Markets Wired

As Prepared for Delivery

Thank you for the invitation to be part of this conference and to speak with you today. The conference agenda lays out some of the significant opportunities and challenges of expanding central clearing in the Treasury market, and I look forward to hearing your perspectives.

In my remarks, I will focus on the critical roles and evolution of the Treasury market, and review the significant progress made to strengthen the Treasury market as well as what remains to be done. I will highlight the recent work done under the umbrella of the Inter-Agency Working Group on Treasury Market Surveillance (IAWG), which was formed in 1992, to strengthen the resilience of the Treasury market.^[i] I would emphasize that an efficient and resilient Treasury market has been a shared goal and is a place for common ground across Administrations and over time. I will conclude with the importance of expanded central clearing for resilience and financial stability, as market participants and regulators, some in the audience today, move forward with implementation.

The Critical Roles of the Treasury Market and its Liquidity

The Treasury market serves a range of critical functions. A strong Treasury market is key for financing our government at the lowest cost to the taxpayer over time. It is also at the core of global financial markets and provides the benchmark risk-free yield curve. It helps to underpin the dollar in global transactions. And being the deepest and most liquid market in the world, it serves as a key source of safe and liquid assets for investors and is used for liquidity risk management by many financial firms. This last point is increasingly relevant for nonbank financial institutions, and in particular investment funds, who do not have access to central bank liquidity and rely on Treasury market liquidity in periods of stress.

There is no larger thoroughfare for global capital than the U.S. Treasury market, which averages around $900 billion in transactions per day, with high volume days in recent years around $1.5 trillion.^[ii] There is roughly $4 trillion in repo financing each day.^[iii] And the U.S. Treasury futures market is itself large and important, with an average daily trading volume of about $750 billion in notional so far in 2024.^[iv]

The depth and liquidity of the Treasury market are central to serving its critical functions. Currently, primary markets are functioning well, helped by Treasury’s longstanding “regular and predictable” issuance strategy.[v] On this slide, you can see two commonly used metrics to assess primary market functioning. One indicator is the bid-to-cover ratio, which has been stable and well above 2 over the past several years, for both the 2- and 10-year Treasury notes, even as issuance has been increasing. Similarly, as shown on the right, auction tails — which compare the yield set in the auction with the yield in when-issued trading — indicate that auction results have fluctuated within a pretty tight range (about +/- 3 basis points), even as the variability increased when interest rate volatility moved up starting in 2022. Both figures indicate continued strong demand for Treasury securities.

Turning to secondary markets, liquidity conditions are often proxied by actual trading costs. An index based on bid-ask spreads, market depth, and price impact measures is shown on the left; higher values indicate higher costs and less liquidity. While these costs generally do not vary significantly day-to-day, they have been slightly higher since mid-2022 than in prior years. This pattern reflects the positive correlation with interest rate volatility, which has risen, and is shown by the upward slope between costs and volatility on the chart to the right.

Another notable feature of market liquidity is that it can deteriorate quickly when unexpected shocks hit. This was evident in March 2020 at the onset of the pandemic, as well as in March 2023, when some banks faced rapid depositor runs. Also, as can be seen by the red dots on the figure to the right, illiquidity was worse than might be expected given the volatility in March 2020. These dots illustrate the “dash for cash” when the desire to sell Treasury securities surged, especially by investment funds, and exceeded the ability or willingness of dealers to supply liquidity. As you know, the market dysfunction was resolved only after the Federal Reserve itself provided liquidity by directly purchasing Treasury securities in significant amounts.

In contrast to 2020, during the bank deposit runs in 2023 — shown by the purple dots — the increase in transaction costs was relatively in line with the rise in volatility. Importantly, moderately-reduced liquidity did not amplify volatility during that period, and market conditions remained orderly, though likely helped by the actions taken by the Treasury and Federal Reserve to reduce contagion from the bank failures. More recently, as highlighted by the green dots for 2024, Treasury market liquidity did not deteriorate unusually following the steep drop in global stock prices and unwinding of carry trades in early August of this year.

The Evolution of the Treasury Market

But this is not where the story ends as Treasury market structure is changing continually. It has evolved significantly over the last couple decades, driven in part by regulatory and technological changes as more data have become available and computing power has advanced.

One such change is increased electronic trading and how shifting types of market intermediaries have transformed the provision of market liquidity. While traditional dealers had been the main participants in the interdealer cash market, principal trading firms (PTFs) now represent most trading activity in the futures and electronically brokered interdealer cash markets. We saw an implication of these changes in the Treasury “flash rally” on October 15, 2014. It was that event that led to the expansion of the work of the IAWG.

At the same time, we have seen an increase in the amount of Treasury securities outstanding relative to the capacity of dealers to provide liquidity to those markets, partly reflecting the regulations adopted in response to the Global Financial Crisis (GFC) of 2007-09.^[vi] Moreover, the investor base has shifted as holdings by more price sensitive investors, including private funds with liquidity mismatch or leverage, have increased. Currently, money market and mutual funds hold about 16% of total outstanding Treasury debt, respectively, and the household sector, which includes hedge funds, holds about 10%.^[vii] 

A Review of Recent Efforts to Increase the Resilience of the Treasury Market

In response to these changes and the events of March 2020, the IAWG initiated a comprehensive review and set out a program to strengthen the Treasury market.

In its 2021 public report, the IAWG proposed six guiding principles for public policy in the Treasury markets.^[viii] At its core, policy should promote a Treasury market where prices reflect the current and expected economic and financial conditions, liquidity in the market is resilient and elastic, and both are underpinned by effective infrastructure, appropriate risk management, and transparency. We set out five workstreams that are outlined on this next slide. I will highlight some of the work that has been done, and what remains.

First, we have significantly improved the quality and availability of data on the Treasury market. In February 2023, FINRA began to publish aggregate transaction volume data on a daily basis—only weekly data were available before then. Earlier this year, FINRA began to disclose daily transaction-level data for on-the-run securities. These data represent about one-half of overall daily trading and about 75% of the daily activity in nominal coupon securities. While the IAWG’s efforts have led to greatly expanded data availability, we also have been deliberate to avoid potential harms, such as to confidential positions by placing caps on trade sizes.

In addition, we are closing a large data gap in the repo market for non-centrally cleared bilateral repo. Treasury’s Office of Financial Research (OFR) has been working with dealers so that everyone is prepared to start the data collection at the transaction level in the first week of December. Based on the pilot conducted in 2022 and earlier work, the new data from this collection may give the official sector insights into the more than 45% percent of the repo market that has been opaque since before the GFC.^[ix]

Moreover, the Securities and Exchange Commission (SEC) is collecting more information on hedge funds through recent improvements in Form PF filings. In addition, OFR launched a new Hedge Fund Monitor that makes aggregated data on hedge fund activities from Form PF and other sources more accessible to the public. An example from this monitor is shown on this next slide, which highlights a significant increase in repo (mostly Treasury) and prime brokerage borrowing underlying an increase in leverage of some hedge funds. And starting in March 2025, Form PF will collect more detailed data for large hedge funds, such as separate reporting of Treasury cash and derivatives.

Turning back to the IAWG workstreams, the second one is to improve the resilience of market intermediation. We have put in place a number of changes here as well. Earlier this year, Treasury started a buyback program that creates predictable opportunities for dealers to sell off-the-run securities to support market liquidity. While the program is modest in size and not designed to respond to crises, it should free up dealer balance sheets allocated to less-liquid positions. Since the launch of the program in May, Treasury has purchased close to $40 billion of securities in 24 operations, sometimes buying less than the stated maximum depending on the offers we receive relative to prevailing market prices. We recently posted some metrics on the operations and are monitoring the effects of this program.^[x]  

In addition, since March 2020, the Federal Reserve has put in place two facilities that should support liquidity in periods of stress: the Standing Repo Facility (SRF) to finance Treasury repo with pre-authorized banks and primary dealers, and the Foreign and International Monetary Authorities facility for certain foreign central banks. We saw that the SRF was tapped at the last quarter-end, indicating initial signs of success by the regulators to encourage its use and avoiding stigma.

One idea that remains open is to reconsider changes to the supplementary leverage ratio (SLR), which currently requires firms to hold the same amount of capital on reserves and Treasury securities as they do on risky debt. Proposed options vary and can include excluding reserves held at the central bank and perhaps some Treasury securities from the SLR calculation. Another is to make the enhanced-SLR buffer countercyclical, to be released in periods of market-wide stress based on triggers that are defined ex ante so that banks could plan ahead. This could be accomplished without reducing the overall amount of required capital in the system.

The third and fourth workstreams focus on ensuring efficient and effective infrastructure, recognizing the emergence of new types of firms and trading practices mentioned earlier. The SEC adopted new rules this year that require firms with significant liquidity-provision roles, such as PTFs, to register with the SEC as a dealer. It also has been working to finalize its proposed amendments to Regulation ATS to enhance the resilience of alternative trading venues. Another key infrastructure reform is expanded central clearing, which I will turn to shortly in more detail.

