(Reuters) – Treasury Secretary Janet Yellen said on Wednesday that US banks look healthy enough to be able to pay dividends and buy back shares, an updated view reflecting the growing confidence of senior economic officials in the recovery of the coronavirus pandemic.
Yellen made her comments on a second day of testimony in Congress alongside Federal Reserve Chairman Jerome Powell. The hearings are part of a quarterly coronavirus relief update that they must take.
When asked by Senate Banking Committee Chairman Sherrod Brown if he was opposed to banks paying dividends and repurchasing shares, Yellen said he was previously opposed, but that financial institutions look healthier now and “should have some ability to pay. , respecting the rules, to generate profits for shareholders. “
Yellen and Powell, in prepared remarks mirroring those delivered Tuesday before the House Financial Services Committee, offered an optimistic outlook for the economy, fueled by expectations of continued progress against the pandemic due to the launch of vaccines and other. $ 1.9 billion in federal aid. spend just starting out.
“It’s going to be a very, very strong year in the most likely case,” Powell said in response to a senator’s question about the economic outlook.
The US economic recovery is evolving faster than expected, but it still faces risks from the pandemic on the one hand and potential inflation on the other as massive fiscal support moves through the system.
The federal response to the crisis, which included spending of around $ 5 trillion and considerable support from the US central bank, set the stage for a rebound that is now taking hold as the COVID-19 vaccination program 19 gains momentum and pandemic restrictions are lifted.
However, it is unclear how quickly millions of still unemployed workers will find their way back to their jobs, if the Fed can keep markets in equilibrium amid rising prices and bond yields, and if initial progress against the pandemic can be sustained.
Yellen, as she was on Tuesday, was pressured by Republicans for her support for an allocation from the International Monetary Fund’s emergency reserves to help poorer countries hit by the pandemic avoid having to cut spending.
IMF Managing Director Kristalina Georgieva said Tuesday that she would present to the IMF’s executive board a formal proposal for a possible $ 650 billion expansion of the Fund’s special drawing rights by June. The Biden administration has endorsed such a move.
While supporters say the plan will prevent a widening of global economic disparities, Republicans say it will do little to help countries most in need, while delivering free reserves to China, Russia, Iran and others considered adversaries of the United States. .
Several of the lawmakers also raised concerns that the expansion would place new burdens on American taxpayers, prompting an irritable exchange between Yellen and Republican Senator John Kennedy of Louisiana.
Kennedy charged that the SDR plan would require the Treasury to issue $ 180 billion in new debt to provide dollars to countries that convert their SDRs to underlying currencies. SDRs, the IMF’s unit of exchange, are based on a basket of currencies that include US dollars, euros, British pounds, Japanese yen, and Chinese yuan.
Yellen refuted this idea, saying there would be no net cost to taxpayers and that the interest on the issued Treasuries would be offset by the interest earned on the SDR holdings.
“I rest my case!” Kennedy said.
Yellen replied: “There is no money to pay back. It does not matter. The interest we earn on any excess SDR offsets the cost of issuing Treasuries and is essentially a wash. “
“Without disrespecting him, but I think you’re wrong. I think we’ll have to borrow all of the $ 180 billion of this, ”Kennedy responded.
“I don’t know where you got a number like that from,” Yellen replied.
The Biden administration’s adoption of a climate policy that encourages investments in low- or zero-carbon activities was also a topic again, and Republicans expressed concern that the Treasury and the Fed may begin to actively discourage investors. banks so they don’t provide financing to legacy power companies.
Kennedy, who represents one of the country’s leading energy-producing states, told Powell that he was concerned that central banks elsewhere were adapting their monetary policy to take into account “fiscal” issues such as carbon footprints or house prices.
“Some people are going to beat you, Mr. President, as if you stole Christmas to get involved in social policy disguised as economic policy. And for the long-term health of the Federal Reserve, you need to resist that, ”the senator said.
Powell, affable as usual, agreed.
“Leaving our base of operations and deviating from our mandate is something that will jeopardize long-term independence,” Powell said. “If we are going to play on all issues, then the case for our independence weakens.”
Written by Dan Burns and David Lawder; Editing by Paul Simao