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 Remarks by U.S. Treasury Secretary Steven T. Mnuchin before the Third Annual Conference on the Evolving Structure of the U.S. Treasury Market


11/28/2017

As prepared for delivery

New York, NY – Good afternoon. Before I begin I want to thank the market participants here today and also thank the Federal Reserve Bank of New York for co-hosting this event with the Treasury Department.

Just two blocks from here is Federal Hall – a relatively small building that sits in between the giant skyscrapers of lower Manhattan. The building does not stand as tall as the others, but in a sense, it looms over all of them. It was in Federal Hall that the first Congress established the Department of the Treasury and authorized the assumption of state debt by the federal government. This was the seminal moment in the history of our national debt and was a plan developed by Alexander Hamilton. He lived just a few blocks from here on Wall Street where he watched the inauguration of George Washington.
                                                      
I am mindful of the history of the winding streets of lower New York. There is no better place to discuss important issues related to financing the government. This is not an abstract issue, but is central to our long-term economic prosperity as a nation. This was true when Hamilton delivered his First Report on the Public Credit to the first Congress in 1790 and it remains true today.

It is critical that we are able to finance the U.S. Government at the least cost over time. This ensures that taxpayer dollars both now and in the future are allocated effectively and that other benchmark rates are set appropriately.

The Federal Reserve's balance sheet normalization is of great interest to all of those in this room. Moving forward, Treasury is taking into account the Fed's System Open Market Account (SOMA) redemptions when considering debt issuance. Given the Fed's announced changes to its reinvestment policy, projections for the fiscal outlook, and increasing bill supply, Treasury anticipates announcing gradual adjustments to nominal coupon and 2-year floating rate note auction sizes at the February 2018 refunding. The magnitude and allocation of increases to auction sizes will depend in part on projections for the fiscal outlook, as well as feedback from market participants.

Based on current fiscal forecasts and internal Treasury modeling, it is anticipated that these changes will likely result in a stabilization of the weighted average maturity (WAM) of debt outstanding at or around the current levels. This is with the caveat that unexpected large changes in borrowing needs could have an unforeseen impact on future issuance and ultimately the level of WAM. Any adjustments will be made in a manner consistent with the Treasury's practice of being regular and predictable.

Regarding WAM, there are a few things worth mentioning. First, WAM is a somewhat imperfect proxy for the risk and cost tradeoffs that Treasury considers as it makes its issuance decisions. Generally, a longer WAM is associated with higher debt service costs, which reflects rising term premiums associated with longer issuance, but lower interest-cost volatility, which reflects a reduction in debt rollover. Analysis suggests that the marginal benefits of extending the WAM tend to decline as WAM moves beyond the intermediate sector of the yield curve, while the marginal costs increase. In the case of the U.S., our WAM has reached its highest point in decades – at about 70 months or almost six years. In light of the cost-benefit analysis I just referenced, further extension will likely increase debt service costs without significant risk reduction. Hence the benefit of stabilizing WAM at or around the current level.

I also want to acknowledge the progress made in the availability of Treasury securities transaction data to Treasury and the regulatory community. I know Craig Phillips provided a detailed update on the collection of this data earlier today as well as our next steps with regard to the TRACE data, and I want to say a few words about this. Starting in July, FINRA began collecting Treasury post-trade data through TRACE from its member SEC registered broker-dealers and this data is currently being analyzed. As highlighted in the Capital Markets Core Principles Report released in October, gaps in the post-trade Treasury securities data remain because not all Treasury market participants are FINRA members. Treasury, along with regulators, is seeking ways to close these data gaps in an effort to make the post-trade data more complete and useful to the official sector.

Whether the TRACE data should be made available to the public is an issue that poses both opportunities and challenges that must be carefully weighed by policy makers. The Treasury market is the deepest and most liquid market in the world, which helps minimize the government's borrowing costs. In thinking about public transparency, our first principal is to "do no harm" to this market. As such, there is a need to balance the interests of all stakeholders that participate in the Treasury market in a way that is least disruptive to the liquidity and functioning of Treasury market. The policy of public transparency around the TRACE data is currently under review. This review will be an involved, data-driven process with significant outreach to market participants and we look forward to the feedback we will receive on this matter.
           
The Treasury market is tied to our long-term economic health as a nation. That is why I am here today to talk about our program for economic growth. Our ability to achieve three percent or higher GDP growth will not only benefit today's families, workers, and small businesses, it will lessen the burden on future generations by ensuring our financing is done on the most attractive terms possible.

For years, the country experienced average economic growth of only two percent each year – we saw labor force participation at some of its lowest levels in more than 35 years, and we have seen anemic productivity growth. This slow growth has sometimes been referred to as a "New Normal." As I have said before, this is not normal for me, for President Trump, or for the American people. I am committed to a return to higher, sustained levels of GDP growth, and today I want to outline how we are going to get there. It will come through a combination of factors, but I want to highlight tax reform and regulatory relief, which are the two centerpieces of our plan.

The House of Representatives recently passed the Tax Cuts and Jobs Act and two weeks ago, the Senate Finance Committee reported out its version of the bill. The Senate will debate the bill this week and we look forward to continuing to work with the Senate to pass its version of the bill and get legislation on the President's desk by the end of the year.

Growth in this country is largely a combination of the productivity of our workers and the number of work hours. It is therefore important to have a tax code that encourages capital investment and labor force participation. Our reforms do this in a number of ways.

Our current business tax rate is the highest in the industrial world. We have a system of international taxation that encourages companies to keep their profits offshore. These do not encourage investment in our country and likely do the opposite.