The fifth workstream focuses on the potential for surges in demand for Treasury liquidity in periods of stress from liquidity mismatch and excessive leverage of some types of investment funds. For example, open-end bond and loan mutual funds have a liquidity mismatch between daily redemptions offered to shareholders and the longer time it takes to sell the underlying bonds and loans. The SEC proposed a rule with options to address this “phantom” liquidity to help avoid a repeat of the surge in Treasury sales in March 2020, though there was substantial industry pushback because of operational impediments to swing pricing. However, as these funds have grown to hold a significant share of corporate credit, the SEC and the industry should continue to explore possible solutions.

In addition, we saw in March 2020 that excessive leverage in the Treasury market could become destabilizing. Much attention has focused on the cash-futures basis trade, in which hedge funds take short positions in Treasury futures corresponding to long positions by asset managers, and finance their long cash Treasury hedges with repo. This basis trade supports Treasury market functioning in normal times by tying together cash and futures markets and serving as an important source of demand for Treasury securities.

However, the basis trade is typically highly leveraged — research has highlighted the leverage arising both from zero haircuts on bilateral uncleared Treasury repo offered to hedge funds, and from long futures positions at asset managers. Asset managers may prefer futures to repo because futures are less operationally cumbersome, but also because they do not require the interest expense reporting that repo does.^[xi] Hedge fund leverage in this trade may be mitigated by portfolio and cross-margining not reflected by the zero haircuts on repo, but practices are opaque. It is important for regulators to mitigate excessive leverage to prevent forced unwinds during stress periods, especially as the cash basis trade has continued to grow.

The Central Clearing Mandate and What Comes Next

This brings us to expanded central clearing for Treasury securities transactions, which is an important structural change.^[xii] Central clearing is used for a number of other asset classes, including equities and exchange-traded derivatives. In addition, parts of the Treasury market are already centrally cleared, such as the entire futures market and parts of the cash and repo markets.

Evaluating expanded central clearing was put forward by the IAWG to increase intermediation capacity and reduce risk. Expanded central clearing should increase the intermediation capacity of bank-affiliated dealers because bank capital and leverage requirements recognize the risk-reducing effects of multilateral netting of centrally-cleared trades. Combined with increased disclosures, it may also enable a path forward to some all-to-all trading. On the risk side, central clearing should lead to better risk management by enhancing and standardizing practices. A central counterparty (CCP), for example, could establish margins that better reflect the market risk and concentration of positions rather than just the low-risk nature of Treasury securities. The centralization of transactions also provides greater visibility into market conditions.

Last year, after substantive engagement with market participants and other regulators, the SEC finalized rules to require central clearing of Treasury securities transactions, with deadlines for cash securities by year-end 2025 and for repo by the end of June 2026. Market participants now are moving deliberately and quickly to implement and to meet interim deadlines and an important date is fast approaching. By March 31, 2025, covered CCPs need to implement customer clearing models and segregate house and customer margins, among other requirements.

I know some have noted that expanded central clearing could cause the Treasury transactions costs to increase because CCPs would impose costs related to meeting risk management and other operational requirements. As a result, some intermediaries could pull back from the market or widen bid-ask spreads. However, private costs to individual market participants may not reflect the systemic costs to the broader financial system. Expanded central clearing that requires market participants to internalize costs of better risk management should prevent excessive risk taking and reduce systemic risk. Moreover, to avoid unnecessary cost increases, there is room in implementation to look at the cross-margining of futures and cash securities such that margins are calibrated appropriately to the economic risks. While cross-margining can already be used for house accounts, how it is extended to customer accounts and the implications for systemic risk should be considered carefully.

Turning to the implementation work ahead, there are many open issues to ensure market participants are ready, including around market structure, client access models, accounting, regulatory capital, and MMF access. I will comment on just two of these issues.

Starting with market structure, the new mandate will lead to a significant increase in the volume of transactions to be centrally cleared. Treasury clearing activity is expected to increase by more than $4 trillion each day, and at least 7,000 new relationships between direct and indirect participants are expected to be needed in advance of the deadlines.^[xiii] Currently there is only one CCP for U.S. Treasuries, though some firms are actively considering entering this market. Entry could lead to greater competition and innovation and bring with it different clearing offerings and pricing, and from a macro perspective, there could be gains to operational resilience from multiple CPPs. These are important potential benefits even as there are some open questions about a loss in netting benefits and fragmentation of liquidity pools when there is more than one CCP.

The issue of market structure also is tied to client access models. The current Treasury market practice for centrally cleared trades is for trade clearing and execution to be bundled together, following a “done-with” model, as dealers have preferred to link the use of their scarce balance sheet with revenues from execution. But there is significant demand for “done-away” models, which are commonplace in other markets with central clearing, namely futures and swaps. In this model, trades executed with one counterparty can be cleared separately through a different clearinghouse member. As such, a big advantage is that it could provide greater competition in trade execution and trade clearing, which would support improved market functioning.

Of course, there are operational issues to wrestle with to achieve expanded central clearing. SIFMA’s new report and its work on developing master clearing agreements for done-with models are helpful steps to support the upcoming transition, alongside the work under way at many other organizations here today.^[xiv] Taking a step back, though, the work to expand central clearing offers significant benefits by reducing risks to financial stability, increasing competition and innovation, and improving operational resilience.

Conclusion

To conclude, Treasury and the financial regulators, working closely with the industry, have made significant progress to strengthen the resilience of the Treasury market and implementing expanded central clearing is advancing in ways that would reduce systemic risk and expand product offerings. Some work remains, however, to address reduced bank-dealer capacity and a growing nonbank sector that relies on Treasury market liquidity in periods of stress. Given the critical role the Treasury market plays in the U.S. and the global economy, it is imperative to continue to execute on the current program and evaluate the market’s performance against the principles laid out earlier. This work has become more significant with projections for elevated levels of issuance over the coming years. I want to thank you for your engagement and cooperation throughout the reform efforts. Industry and policymakers working together has been critical to the progress and I encourage you to continue this important work.

The slides and figures referenced in these remarks are available here.

---

_[i] The IAWG was formed in 1992 by the Treasury Department, the Securities and Exchange Commission (SEC), and the Board of Governors of the Federal Reserve System (the Federal Reserve Board) to improve monitoring and surveillance and strengthen interagency coordination with respect to the Treasury markets following the Salomon Brothers auction bidding scandal.  See U.S. Department of the Treasury, Securities and Exchange Commission, and Board of Governors of the Federal Reserve System, 1992, “Joint Report on the Government Securities Market,” U.S. Government Printing Office, January 22.  Today, the IAWG consists of staff from the Treasury Department, SEC, Federal Reserve Board, Federal Reserve Bank of New York, and Commodity Futures Trading Commission.

_[ii] Treasury Daily Aggregate Statistics | FINRA.org.

_[iii] US Repo Statistics – SIFMA – US Repo Statistics – SIFMA.

_[iv] U.S. Treasury futures, options, and cash – CME Group.

_[v] Remarks by Assistant Secretary for Financial Markets Joshua Frost on Principles of U.S. Debt Management Policy | U.S. Department of the Treasury.

_[vi] Liang, Nellie and Pat Parkinson (2020), “Enhancing Liquidity of the U.S. Treasury Market Under Stress,” Hutchinson Center Working Paper #72, Brookings, December, and Duffie, Darrell, Michael Fleming, Frank Keane, Claire Nelson, Or Shachar, and Peter Van Tassel (2023), “Dealer Capacity and U.S. Treasury Market Functionality” Federal Reserve Bank of New York Staff Reports, no. 1070, August.

_[vii] TBACCharge2Q32024.pdf (treasury.gov).

_[viii] IAWG (2021) report “Recent Disruptions and Potential Reforms in the U.S. Treasury Market: A Staff Progress Report,” November 8, 2021.

_[ix] Non-centrally Cleared Bilateral Repo | Office of Financial Research and OFR’s Pilot Provides Unique Window Into the Non-centrally Cleared Bilateral Repo Market | Office of Financial Research.

_[x] TreasurySupplementalQ42024.pdf.

_[xii] See IAWG (2021) report “Recent Disruptions and Potential Reforms in the U.S. Treasury Market: A Staff Progress Report,” November 8, 2021; Duffie, Darrell (2020), “Still the World’s Safe Haven? Redesigning the U.S. Treasury Market After the COVID-19 Crisis,” Hutchinson Center Working Paper #62, Brookings, June;  Liang, Nellie and Pat Parkinson (2020), “Enhancing Liquidity of the U.S. Treasury Market Under Stress,” Hutchinson Center Working Paper #72, Brookings, December.

_[xiii] Treasury Clearing Mandate Survey White Paper | DTCC and U.S. Treasury Central Clearing.

_[xiv] US Treasury Central Clearing: Industry Considerations Report – SIFMA – US Treasury Central Clearing: Industry Considerations Report – SIFMA and SIFMA and SIFMA AMG Publish Master Treasury Securities Clearing Agreement.

WASHINGTON — Today, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) is sanctioning Amana the Settlement Movement of Gush Emunim Central Cooperative Association Ltd (Amana), a settlement development organization that is involved with U.S.-sanctioned individuals and outposts that perpetrate violence in the West Bank, and its subsidiary Binyanei Bar Amana Ltd. This action, taken pursuant to Executive Order (E.O.) 14115, is part of an ongoing multilateral approach by the United States and its partners to hold accountable those who are threatening the peace, security, and stability of the West Bank. Amana has also been sanctioned by the United Kingdom and Canada.

