so the President says that Powell should face criminal charges. I'm sure that there will be some projects in the Trump administration that do not go well, and ultimately, I guess you could hold Donald Trump responsible for that. I don't think that we should say, well, some project came in late and over budget, so we'll put Donald Trump in jail, or Chairman Powell in jail. But I want to focus a bit on the first the dual mandate. Is there any reason for us to tamper with the dual mandate and to just and to ignore unemployment in the process of setting interest rates? Does anybody... Mr. English.

I don't think so. I, I think that the dual mandate makes a lot of sense. Much of the time, those two mandates point in the same direction. If the economy's overheating and inflation is high, you tighten monetary policy. When they're not, I think it's appropriate to try to balance those, those risks and costs. And so I, I'm a fan of the dual mandate. I wouldn't see any reason to...

I'm going to throw in a third possible mandate or a less important mandate, and that is the Federal Reserve can have a tremendous effect on the U.S. budget deficit. First, we are the biggest debtor in the history of the world. And second, when they expand their balance sheet, they're quite capable of making an enormous profit, which they turn over to the federal government. You know, we're putting together community projects and every $100,000 matters. And yet the Fed has at times remitted nearly $100 billion to the U.S. government, and Fed chairs have been embarrassed by it, saying don't, don't look at that. Should we be looking, can the Fed, in addition to meeting its dual mandates, also help reduce the federal deficit? And does reducing the federal deficit matter? I don't know which witness wants to respond. Yes, go ahead.

So as I pointed out at the beginning of my remarks, you may have missed it, the third mandate, there's actually three, the third one is moderate long-term interest rates. And one can view that as a mandate to minimize the risk premium that the U.S. Treasury has to pay in the market for the inflation premium, the premium on expected inflation, and the premium on risks to the U.S. fiscal situation, risks to the macroeconomic situation that are avoidable. So in some sense we already have something like that. But to, to aim policy at reducing just the nominal interest expenditure in the debt, that's a different matter entirely. And that's, that's a road to hyperinflation.

Well, there's also the remittances. That is to say, a larger balance sheet means in effect you monetize the debt and the Fed quote earns an interest on that money and remits it to the federal government. And as I say, it can be $50, $100 billion of federal deficit reduction. Does that matter?

So I highlighted, I recommended that the Fed stick to Treasury bills only. The losses that the Fed's incurred have been due to its long-term holdings. And in addition, an unrealized capital loss on the Fed's balance sheet that's going to affect it for years to come. Sticking to bills only would greatly reduce the risk involved in the flow of remittances. That effect on remittances reflects the fact that the Fed is taking on fiscal risk in some sense apart from Congress's approval.

Thank you. Gentleman's time has expired. The chair now recognizes the gentleman from Nebraska, Mr. Flood, for five minutes.

Thank you, Mr. Chairman. Dr. English, you mentioned in your written testimony that the Fed and the Treasury could improve decision making by the other institution providing as much clarity as possible about their future plans. Can you expand on what should be provided by these institutions?

Sure, Congressman. I think what I had in mind was on the one hand for the Treasury to provide greater information about its intentions regarding future issuance and the future distribution of their outstanding debt across maturities so the Fed would understand what was the backdrop against which it was doing monetary policy. And for the Federal Reserve to provide greater information about what it views as its steady state balance sheet. What is it aiming for? Is it aiming to hold, as Jeff was saying earlier, Treasury securities that are tilted a bit towards the short end, all the way as Jeff Lacker would have it to bills only, or what? Just what is their intent? That matters for the Treasury because the Treasury is trying to decide on its issuance and what the Fed is holding isn't being held by the public and what matters in some sense is what's held by the public. So the Treasury will adjust what it's issuing depending on where it thinks the Fed is going. I think the Fed could provide more information on that.

Based on that answer, Mr. Hoenig, Dr. Lacker, Dr. Huther, as former Federal Reserve or Treasury officials, could Dr. English's recommendation for the Fed and Treasury to provide as much clarity as possible about future plans be beneficial to those institutions? Is this possibly something worth exploring when potentially creating a new accord? Let's start with Mr. Hoenig first.

Well, I think anytime you clarify what your intentions are, you're going to improve the outcomes. There's no question about it. But I want to emphasize to you that the main issue is how much debt has to be monetized to keep the Treasury market stable and liquid because the Treasury, because of the debt, has to issue so much additional debt and someone has to buy it. And if that debt is growing much too quickly, if the Fed monetizes it, you're going to have inflation. And that's the real problem. If you have an ongoing enough liquidity into the market for the economy to grow at its three, hopefully four percent growth rate, fine. And clarity will only make that go better. But you have to have the debt under control for that to really make a long-term difference in my opinion.

Dr. Lacker?

I take your question to be taking a path of the deficit as given, how to finance it, how debt management ought to work. I think absent the clear assignment of debt management to the Treasury as I advocate, I think under the current arrangements, communication could be better between the two and to the market more importantly. So now we get these refunding announcements from the Treasury. Separately, there's some monetary policy, so-called monetary policy announcement about quantitative easing or the path of the Fed's holdings. Why isn't that a joint announcement? Why don't they just, you know, why isn't a joint communique about what that debt in the hands of the public is going to look like?

Thank you. Dr. Huther?

I think the challenge for additional policy clarity really revolves around the uncertainty that we face going forward. And it's really hard for policymakers to provide a great deal of clarity when they don't know anything more than the rest of us in some degree. And so while clarity's great, the best we can do is try to frame where we're going. It's really hard when it comes down to the specifics given just the way the world is.

So with my remaining time, Mr. English, you want to react to that?

So I wanted to react to something Jeff Lacker said, I think. You said why shouldn't this be a joint announcement? I think even if that joint announcement was in some sense benign, each institution is making its own decisions and they're just stapling the papers together. I think doing that could likely be seen as a step toward Treasury dominance of the Fed and towards fiscal dominance. Given our unsustainable fiscal path, people will be suspicious. They'll be worried that the Treasury will be dominating the Fed, that the Fed will be generating higher inflation in order to ease the fiscal pressures. The President has called for lower rates explicitly on that basis. So I think it's actually better to have these things separated so it's clear that the Fed is independent, it's making...

I am out of time, so I got to stop you there. I yield back.

Gentleman yields back. Seeing no other requests for time, I want to thank all of our witnesses for their testimony today. And I must say in good faith, in a world, in a society, in a Congress where we live 10 minutes at a time based on the last five minutes, the experience and the insight and the willingness of this panel to discuss the near and far future is really quite refreshing. I just hope we have the ability and the discipline to listen to what you've said. And with that, without objection, all members will have five legislative days to submit additional written questions for the witnesses to the chair. The questions will be forwarded to the witnesses for their response. Witnesses, please respond no later than April 22nd, 2026. This hearing is adjourned.