By Ann Saphir and David Lawder
(Reuters) - Treasury Secretary Janet Yellen on Wednesday said U.S. banks look healthy enough to be allowed to pay dividends and repurchase stock, an updated view that reflects top economic officials' growing confidence in the recovery from the coronavirus pandemic.
Yellen made her comments in a second day of testimony in Congress alongside Federal Reserve Chair Jerome Powell. The hearings are part of a quarterly coronavirus aid update they are required to make.
Asked by Senate Banking Committee Chairman Sherrod Brown if she opposed banks paying dividends and buying back stock, Yellen said she was previously opposed but financial institutions look healthier now and "should have some ability to, abiding by the rules, to make returns to shareholders."
Yellen and Powell, in prepared remarks that mirrored those delivered on Tuesday before the House of Representatives Financial Services Committee, offered an optimistic outlook for the economy, fueled by expectations for continued progress against the pandemic due to vaccine rollouts and another $1.9 trillion of federal relief spending just getting underway.
"It is going to be a very, very strong year in the most likely case," Powell said in response to a senator's question on the economic outlook.
The U.S. economic recovery is evolving faster than expected, but still faces risks from the pandemic on one side and potential inflation on the other as massive fiscal support rolls through the system.
The federal response to the crisis, including spending of about $5 trillion and considerable support from the U.S. central bank, set the stage for a rebound now taking hold as the COVID-19 vaccination program gains momentum and pandemic restrictions are lifted.
However, it remains unclear how quickly millions of still-unemployed workers will find their way back to jobs, whether the Fed can keep markets on an even keel amid rising prices and bond yields, and if initial progress against the pandemic can be sustained.
FOREIGN ASSISTANCE
Yellen, as she was on Tuesday, was pressed by Republicans on her support for an allocation of International Monetary Fund's emergency reserves to help poorer countries hard hit by the pandemic avoid having to slash spending.
IMF Managing Director Kristalina Georgieva said on Tuesday she would present the IMF's executive board with a formal proposal for a possible $650 billion expansion of the Fund's Special Drawing Rights by June. The Biden administration has backed such a move.
While supporters say the plan will prevent a widening of global economic disparities, Republicans contend it will do little to help the neediest countries, while handing free reserves to China, Russia, Iran and others seen as U.S. adversaries.
Several of the lawmakers also expressed concerns the expansion would lead to new burdens for U.S. taxpayers, prompting a testy exchange between Yellen and Republican Senator John Kennedy of Louisiana.
Kennedy charged that the SDR plan would require 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 including U.S. dollars, euros, British pounds, Japanese yen and Chinese yuan.
Yellen refuted this idea, saying there would be no net cost to taxpayers and that interest on any Treasuries issued would be offset by interest earned on the SDR holdings.
"I rest my case!" Kennedy said.
Yellen retorted: "There is no money to be paid back. It doesn't matter. The interest that we earn on any excess SDR holdings offsets the cost of issuing Treasuries and it's essentially a wash."
"No disrespect, but I think you're wrong. I think we're going to have to borrow all the $180 billion of this," Kennedy shot back.
"I don't know where you got a number like that from," Yellen replied.
CLIMATE CONCERNS
The Biden administration's embrace of a climate policy that encourages investments in low- or no-carbon activities was also at issue again, with Republicans voicing concerns the Treasury and Fed may start actively discouraging banks from providing financing to legacy energy companies.
Kennedy, who represents one of the country's top energy-producing states, told Powell it worried him that central banks elsewhere were tailoring their monetary policy to take account of "fiscal" issues like carbon footprints or housing prices.
"Some people are going to beat on you, Mr. Chairman, like you stole Christmas to get involved in social policy in the guise of economic policy. And for the long-term health of the Federal Reserve, you need to resist that," the senator said.
Powell, mild-mannered as usual, agreed.
"Getting off of our home base and straying from our mandate is something that will put independence at risk over the long term," Powell said. "If we are going to be playing on every issue then the case for our independence weakens."