“The United States, along with our allies and partners, remains committed to holding accountable those who seek to facilitate these destabilizing activities, which threaten the stability of the West Bank, Israel, and the wider region,” said Deputy Secretary of the Treasury Wally Adeyemo.

Concurrently, the Department of State is designating three individuals and one entity under E.O. 14115. For more information on these targets, please see the Department of State press release at this link.

The United States has consistently opposed violence in the West Bank, as well as other acts that unduly restrict civilians’ access to essential services and basic necessities and risk further escalating tensions and expanding the conflict in the region. As noted in FinCEN’s February 1, 2024 Alert and July 11, 2024 Supplemental Alert, Treasury remains concerned by reports of escalating violence in the West Bank and encourages continued reporting by financial institutions of suspicious activity potentially related to the financing of these violent acts.

MAJOR SETTLEMENT ORGANIZATION IN WEST BANK

Amana is a key part of the Israeli extremist settlement movement and maintains ties to various persons previously sanctioned by the U.S. government and its partners for perpetrating violence in the West Bank. For example, Amana provided a loan to Israeli settler Isaschar Manne, and served as a partner in the formation of Meitarim Farm. The U.S. Department of State sanctioned Isaschar Manne and Meitarim Farm on July 11, 2024 pursuant to E.O. 14115. The settlers and farms that Amana supports play a key role in developing settlements in the West Bank, from which in turn settlers commit violence. More broadly, Amana strategically uses farming outposts, which it supports through financing, loans, and building infrastructure, to expand settlements and seize land. 

OFAC today is also sanctioning Amana’s subsidiary, Binyanei Bar Amana Ltd (BBA). BBA is a construction and development company that builds and sells homes in settlements and outposts in the West Bank.

OFAC is sanctioning Amana pursuant to E.O. 14115 for being a foreign person that is responsible for or complicit in, or has directly or indirectly engaged or attempted to engage in, planning, ordering, otherwise directing, or participating in seizure or dispossession of property by private actors, affecting the West Bank. OFAC is sanctioning BBA pursuant to E.O. 14115 for being a foreign person that is owned or controlled by, or has acted or purported to act for or on behalf of, directly or indirectly, Amana.

SANCTIONS IMPLICATIONS

As a result of today’s action, all property and interests in property of the designated persons described above that are in the United States or in the possession or control of U.S. persons are blocked and must be reported to OFAC. In addition, any entities that are owned, directly or indirectly, individually or in the aggregate, 50 percent or more by one or more blocked persons are also blocked. Unless authorized by a general or specific license issued by OFAC, or exempt, OFAC’s regulations generally prohibit all transactions by U.S. persons or within (or transiting) the United States that involve any property or interests in property of designated or otherwise blocked persons. U.S. persons must comply with OFAC regulations, including all U.S. citizens and permanent resident aliens regardless of where they are located, all persons within the United States, and all U.S.- incorporated entities and their foreign branches. Non-U.S. persons are also subject to certain OFAC prohibitions. For example, non-U.S. persons are prohibited from causing or conspiring to cause U.S. persons to wittingly or unwittingly violate U.S. sanctions, as well as engaging in conduct that evades U.S. sanctions. 

U.S. persons may face civil or criminal penalties for violations of E.O. 14115. OFAC’s Economic Sanctions Enforcement Guidelines provide more information regarding OFAC’s enforcement of U.S. sanctions, including the factors that OFAC generally considers when determining an appropriate response to an apparent violation.

Financial institutions and other persons that engage in certain transactions or activities with the sanctioned entities and individuals may expose themselves to sanctions or be subject to an enforcement action. The prohibitions include the making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any designated person, or the receipt of any contribution or provision of funds, goods, or services from any such person. 

The power and integrity of OFAC sanctions derive not only from OFAC’s ability to designate and add persons to the Specially Designated Nationals and Blocked Persons (SDN) List, but also from its willingness to remove persons from the SDN List consistent with the law. The ultimate goal of sanctions is not to punish, but to bring about a positive change in behavior. 

For information concerning the process for seeking removal from an OFAC list, including the SDN List, please refer to OFAC’s Frequently Asked Question 897 here. For detailed information on the process to submit a request for removal from an OFAC sanctions list, please click here.

Click here for more information on the persons designated today.

###

WASHINGTON – Today, the U.S. Department of the Treasury (Treasury), as Chair of the Committee on Foreign Investment in the United States (CFIUS), issued a final rule to enhance certain CFIUS procedures and sharpen its penalty and enforcement authorities. The final rule is the first substantive update to the monitoring and enforcement provisions of the CFIUS regulations since the implementation of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), which amended CFIUS’s governing statute (section 721 of the Defense Production Act of 1950). The final rule issued today follows a proposed rule issued in April and responds to public comments received in response to the proposed rule.

“This rule enhances CFIUS’s ability to vigorously defend the national security of the United States by ensuring our investment screening regime has a sharper scalpel to more quickly and effectively address national security risks that arise in CFIUS reviews,” said Assistant Secretary for Investment Security Paul Rosen.

CFIUS is authorized to review certain transactions involving foreign investment into U.S. businesses and certain transactions by foreign persons involving real estate in the United States in order to determine the effect of such transactions on the national security of the United States. CFIUS enforces transaction parties’ compliance with its statute and regulations, as well as agreements entered into and conditions and orders imposed under such authorities, through its authority to impose civil monetary penalties and seek other remedies. In recent years, CFIUS has enhanced its compliance and monitoring capabilities, along with its ability to identify and investigate transactions that were not notified to CFIUS. This final rule reflects and builds upon those enhancements to help CFIUS accomplish its national security mission consistent with the United States’ open investment policy.

The final rule enhances CFIUS’s authorities through the following key changes:

• Expanding the types of information CFIUS can require transaction parties and other persons to submit when engaging with them on transactions that were not filed with CFIUS;
• Allowing the CFIUS Staff Chairperson to set, as appropriate, a timeline for transaction parties to respond to risk mitigation proposals for matters under active review to assist CFIUS in concluding its reviews and investigations within the time frame required by statute;
• Expanding the circumstances in which a civil monetary penalty may be imposed due to a party’s material misstatement and omission, including when the material misstatement or omission occurs outside a review or investigation of a transaction and when it occurs in the context of CFIUS’s monitoring and compliance functions;
• Substantially increasing the maximum civil monetary penalty available for violations of obligations under the CFIUS statute and regulations, as well as agreements, orders, and conditions authorized by the statute and regulations, and introducing a new method for determining the maximum possible penalty for a breach of a mitigation agreement, condition, or order imposed;
• Expanding the instances in which CFIUS may use its subpoena authority, including in connection with assessing national security risk associated with non-notified transactions; and
• Extending the time frame for submission of a petition for reconsideration of a penalty to CFIUS and the number of days for CFIUS to respond to such a petition.

In assessing compliance and whether to bring an enforcement action in a particular case, CFIUS will continue to evaluate the facts and circumstances surrounding the conduct including the aggravating and mitigating factors described in the CFIUS Enforcement and Penalty Guidelines.

The final rule will become effective 30 days after publication in the Federal Register and is available at https://www.cfius.gov/.

###

As Prepared for Delivery

Good afternoon. Let me start by thanking you for your continued work promoting financial literacy and education and for being part of today’s Financial Literacy and Education Commission (FLEC) meeting.

The FLEC provides a crucial forum to coordinate the government’s efforts to help consumers make informed, sound decisions that enhance their financial well-being. And today we are pleased to focus our discussion on a key recent effort: the Department of the Treasury’s (Treasury) National Strategy for Financial Inclusion in the United States, which we published at the end of October. 

The Strategy is based on extensive research and stakeholder engagement across the public, private, and non-profit sectors, including with many of you. And it’s part of Treasury’s and the Biden-Harris Administration’s broader focus on reaching people and places that have been underserved in order to advance a more inclusive financial system and strengthen our economy. When families lack access to financial services or affordable credit, they are less able to weather economic shocks or invest in their futures. And this creates friction in our economy. 

The Strategy is designed to address these issues head-on—setting out a plan to make our financial system more inclusive and our economy more dynamic and resilient. And it importantly focuses not just on increasing access to the financial system but also on leveraging that access to drive better consumer outcomes like increased financial resilience, well-being, and wealth. 

The Strategy emphasizes the need for unbiased, clear, and relevant financial information to equip consumers to make informed financial decisions. And it puts forward five key objectives: promote access to transaction accounts; increase access to safe and affordable credit; increase retirement and emergency savings opportunities; improve government financial services; and strengthen consumer protections. 

I know that many of you are already doing important work to further financial inclusion. Federal partners in the FLEC, for example, are investing in faster payments, better consumer protections, and improved financial education. Others listening today are providing valuable feedback on their communities’ needs and working with financial service providers to remove barriers to access. 

Successful implementation of the Strategy will depend on continued strong interagency collaboration, strategic public-private partnerships, and trusted community partners. 