The tax plans that have been proposed in both the House and the Senate call for a reduction of our corporate business rate to 20 percent. This will make it more profitable to own and operate a company in the U.S. The Council of Economic Advisers released a report in October indicating that the Unified Framework, which served as the basis of the current bills, would increase GDP between three and five percent over the baseline long-run projection. By lowering business taxes, we increase the after-tax return on capital. This induces companies to invest more in their capital stock boosting productivity.

America's success comes when all businesses grow – both large and small. We are going to lower the top rate on pass-through entities like LLCs, S-corps, and partnerships. They will be taxed at the lowest rates since the 1930s. That will ensure our small and family-owned businesses – which generate substantial economic growth in this country – are best able to prosper. Businesses like partnerships and S-crops generate a significant amount of U.S. business income.

Another aspect of growth is foreign direct investment. This is something I have spoken about before because of how important it is to create a positive environment for foreign investors in the U.S. Investors respond to different tax rates. Lower rates in the U.S. will incentivize domestic investors to keep their money here and foreign investors to bring their money here.

The tax reform bills that are making their way through Congress also would allow the cost of many capital investments to be deducted immediately, rather than depreciated over time. By accelerating the tax deduction for an investment's cost, expensing lowers the tax price of making an investment. Economists think that expensing can be an especially effective way to stimulate additional capital investment, because expensing tends to concentrate its tax break on new investments. This is just another way our plan will increase economic growth for the country.

Tax reform is absolutely critical to our reform efforts and we are going to continue to work every day to pass meaningful tax legislation for the President's signature.

Regulatory reform is another powerful tool we are using to spur economic growth. Too often regulators consider only the benefits and not the costs of their actions. We are for a system of properly tailored regulation, and not regulation for its own sake.

Sectors of the economy that are heavily regulated tend to have lower levels of output growth than those that are less regulated. President Trump's one in, two out plan is going to dramatically overhaul our administrative system and make it easier for American businesses to provide greater options and opportunities for the American people.

In addition, Executive Order 13772 issued by the President on February 3, 2017, directed the Treasury to identify statutes and regulations that inhibit the operation of the financial system in accordance with certain Core Principles. These Principles include fostering economic growth through more rigorous regulatory analysis and making sure regulation is efficient, effective, and appropriately tailored.

Part of our work has included canvassing a large number of stakeholders. Through a series of industry, academic, and other stakeholder gatherings and bilateral meetings we have learned how regulation is impacting the financial system and how best to address the goals of the Core Principles.

It is important to note that these reports and recommendations are not the final result – they are an important framework for regulatory reform necessary to start a robust, multifaceted implementation plan.

Our first report on Banks and Credit Unions was released on June 12 of this year. Treasury set forth recommendations advocating for the sensible rebalancing of regulations given the significant improvement in the strength of the financial system and the economy, as well as the benefit of perspective since the Great Recession. A main focus of our recommendations relates to the tailoring and recalibration of the capital and liquidity regimes put in place in recent years and how to improve many regulations that affect our markets. For example, one of the major recommendations in the report was to rationalize and simplify the Volcker rule. This is important to decrease regulatory burden, remove unnecessary compliance procedures, and to reduce requirements on a range of banks that are not fundamentally involved in trading as a business line.

We look forward to working with Chairman Crapo and a bipartisan group of senators whose proposal has incorporated some of the recommendations made in our June E.O. Report, especially those related to providing meaningful relief to community and regional banks. The proposed bill, for example, would largely exempt community banks from the Volcker Rule and would further tailor some of the capital and liquidity rules as it applies to our banking system.

Treasury issued a report on Capital Markets on October 6. The U.S. capital markets are the most vibrant in the world and of critical importance in supporting the U.S. economy. Certain elements of the regulatory framework are functioning well and support healthy capital markets. Other elements need better tailoring to help markets function more effectively for market participants.

We made a number of recommendations to promote better equity capital formation for companies of all sizes, including promoting the liquidity of secondary markets.

As one example, we are troubled by the decline in the number of public companies – down nearly 50 percent over the last 20 years. Our recommendations aim to reduce burdens in public company reporting requirements, reduce filing requirements, and better align rules providing critical support to new issue offerings, including research.

Treasury supports innovative fund-raising techniques, such as crowdfunding, for our small businesses, which contribute significantly to job growth. The definition, eligibility size and time for emerging growth companies should be revisited along with thoughtful reform of accredited investor eligibility standards.

Finally, in our third report, on Asset Management and Insurance, released on October 26, we addressed – among other issues – appropriate evaluation of systemic risk. Specifically, the method and implications for designations of firms. To ensure appropriate evaluation of systemic risk and solvency, we must appropriately calibrate our evaluations to ensure we consider the differences between banks, asset managers, and insurance companies.

The long-term financial prospects of this country are brightest when our economy is innovative, productive, and growing at high, sustained levels. We are committed to making this happen. In addition to the growth benefits, tax reform and regulatory relief will ensure that the market for U.S. Government securities continues to be the largest and most liquid in the world.

Hamilton understood the connection between a nation's financial health and its long-term prosperity. It is fitting that we are here today just a few minutes from Trinity Church where he is buried to reaffirm our commitment to sustainable, prudently-managed debt. The modern financial system is built on a foundation laid by Hamilton, and we would be wise to learn some of his lessons.
                                                       
We will ensure that American taxpayers are getting the best deal possible with their financing, and that the American markets remain robust. Thank you very much for being here and thank you for your participation in these important conversations.

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