We saw powerful examples of interagency collaboration during the pandemic, such as the partnership between the Internal Revenue Service and the Federal Deposit Insurance Corporation to help consumers without bank accounts identify and open accounts. The unbanked rate fell to 4.5 percent, the lowest in decades.

Many of these new accounts were Bank On accounts, low-cost accounts with reduced overdraft fees, demonstrating the potential of public-private partnerships to expand access. 

And let me emphasize that community development financial institutions and minority depository institutions are key examples of community partners that have earned the trust of underserved communities, with strong track records of facilitating financial inclusion, building wealth, and ensuring that community leaders and those they represent are heard. Our continued support of community financial infrastructure is critical. 

As we look ahead, I call on my fellow federal agencies and other partners attending today to build on our work to date and take concrete additional steps: to review existing programs and products for opportunities to enhance financial inclusion; to strengthen partnerships; and to share best practices. We can together build a financial system that serves all Americans and fuels innovation and economic growth. 

###

WASHINGTON — Today, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned 26 companies, individuals, and vessels associated with the Al-Qatirji Company, a Syrian conglomerate responsible for generating hundreds of millions of dollars in revenue for Iran’s Islamic Revolutionary Guard Corps-Qods Force (IRGC-QF) and the Houthis through the sale of Iranian oil to Syria and the People’s Republic of China (PRC). Previously designated for its role in facilitating the sale of fuel between the Syrian regime and the Islamic State of Iraq and Syria (ISIS), the Al-Qatirji Company has morphed into one of the main channels through which the IRGC-QF generates revenue and funds its regional proxy groups. OFAC is expanding its targeting of Al-Qatirji’s network and its fleet of vessels to inhibit the IRGC-QF from benefiting from this relationship. 

“Iran is increasingly relying on key business partners like the Al-Qatirji Company to fund its destabilizing activities and web of terrorist proxies across the region,” said Acting Under Secretary of the Treasury for Terrorism and Financial Intelligence Bradley T. Smith. “Treasury will continue to take all available measures to restrict the Iranian regime’s ability to profit from the illicit schemes that enable its dangerous regional agenda.”

Today’s action is being taken pursuant to counterterrorism authority Executive Order (E.O.) 13224, as amended. OFAC designated the IRGC-QF pursuant to E.O. 13224 on October 25, 2007, for providing material support to multiple terrorist groups. The Al-Qatirji Company was designated pursuant to E.O. 13582 on September 6, 2018 for its ties to the Government of Syria. The U.S. Department of State designated Ansarallah, also known as the Houthis, as a Specially Designated Global Terrorist (SDGT) pursuant to E.O. 13224, as amended, effective February 16, 2024, for having committed or attempted to commit, posing a significant risk of committing, or having participated in training to commit acts of terrorism. 

The Al-Qatirji Company, the irgc-qf, and iranian proxies 

The Al-Qatirji Company exports millions of barrels of Iranian oil, worth hundreds of millions of dollars, to Syria and East Asia, including the PRC, to finance the IRGC-QF and Houthis. As of 2024, the Al-Qatirji Company has become one of the IRGC-QF’s main financial channels, enabling the IRGC-QF to generate and access hundreds of millions of dollars in revenue this year alone, much of which is laundered through major cities such as Istanbul and Beirut. Some of the oil proceeds are ultimately sent to the Houthis, who receive millions of dollars per month from the Al-Qatirji Company. 

The Al-Qatirji Company is being designated pursuant to E.O. 13224, as amended, for having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, the IRGC-QF.

The Al-Qatirji Company controls the following vessels, which it uses to transport Iranian petroleum: Guyana-flagged BARON (IMO: 9080493), Iran-flagged ROMINA (IMO: 9114608), Guyana-flagged CHLOE (IMO: 9173745), Palau-flagged JOEL (IMO: 9198094), Iran-flagged LOTUS (IMO: 9203784), Panama-flagged REX 1 (IMO: 9219056), Guyana-flagged RAMONA I (IMO: 9233222), Barbados-flagged LELIA (IMO: 9258870), Barbados-flagged ELINE (IMO: 9292486), Panama-flagged CELINE (IMO: 9305609), Guyana-flagged MIA (IMO: 9018464), and Guyana-flagged LIA (IMO: 9041057). The Al-Qatirji Company has coordinated oil shipments worth tens of millions of dollars with the IRGC-QF using the BARON and Iran-flagged STAR 5 (IMO: 9150377).

The Al-Qatirji Company is the ultimate beneficial owner of the LELIA, JOEL, ELINE, and CELINE. The Al-Qatirji Company proposed to return these vessels to the IRGC-QF to settle tens of millions of dollars’ worth of debts. 

The LELIA, ELINE, and CELINE are managed and operated by India-based Salina Ship Management Pvt Ltd. Panama-based Bluespectrum Shipping S.A. serves as the registered owner, ship manager, and operator of the JOEL.

Salina Ship Management Pvt Ltd and Bluespectrum Shipping S.A. are being designated pursuant to E.O. 13224, as amended, for having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, the Al-Qatirji Company. The LELIA, ELINE, and CELINE are being identified as blocked property in which Salina Ship Management Pvt Ltd has an interest. The JOEL is being identified as blocked property in which Bluespectrum Shipping S.A. has an interest.

The REX 1 is managed, owned, and operated by Lebanon-based Softwater Navigation Holding Ltd.. The BARON is managed and owned by Lebanon-based Pearl Shipping & Trading Ltd. The RAMONA I is owned by Panama-based Elias Shipping & Trading Group SA. Iran-based Moshtaq Tejarat Sanat Co JSC is the registered owner of the STAR 5. Marshall Islands-based Nativa Management Ltd is the owner and manager of the LIA. Iran-based Amitis Jazireh Kish Ship Management Co LLC is the ship manager of the ROMINA. Seychelles-based Veline Shiptrade Incorporated is the owner and operator of the MIA. 

Softwater Navigation Holding Ltd., Pearl Shipping & Trading Ltd, Elias Shipping & Trading Group SA, Moshtaq Tejarat Sanat Co JSC, Nativa Management Ltd, Amitis Jazireh Kish Ship Management Co LLC, and Veline Shiptrade Incorporated are being designated pursuant to E.O. 13224, as amended, for having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, the Al-Qatirji Company.

The REX 1 is being identified as blocked property in which Softwater Navigation Holding Ltd. has an interest. The BARON is being identified as blocked property in which Pearl Shipping & Trading Ltd has an interest. The RAMONA I is being identified as blocked property in which Elias Shipping & Trading Group SA has an interest. The STAR 5 is being identified as blocked property in which Moshtaq Tejarat Sanat Co JSC has an interest. The LIA is being identified as blocked property in which Nativa Management Ltd has an interest. The ROMINA is being identified as blocked property in which Amitis Jazireh Kish Ship Management Co LLC has an interest. The MIA is being identified as blocked property in which Veline Shiptrade Incorporated has an interest. The LOTUS and the CHLOE are being identified as blocked property in which the Al-Qatirji Company has an interest.

Al-Qatirji Company Leadership

Hussam Bin Ahmed Rushdi Al-Qatirji (Hussam Al-Qatirji) has become a leader of the Al-Qatirji Company since the death of Muhammad Al-Qatirji in mid-2024. Executives of the Al-Qatirji Company have met directly with senior officials of the IRGC-QF, as well as with their other financial supporters, including sanctioned IRGC-QF-backed Houthi financial official Sa’id al-Jamal. Hussam Al-Qatirji, together with Muhammad Agha Ahmed Rashdi Qatirji, works on the Al-Qatirji Company’s oil portfolio. ‘Abbas Katerji, Muhammad Al-Qatirji’s son, also works for the Al-Qatirji Company.

Hussam Al-Qatirji is being designated pursuant to E.O. 13224, as amended, for having acted or purported to act for or on behalf of, directly or indirectly, the Al-Qatirji Company. Hussam Al-Qatirji was previously designated pursuant to E.O. 13573 on November 9, 2020 for his role in brokering the Syrian regime’s oil trade with ISIS. 

Muhammad Agha Ahmed Rashdi Qatirji and ‘Abbas Katerji are being designated pursuant to E.O. 13224, as amended, for having acted or purported to act for or on behalf of, directly or indirectly, the Al-Qatirji Company. 

SANCTIONS IMPLICATIONS 

As a result of today’s action, all property and interests in property of these individuals and entities named above, and of any entities that are owned, directly or indirectly, 50 percent or more by them, individually, or with other blocked persons, that are in the United States or in the possession or control of U.S. persons must be blocked and reported to OFAC. OFAC’s regulations generally prohibit all dealings by U.S. persons or within the United States (including transactions transiting the United States) that involve any property or interests in property of designated or blocked persons. U.S. persons must comply with OFAC regulations, including all U.S. citizens and permanent resident aliens regardless of where they are located, all persons within the United States, and all U.S.-incorporated entities and their foreign branches. Non-U.S. persons are also subject to certain OFAC prohibitions. For example, non-U.S. persons are prohibited from causing or conspiring to cause U.S. persons to wittingly or unwittingly violate U.S. sanctions, as well as engaging in conduct that evades U.S. sanctions. Violations of OFAC regulations may result in civil or criminal penalties. OFAC may impose civil penalties for sanctions violations based on strict liability, meaning that a person subject to U.S. jurisdiction may be held civilly liable even if such person did not know or have reason to know that it was engaging in a transaction that was prohibited under sanctions laws and regulations administered by OFAC. OFAC’s Economic Sanctions Enforcement Guidelines provide more information regarding OFAC’s enforcement of U.S. economic sanctions, including the factors that OFAC generally considers when determining an appropriate response to an apparent violation. For additional information on complying with U.S. sanctions and export control laws, please see Department of Commerce, Department of the Treasury, and Department of Justice Tri-Seal Compliance Note.

Furthermore, engaging in certain transactions with the individuals designated today entails risk of secondary sanctions pursuant to E.O. 13224, as amended. Pursuant to this authority, OFAC can prohibit or impose strict conditions on the opening or maintaining in the United States of a correspondent account or a payable-through account of any foreign financial institution that knowingly conducted or facilitated any significant transaction on behalf of a Specially Designated Global Terrorist. 

The power and integrity of OFAC sanctions derive not only from OFAC’s ability to designate and add persons to the SDN List, but also from its willingness to remove persons from the SDN List consistent with the law. The ultimate goal of sanctions is not to punish, but to bring about a positive change in behavior. For information concerning the process for seeking removal from an OFAC list, including the SDN List, please refer to OFAC’s Frequently Asked Question 897 here. For detailed information on the process to submit a request for removal from an OFAC sanctions list, please click here.

Click here for more information on the individual and entities identified today.

###

As Prepared for Delivery

I am honored to join you at PIIE, an institution that has done as much as any to help policymakers and the public think through the trade-offs that animate the thorniest questions of economic policy. I am grateful to Adam Posen for extending his welcome; to Caroline Atkinson, our distinguished moderator; and to all of you for joining us.

I am privileged to lead Treasury’s Office of Economic Policy in the Biden Administration. Our team works to inform the Administration’s policymaking process with rigorous economic analysis and to understand the economic impact of our existing policies. Today I am excited to think through with all of you a topic of central importance to the U.S. economy and to our Administration’s goals: the state of and outlook for American business investment.

The Biden Administration has promoted policies encouraging business investment because it is necessary to improve outcomes for American families in the long run. For a prosperous corporate sector to truly benefit families and workers, businesses must feel confident investing their profits to generate new jobs, opportunities, and innovations. And by recognizing the public sector’s role in creating incentives to solve market failures in strategically important industries like clean technology and semiconductors, we can expand our economy’s ability to produce in the long run: a strategy that Secretary Yellen has called “modern supply-side economics.”

Business investment has been surprisingly strong in the post-pandemic economy. Higher interest rates raise firms’ borrowing costs and are typically expected to slow investment growth. Higher uncertainty around macroeconomic forecasts in the post-pandemic expansion should also have slowed investment. But instead, business investment has grown faster in the United States than before the pandemic. I will begin by considering the post-pandemic performance of U.S. private nonresidential fixed investment (business fixed investment, or “BFI”) against three counterfactuals: historical experience, forecasters’ expectations, and international comparators. I will show that U.S. BFI has outperformed all three counterfactuals since the pandemic. 

The well-documented surge in construction of high-tech manufacturing facilities related to public incentives in the CHIPS and Inflation Reduction Act explains much of the outperformance. There’s more to it than just those public incentives: I will explore evidence that global investors perceive abnormal returns to U.S. investment even outside those strategic sectors, including the rise in entrepreneurship and the rise in foreign direct investment into the United States. But the contributions of CHIPS and the IRA to the investment boom are palpable.

Finally, I will consider the outlook for business investment. The tailwind from manufacturing construction cannot continue in perpetuity and may become a drag on BFI growth in the coming years as groundbreakings recede. But if incentives to invest in the clean energy and semiconductor space persists, investors’ focus is likely to shift from building those factories to bringing them online and staffing them, creating upside for equipment and intellectual property investment. Any steps by the next Administration to weaken these important incentives risks slowing investment growth, and thereby undermining the important progress that American businesses have made expanding our productive capacity.

Three Counterfactuals for Assessing Business Investment

Historical Business Cycle Behavior

First, let me consider a historical counterfactual. Figure 1 shows BFI as a share of GDP since the COVID business cycle peak (blue), compared with the analogous period in the Great Recession and Recovery (orange), and the average behavior in all U.S. business cycles since 1971 (dotted). Typically, investment tends to fall as a percent of GDP in a recession and to continue to contribute less well into the recovery.  This was especially the case in the 2008 Great Recession, when business investment as percent of GDP fell by more than 2 percentage points.  In recent years, business investment has bucked that trend, remaining at roughly the same share of GDP since before COVID: a better outcome than after every other recession since 1980. Indeed, in this cycle, American businesses invested $625 billion more than if overall growth had been the same but investment followed its usual historical pattern.^[1]

Figure 1

Notes: Business cycle peaks are the National Bureau of Economic Research’s quarterly business cycle peaks. “Business fixed investment” is private nonresidential fixed investment. Source: Bureau of Economic Analysis; National Bureau of Economic Research; U.S. Treasury calculations. 

Professional Forecasters

A second benchmark: what did economic forecasters expect for business investment growth earlier in the cycle? U.S. business investment has generally outpaced economists’ “conventional wisdom,” as measured both by consensus forecasts and using conventional modeling tools.

Figure 2 shows actual calendar-year growth in business investment (blue bars) for 2022-2024, alongside the Blue Chip consensus forecasts for October 2019 (red bars) and October 2022 (green bars). Realized investment has outpaced the pre-COVID and post-COVID forecasts. The pre-COVID forecasts from 2019 reflected the expectation that a historically middling rate of business investment growth between 3 and 4 percent would persist in the years ahead. Of course, those forecasts were missed significantly in 2020 as investment collapsed during the pandemic, and were beaten significantly in 2021 amid the reopening. But even once aggregate growth normalized in 2022, investment has continued to rise at a pace significantly above the pre-COVID forecasts, The post-COVID forecasts from October 2022 reflected an environment where the Federal Reserve’s interest rate hikes were well underway and markets expected persistently higher rates. Actual business investment growth outperformed each of these forecasts from 2022 to 2024 to date.

Figure 2

Notes: Actual investment growth reflects the actual annual average growth rate in private nonresidential fixed investment. Blue Chip Forecasts are the consensus forecasts for the same reported by Blue Chip Economic Indicators in October 2019 and October 2022. *For 2024, an estimate of actual growth is shown assuming that reported growth rate in the first three quarters of 2024 persists in the fourth quarter. Source: Bureau of Economic Analysis; Blue Chip Economic Indicators; U.S. Treasury calculations. 

It is useful to consider what sort of mechanical logic drove those prevailing forecasts (pre-COVID and post-COVID) for historically middling business investment growth. In the classical accelerator model, changes in the capital stock are driven by changes in output. Firms invest based on their desired level of capital, itself proportional to output, to maximize their expected future profits, not simply because they currently have high profits or substantial retained earnings. Capital then increases when output growth increases; that is, businesses invest more when the economy grows faster.

Figure 3 implements the Jorgensen-Siebert (1968) accelerator model, in which investment depends on recent lags to overall output growth. In the immediate pandemic recovery, these models predicted a quick rebound in investment, which was indeed matched by reality. But once the economy cooled from that initial burst of growth, the models called for slower investment growth as shown on the right side of Figure 3. From the second half of 2022 through 2024, investment grew significantly faster than a conventional accelerator model would imply. Firms were investing more quickly than conventional models implied.

Figure 3

Other Advanced Economies

Comparing the U.S. experience to other advanced economies provides a third counterfactual. Global challenges including the upturn in inflation and the ensuing increase in global interest rates impacted other advanced economies (albeit to varying degrees), but something has been markedly different with respect to American investment.

It has been widely recognized that aggregate U.S. growth has run faster than that of other G7 economies.^[2] And investment is an important contributor to that outperformance. Figure 4 compares the change in real investment from pre-pandemic levels—the 2019 average—to the most recent four quarters ending 2024:Q2 across the G7. Comparing similar concepts of business investment across countries can be challenging, but Figure 4 seeks to identify the closest proxy possible in each country to the U.S. concept of business investment: real capital formation by private actors excluding residential investment.

By these measures, U.S. outperformance is quite striking: business investment has risen almost 17 percent since 2019, nearly double the closest other G7 country (Italy). Indeed, a few G7 countries are still seeing real investment levels below that which prevailed over the pandemic. To be sure, other G7 countries have faced different challenges than the United States, not least Europe’s proximity to shocks from the Russian invasion of Ukraine. But U.S. outperformance is striking nonetheless.

Figure 4

Notes: Data for other countries seek to mirror the U.S. BFI concept as closely as possible given each country’s national accounts structure. United Kingdom is real gross fixed capital formation for business investment. Japan is real gross private non-residential domestic investment. Canada is business fixed investment less residential structures investment, deflated by the gross fixed capital formation implicit deflator. France is non-government gross fixed capital formation less dwelling investment, deflated by the gross fixed capital formation implicit deflator. Germany is private fixed investment less residential construction, deflated by the gross fixed capital formation implicit deflator. Italy is gross fixed capital formation less fixed investment in housing and general government expenditure on gross fixed investment, deflated by the gross fixed capital formation implicit deflator. Source: Statistics Canada; Institut National de la Statistique/Economique (France); OECD; Deutsche Bundesbank and Federal Statistical Office (Germany); Instituto Nazionale di Statistica (Italy); Cabinet Office of Japan; Office for National Statistics (U.K.); U.S. Bureau of Economic Analysis; Haver Analytics; U.S. Treasury calculations. All data seasonally adjusted, either by the source or with X-13-ARIMA.

Figure 5 presents the time series of real business fixed investment across each G7 economy, indexed to 2019 levels. The United States generally kept pace with Italy and France in 2021, but has pulled away more recently.

Figure 5

Notes: Data for other countries seek to mirror the U.S. BFI concept as closely as possible given each country’s national accounts structure. United Kingdom is real gross fixed capital formation for business investment. Japan is real gross private non-residential domestic investment. Canada is business fixed investment less residential structures investment, deflated by the gross fixed capital formation implicit deflator. France is non-government gross fixed capital formation less dwelling investment, deflated by the gross fixed capital formation implicit deflator. Germany is private fixed investment less residential construction, deflated by the gross fixed capital formation implicit deflator. Italy is gross fixed capital formation less fixed investment in housing and general government expenditure on gross fixed investment, deflated by the gross fixed capital formation implicit deflator. Source: Statistics Canada; Institut National de la Statistique/Economique (France); OECD; Deutsche Bundesbank and Federal Statistical Office (Germany); Instituto Nazionale di Statistica (Italy); Cabinet Office of Japan; Office for National Statistics (U.K.); U.S. Bureau of Economic Analysis; Haver Analytics; U.S. Treasury calculations. All data seasonally adjusted, either by the source or with X-13-ARIMA.

Drivers of U.S. Outperformance

Construction for High-Tech Manufacturing

I will turn now to candidate explanations for the performance of business investment in the United States.  First, decomposing investment from an accounting perspective can help shed some light. The national accounts divide business investment into structures investment (construction), equipment investment (physical capital expenditures outside construction), and intellectual property investment (including research and development, software, and other non-physical capital formation). Figure 6 decomposes investment growth along these lines, further dividing structures investment into construction for manufacturing and non-manufacturing.

Over the 35 years leading up to the Great Recession (left bar) and the 12 years following the Global Financial Crisis (middle), the average composition of business investment growth was largely consistent: significant contributions from investment in equipment and in intellectual property, with some small varying contribution from changes in structures investment (construction) in non-manufacturing sectors. Investment in manufacturing structures (factory construction) made no contribution on average.

But since 2021, the picture has looked different; average contributions from equipment and intellectual property have been largely consistent, but a new contributor has appeared: construction for manufacturing structures (essentially, factory building). Factory construction has added more than 1 percentage point at an annual rate to BFI growth on its own, explaining most of the elevated rate of BFI growth relative to history.

Figure 6

Notes: Growth in private nonresidential fixed investment is decomposed into contributions from equipment, intellectual property, manufacturing structures, and other structures over the indicated time periods. Contributions are inferred from the given subcomponents’ published contributions to private fixed investment growth, and then scaled by the ratio of private nonresidential fixed investment growth (BFI growth) to BFI growth’s contribution to overall private fixed investment growth. Source: Bureau of Economic Analysis; U.S. Treasury calculations. 

The surge in factory construction is well documented: spending has more than doubled in real terms since 2021 and it has further increased since then.^[3] Of course, one should not expect this surge to continue in perpetuity, so its contributions to business investment growth should dwindle. But it has reflected a new kind of private investment that helps explain the resilience of overall business investment.  Data from the Census Bureau allows us to further decompose the surge in manufacturing construction. Figure 7 compares the composition of real manufacturing construction spending on average from 2005-2022 to the average since the beginning of 2023. Factories in “computer, electrical, and electronic” manufacturing are the obvious source of the surge—a category that includes semiconductors and electric vehicle batteries. This is consistent with the CHIPS and Science Act and the Inflation Reduction Act achieving their aim of encouraging private investment in semiconductor and clean technology manufacturing. 

Figure 7

Notes: Value of private construction put in place for manufacturing decomposed by detailed type. Monthly at a seasonally adjusted, annualized rate. Nominal spending is deflated by the producer price index for intermediate demand materials and components for construction. Source: U.S. Census Bureau; Bureau of Labor Statistics; U.S. Treasury calculations. 

Here, international context is again helpful to identify the drivers of the shift. No harmonized data series provides an exact comparison to the United States, but comparable data indicators help unveil the relevant trends. Importantly, the boom appears to be uniquely American.

Other advanced economies have not experienced similar increases, according to roughly analogous data sets measuring some concept of real construction for manufacturing purposes (Figure 7). Japan has had seen increases in the floor area of new manufacturing over the past year, but construction remains below pre-pandemic levels. Germany’s real new construction spending on factory and workshop buildings has remained relatively stable over the past decade. Notably, the United Kingdom and Australia did see some meaningful increases in real industrial construction in 2022 and 2023. But those series have leveled off or fallen since then, over the period in which U.S. manufacturing construction has nearly doubled. 

Figure 8

Notes: U.S. Value of Private Construction Put in Place for Manufacturing, U.S. Census Bureau. Monthly at a seasonally adjusted, annualized rate. Nominal spending deflated by the Producer Price Index for Intermediate Demand Materials and Components for Construction, Bureau of Labor Statistics. United Kingdom Construction Output: Other New Work, Private Industrial, Office for National Statistics. Annual millions of chained 2019 Pounds. Japan Building Starts, Floor Area: Manufacturing, The Ministry of Land, Infrastructure and Transport. Annual millions of square meters, seasonally-adjusted by authors. Germany New Construction: Factory and Workshop Buildings: Estimated Costs, Federal Statistical Office. Annual millions of chained 2011 Euros. Australia Private New Capital Expenditure: Manufacturing: Buildings/Structures, Australian Bureau of Statistics. Annual millions of chained FY 2021 Australian Dollars.

High Returns to Private Capital

It is clear that the factory building boom explains a significant share of business investment’s outperformance since the pandemic, and it is clear that the boom reflects a surge in areas encouraged by the CHIPS and Science Act and the Inflation Reduction Act. But as shown back in Figure 4, even if the contribution from factory-building disappeared, other components of BFI are still growing at higher levels than history, despite the headwind of higher interest rates.

So factory-building alone cannot be the whole story. American businesses are still investing as if they expect abnormally high returns to investing in the United States, even outside those sectors explicitly encouraged by the Biden Administration policies. 

Indeed, estimates of the return to all private capital—while difficult to observe directly—suggest that realized returns to investment remain historically high. Observing these high returns gives businesses confidence that their investments will pay off in the future. Perhaps best understood as the “aggregate return on all private investment,” the return to all private capital reflects the total returns generated by the full capital stock of the United States. Estimates vary, but Figure 9 uses the methodology developed in Furman (2015). This measure of the return to private capital has hovered around 7 percent since 2015, a figure that remains well above today’s elevated borrowing costs. This calculation is only available through 2023, but strong corporate profit growth and high recent returns in public equity markets, even relative to higher interest rates, suggest that businesses are observing no slowdown in returns available in the market. 

Figure 9

Notes: The return to all private capital is measured as in Furman (2015), as the private capital income as a percent of the prior year’s private capital stock. Private capital income is defined as the sum of 1) corporate profits excluding federal government tax receipts on corporate income, 2) net interest and miscellaneous payments, 3) rental income of all persons, 4) business current transfer payments, 5) current surpluses of government enterprises, 6) property and severance taxes, and 7) the capital share of proprietors’ income, where the capital share was assumed to match the capital share of aggregate income. The private capital stock is defined as the sum of 1) the net stock of produced private assets for all private enterprises, 2) the value of total private land inferred from the Financial Accounts of the U.S., and 3) the value of U.S. capital deployed abroad less foreign capital deployed in the U.S. Source: Bureau of Economic Analysis; Federal Reserve Board; U.S. Treasury calculations. 

There are two pieces of evidence suggesting that business leaders expect these high returns to continue. The first is that more Americans are starting firms. The higher rate of start-ups suggests that more founders expect strong returns from starting businesses than otherwise. There has been a well-recognized^[4] surge in applications to start new businesses since the pandemic, with over 19 million new applications since the end of 2020. While the pace of new business applications has eased somewhat from its heights last year, as shown in Figure 10, that pace remains well above the steady pre-COVID rate. While business formation data for the pandemic period are not fully available, application rates are predictive of actual business formations. Actual business formations from the subsequent eight quarters have a correlation coefficient of +0.9 with applications from likely employers.^[5]

Figure 10

Notes: Applications with planned wages are those that include an explicit date when wages will first be paid. High-propensity business applications are those that the Census Bureau considers likely to pay wages, including those with planned wages as well as other indicators. Source: U.S. Census Bureau. 

The surge in business applications following the pandemic is so sharp that one might wonder whether it truly reflects a rise in entrepreneurship, or whether it may be some measurement artifact related to a pandemic-era distortion. However, several pieces of evidence suggest that the surge is real and no well-supported alternative explanation has been offered a few years into this trend.

First, as shown in Figure 10, the surge is not confined to the broadest set of business applications, which includes many sole proprietorships or other entities that may not fit prevailing understandings of a “small business” (left panel). A similar surge is present for those applications the Census considers having a high propensity to pay wages (middle panel), as well as those who indicate a date on which they will begin paying wages (right panel). Second, the surge follows the patterns of broader post-COVID economic changes. Haltiwanger (2022)^[6] showed that the surge was concentrated in industries likely well suited to a work-from-home environment, such as non-store retailers and professional, scientific, and technical services. Decker and Haltiwanger (2023)^[7] examined the geographic distribution of applications and showed they were concentrated in “donuts” around urban centers, consistent with post-pandemic residential and workplace shifts. CEA (2024)^[8] examines a broader set of administrative data that helps establish the veracity of the surge.

While much more work will be done to understand the surge, the evidence suggests that there is a real impulse here. This is not simply a rebound from the pandemic. There are many candidate explanations: the prevalence of remote work or the gig economy making the decision to start a business less costly or risky, the rise in household wealth experienced since the pandemic enabling more people to risk opening businesses, or even a broader shift in cultural attitudes toward risk-taking. In any case, we observe that more Americans are starting small businesses at a faster rate just as those businesses are playing a growing role in our economy. It is worth noting that those businesses need capital— phones, computers, software, printers, and cars — whether they are launched in the garage, the basement, or an incubator.

A second piece of evidence that business leaders are perceiving higher than normal returns is the picture from inbound foreign direct investment. During the prior expansion, FDI into the United States generally comprised between 10 and 25 percent of global FDI, as shown in Figure 11. But it has spent much of the post-pandemic recovery above that range. More recently, it has settled back into the high end of its old range, but United States is clearly attracting a larger share of global FDI in this cycle than the last. This trend likely has many drivers, but it is consistent with business leaders perceiving especially high returns to investment in the United States.

Figure 11

Notes: Inbound foreign direct investment (FDI) is the value of investment from foreign investors flowing into resident U.S. firms as a proportion of all such flows globally. Inbound flows are net of transactions that decrease the total investment of foreign firms in U.S. enterprises. Source: OECD; U.S. Treasury Calculations. 

Distributional Perspectives

I will turn now to the distributional implications of strong U.S. business investment, with a particular focus on two elements that we have already discussed: the investment surge in clean energy technologies associated with the Inflation Reduction Act and the increase in U.S. entrepreneurship.

Geographical Distribution of High-Tech Manufacturing Investments

We analyze the geographic and socioeconomic distribution of clean energy investment announcements using data from the Clean Investment Monitor (CIM). The CIM is a joint product of the Massachusetts Institute of Technology and the Rhodium Group that catalogs and maps U.S. clean energy investments before and after the IRA passed. Since the IRA passed, clean investments have been landing in more economically disadvantaged counties: those with below average wages, incomes, employment rates, and college graduation rates. 

More than 75 percent of post-IRA clean investments have gone to counties with below-average median incomes, as shown in Figure 12; more than 85 percent have gone to counties with below-average college graduation rates. This is true across all regions of the country and all technologies supported by the IRA; the investment and benefits tend to accrue to disadvantaged counties. We detailed these findings further in Treasury (2024).^[9]

Figure 12

Notes: Median household income is the 2022 value. College graduation rate, defined as a Bachelor’s degree or higher, is the 2022 value from the American Community Survey. Source: Clean Investment Monitor; U.S. Census Bureau; U.S. Treasury calculations. 

Racial Distribution of Self-Employment

One underappreciated aspect of the entrepreneurship surge is that the population of Americans working for themselves is growing more diverse. Self-employed workers reflect an important subset of small business owners: those who work for profit in their own unincorporated business.^[10] The share of self-employed Americans who are Black is also near its all-time high after surging throughout the expansion (Figure 12). This observation is consistent with data from the Survey of Consumer Finances showing that Black business ownership grew faster between 2019 and 2022 than over the previous thirty years.^[11]

Figure 13

Notes: Non-agricultural industries. Data are smoothed with a three-month moving average. Data are not seasonally adjusted, though seasonal adjustment with X-13-ARIMA has a negligible impact on the series. Source: Bureau of Labor Statistics; U.S. Treasury calculations. 

Outlook: Headwinds and Tailwinds

U.S. business investment is outperforming history, expectations, and that of our peer countries. But the outlook for the coming years remains uncertain. We have little historical precedent for the next phase of clean energy and semiconductor investment. We cannot expect the same abnormal growth in manufacturing construction that has been so important to investment in the recent past, but we should expect new forms of investment as those factories come online. We try to stay out of the forecasting business in the Administration, but Goldman Sachs argued this week^[12] that equipment investment will boost growth in BFI by 2 percentage points next year, as IRA and CHIPS-factories are built out. Goldman believes this effect will offset most of the drag from slower factory construction.

An important risk to that outlook, though, is the potential that the incentives for continued investment in the clean technology and semiconductor space are reduced under the next Administration. These incentives are an important mechanism for encouraging more private investment, as we have seen in recent years. And any steps to weaken them threaten to undermine that progress.

Financial markets largely expect interest rates to continue to fall over the course of the year, unwinding one of the principal headwinds for business investment this cycle. The policy landscape will surely impact the outlook as well. Lower tax rates on corporations can increase near-term investment, but trade-offs between such near-term fiscal expansion and long-term fiscal sustainability may be tested more than ever before. The prospect of broadly applied tariffs also stands to weigh on investment. Goldman Sachs found that the increased tariffs of 2019 weighed on investment by increasing firms’ input costs, baiting retaliatory tariffs against U.S. goods, and adding to broader policy uncertainty. Taken together, Goldman found that the 2019 tariff increases were associated with a 1-1.6 percent fall in total investment.^[13] 

Despite the near-term uncertainty, U.S. businesses have been persistently investing at historically robust rates since the pandemic, with more Americans starting businesses and more global investors looking to the United States to invest. The high level of investment has grown and will continue to grow the capital stock, even if further growth in investment itself subsides, driving faster growth of the capital stock and therefore our potential output. There is much reason to be optimistic that the business sector’s success growing our productive capacity will persist in the years ahead.

###

---

_{[1] Actual business fixed investment from 2020:Q1 to 2024:Q3 was $16,287 billion, when summed over periods. As a counterfactual, we measure what business fixed investment would have been if actual nominal GDP figures were realized over that period, but business fixed investment as a share of GDP followed the average pattern depicted in the dotted line in Figure 1; this is $15,661 billion, for a difference of $626 billion.}

_{[2] See, for example, Ben Harris & Robin Brooks, The U.S. Recovery from COVID-19 in International Comparison (Brookings 2024).}

_{[3] Van Nostrand, Eric, Tara Sinclair, and Samarth Gupta. “Unpacking the Boom in U.S. Construction of Manufacturing Facilities.” U.S. Department of the Treasury. June 27, 2023. See Appendix for more detail on the choice of deflator used for measuring manufacturing construction in these remarks.}

_{[4] See, for example, U.S. Department of the Treasury. U.S. Business Investment in the Post-COVID Expansion (June 2024); and Council of Economic Advisers. New Business Surge: Unveiling the Business Application Boom through an Analysis of Administrative Data (January 2024).}

_{[5] “Likely employers” are those the Census Bureau defines as “high-propensity” applications. See the notes to Figure 10 for more detail.}

_{[6] Haltiwanger, John C. “Entrepreneurship during the COVID-19 pandemic: Evidence from the business formation statistics.” Entrepreneurship and Innovation Policy and the Economy 1, no. 1 (2022): 9-42.}

_{[7] Decker, Ryan, and John Haltiwanger. “Surging Business Formation in the Pandemic: Causes and Consequences.” Brookings Papers on Economic Activity (2023): 3-24.}

_{[8] Council of Economic Advisers. New Business Surge: Unveiling the Business Application Boom through an Analysis of Administrative Data (January 2024).}

_{[9] Van Nostrand, Eric; Ashenfarb, Matthew. The Inflation Reduction Act: A Place-Based Analysis. (2023).}

_{[10] This note uses data on self-employed workers from the Current Population Survey; for more detail on the self-employment classification, see Bureau of Labor Statistics: Concepts and Definitions (CPS).}

_{[11] Federal Reserve Board, Survey of Consumer Finances, Business Equity by Race or Ethnicity (1989-2022).}

_{[12] Goldman Sachs. U.S. Economics Analyst. 2025 Capex Outlook: A Gradual Rebound After the Factory-Building Boom (Peng).}

_{[13] Id.}

WASHINGTON — Today, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) is sanctioning Abdel Rahman Joma’a Barakallah (Barakallah) for his leadership role in the Rapid Support Forces (RSF), a primary party responsible for the ongoing violence against civilians in Sudan since April 2023. Barakallah led the RSF’s campaign in West Darfur, which was marked by credible claims of serious human rights abuses, including targeting of civilians, conflict-related sexual violence (CRSV), and ethnically motivated violence. This action is in furtherance of the United Nations Security Council’s November 8 designation of Barakallah and fellow RSF commander Osman Mohamed Hamid Mohamed, who was previously designated by the Department of the Treasury in May 2024. 

“Today’s action underscores our commitment to hold accountable those who seek to facilitate these horrific acts of violence against vulnerable civilian populations in Sudan,” said Acting Under Secretary of the Treasury for Terrorism and Financial Intelligence Bradley T. Smith. “The United States remains focused on supporting an end to this conflict and calls on both sides to participate in peace talks and ensure the basic human rights of all Sudanese civilians.”

SITUATION IN WEST DARFUR

Amidst the backdrop of broader conflict in Sudan, the RSF and allied militias, have orchestrated violence against local populations in Darfur. Among other acts, the RSF has engaged in targeted killings, looting, the use of heavy artillery in populated areas, and CRSV. Furthermore, the RSF and SAF have both undermined the delivery of humanitarian aid, further threatening the Sudanese people amidst the broader war. Promoting accountability for conflict-related sexual violence committed by groups such as the RSF is a top priority for President Biden, who signed a Presidential Memorandum on November 28, 2022 that directs the U.S. government to strengthen the exercise of its financial, diplomatic, and legal tools to address CRSV. 

Abdel Rahman Joma’a Barakallah (Barakallah) is the RSF West Darfur Commander and the head of the RSF’s operations in the region. Barakallah has been directly involved in the planning of the execution of the RSF’s campaign in West Darfur, including playing a key role in the kidnapping and killing of West Darfur Governor Khamis Abbakar. As a Major General and Commander, Barakallah is responsible for the RSF’s activities in the region and the terror unleashed on the local population. Barakallah is also subject to U.S. visa restrictions for his involvement in a gross violation of human rights, namely for the killing of Governor Abbakar.

Barakallah is being sanctioned pursuant to Executive Order 14098 for being a foreign person who is or has been a leader, official, senior executive officer, or member of the board of directors of the RSF, an entity that has, or whose members have, engaged in actions or policies that threaten the peace, security, or stability of Sudan relating to the tenure of such leader, official, senior executive officer, or member of the board of directors.

SANCTIONS IMPLICATIONS

As a result of today’s action, all property and interests in property of the designated person described above that are in the United States or in the possession or control of U.S. persons are blocked and must be reported to OFAC. In addition, any entities that are owned, directly or indirectly, individually or in the aggregate, 50 percent or more by one or more blocked persons are also blocked. Unless authorized by a general or specific license issued by OFAC, or exempt, OFAC’s regulations generally prohibit all transactions by U.S. persons or within (or transiting) the United States that involve any property or interests in property of designated or otherwise blocked persons. 

In addition, financial institutions and other persons that engage in certain transactions or activities with the sanctioned entities and individuals may expose themselves to sanctions or be subject to an enforcement action. The prohibitions include the making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any designated person, or the receipt of any contribution or provision of funds, goods, or services from any such person. 

The power and integrity of OFAC sanctions derive not only from OFAC’s ability to designate and add persons to the SDN List, but also from its willingness to remove persons from the SDN List consistent with the law. The ultimate goal of sanctions is not to punish, but to bring about a positive change in behavior. For information concerning the process for seeking removal from an OFAC list, including the SDN List, please refer to OFAC’s Frequently Asked Question 897 here. For detailed information on the process to submit a request for removal from an OFAC sanctions list, please click here.

Click here for more information on the individual designated today.

###

WASHINGTON — Today, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) is designating one individual and one entity who support a corrupt patronage network in Bosnia and Herzegovina (BiH) that is attempting to evade U.S. sanctions. This network is directly linked to U.S.-designated Igor Dodik (Igor), the son of Milorad Dodik (Dodik), the U.S.-designated President of BiH’s Republika Srpska (RS), one of two entities that make up BiH. For years, Dodik has used his official position to accumulate personal wealth through companies linked to himself and Igor. This corruption has contributed to an undermining of public confidence in BiH state institutions and the rule of law. 

“RS President Milorad Dodik, his associates, and his enablers continue to use their privileged position to erode public confidence in the regional peace frameworks and institutions that have brought stability and security to Bosnia and Herzegovina,” said Acting Under Secretary of the Treasury for Terrorism and Financial Intelligence Bradley T. Smith. “The United States remains committed to exposing the efforts of Dodik and his family to maintain their corrupt patronage networks.” 

Today’s action bolsters previous designations against the Dodiks by exposing Igor’s blatant attempts to evade U.S. sanctions and targeting the individuals who enable the family’s activities that hinder democratic development in the RS. 

IGOR DODIK’S FINANCIAL NETWORK AND ATTEMPT TO EVADE THE EFFECTS OF U.S. SANCTIONS

The United States designated Dodik on January 5, 2022 pursuant to Executive Order (E.O.) 14033 for being responsible for or complicit in, or having directly or indirectly engaged in, a violation of, or an act that has obstructed or threatened the implementation of, the Dayton Peace Agreement (DPA), as well as for corrupt activities. The United States also previously designated Dodik on July 17, 2017 pursuant to E.O. 13304 for obstructing or threatening to obstruct the DPA. Additionally, the United States designated Dodik’s adult children, Igor and Gorica Dodik, on October 20, 2023 pursuant to E.O. 14033 for having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, Dodik, a person whose property and interests in property are blocked pursuant to E.O. 14033.

The Dodiks’ efforts to enrich themselves led to OFAC’s October 20, 2023 and June 18, 2024 designations of core parts of the Dodiks’ corrupt patronage network, including several entities and individuals under Igor’s direct control. Since the designations, the Dodik network has pursued an aggressive strategy to attempt to circumvent the effects of sanctions, namely by restructuring and reestablishing corporate entities to obfuscate his control and transfer company assets from designated entities. 

Dodik used his official position to direct RS government contracts to a network of private companies that he and Igor oversee. While Igor controls many of the companies in this network, he obfuscates his personal connection to the companies by relying on distinct nominal owners and directors. One of these individuals is Vladimir Perisic (Perisic), the general director of Prointer ITSS (Prointer), designated by OFAC on June 18, 2024. As the general director of Prointer — an entity controlled by Igor — Perisic provided updates to Igor, solicited Igor’s approval and guidance, and executed business decisions based on Igor’s instructions. Additionally, Perisic proposed and followed through on a corrupt kickback scheme involving Prointer after receiving instructions and approval from Igor.

After Kaldera Company’s (Kaldera) designation on June 18, 2024, Igor directed U.S.-designated Milenko Cicic (Cicic) (designated on June 18, 2024) to establish Elpring d.o.o. Laktasi (Elpring), which would serve as a replacement for Kaldera. With Igor’s approval, Cicic established Elpring and coordinated the transfer of all of Kaldera’s assets and operations, to include Kaldera’s employees, to Elpring. Throughout this process, Cicic routinely requested Igor’s approval to make key business decisions and ensured that both Igor and himself would have an account for Elpring which they could exercise control over.

Perisic and Elpring are being designated pursuant to E.O. 14033 for being owned or controlled by, or having acted or purported to act for or on behalf of, directly or indirectly, Igor, a person whose property and interests in property are blocked pursuant to E.O. 14033.

SANCTIONS IMPLICATIONS

As a result of today’s action, all property and interests in property of the persons above that are in the United States or in the possession or control of U.S. persons are blocked and must be reported to OFAC. In addition, any entities that are owned, directly or indirectly, 50 percent or more by one or more blocked persons are also blocked. All transactions by U.S. persons or within (or transiting) the United States that involve any property or interests in property of designated or blocked persons are prohibited unless authorized by a general or specific license issued by OFAC, or exempt. These prohibitions include the making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any blocked person and the receipt of any contribution or provision of funds, goods, or services from any such person. Non-U.S. persons are also prohibited from causing or conspiring to cause U.S. persons to wittingly or unwittingly violate U.S. sanctions, as well as from engaging in conduct that evades U.S. sanctions. OFAC’s Economic Sanctions Enforcement Guidelines provide more information regarding OFAC’s enforcement of U.S. sanctions, including the factors that OFAC generally considers when determining an appropriate response to an apparent violation.

In addition, financial institutions and other persons that engage in certain transactions or activities with the sanctioned entities and individuals may expose themselves to sanctions or be subject to an enforcement action. The prohibitions include the making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any designated person, or the receipt of any contribution or provision of funds, goods, or services from any such person. 

The power and integrity of OFAC sanctions derive not only from OFAC’s ability to designate and add persons to the SDN List, but also from its willingness to remove persons from the SDN List consistent with the law. The ultimate goal of sanctions is not to punish, but to bring about a positive change in behavior. For information concerning the process for seeking removal from an OFAC list, including the SDN List, please refer to OFAC’s Frequently Asked Question 897 here. For detailed information on the process to submit a request for removal from an OFAC sanctions list, please click here.

For identifying information on the individuals and entities sanctioned today, click here.

###