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Powell Focuses On Economic Needs At A Key Time In Markets And Politics

The US economy is far from over and the Federal Reserve is in no rush to reiterate its support, central bank chairman Jerome H. Powell told lawmakers in a closely watched hearing on Tuesday.

It’s a pledge Mr Powell has made repeatedly over the past 11 months, but on Tuesday it unfolded against a tense backdrop: as Democrats try to push through a 1.9 relief package. trillion dollars through Congress, Republicans say it is too big and could lead to inflation that would hurt consumers and businesses. Markets also began to shake, with investors worried that an overheating economy would cause the Fed to abandon its efforts to support growth.

Speaking to the Senate Banking Committee, Mr Powell declined to weigh in on the Biden administration’s spending plans, but rebuffed the idea raised by several Republican senators that the economy is on the verge of becoming too hot. The economy has lost nearly 10 million jobs since last February, inflation has been too low rather than too high in recent decades, and the prospects for a rapid recovery – though brighter – remain far from d ‘be assured, he said.

“The economic recovery remains uneven and far from complete, and the way forward is very uncertain,” said Powell. “There is a long way to go.”

The Fed plans to keep interest rates close to zero, where they have been since March, while continuing to buy government-backed bonds at a rate of $ 120 billion per month while waiting for the economy to recover. restore. Investors are increasingly concerned that the Fed will slow down these bond purchases sooner or later if inflation starts to rise.

This concern contributes to pushing up interest rates on long-term public debt; they hit their highest level in a year this week. These rates are the basis of business borrowing and mortgage lending, and their rise has also put equity markets in difficulty.

But on Tuesday, Powell reiterated that the Fed plans to continue buying bonds until it sees “further substantial progress” towards its two goals of full employment and stable inflation. America can “expect us to act cautiously, patiently and with a lot of advance warning” when it comes to slowing down that support, Powell said.

The reassurance seemed to help. The S&P 500 closed higher on Tuesday, coming back from a loss of nearly 2% earlier in the day and breaking a weeklong losing streak.

“We are in one of those times of market mania, where the focus is on inflation” and “he was very optimistic, very calm,” said Julia Coronado, founder of MacroPolicy Perspectives and former economist from the Fed. “He continued to turn his attention to the job market.”

Unemployment has fallen sharply after jumping last year, but the official unemployment rate remains almost double its February 2020 level. And job losses have been more severe for members of minority groups and those in employment. less educated. Although spending has rebounded, activity in the service sector remains subdued.

The vaccines are fueling hopes of a stronger and more comprehensive rebound in 2021. Prices are expected to rise temporarily in the coming months, both from last year’s low readings and, potentially, as consumers Spend down savings accrued during foreclosure dinners and restaurant vacations.

But Fed officials have made it clear that they do not expect a sustained acceleration in inflation and that they plan to exceed temporary increases when they reflect on their policies. Price pressures have been stubbornly lukewarm, rather than too high, for decades and in many advanced economies.

Mr Powell said on Tuesday that longer-term inflation trends are “not changing overnight” and that if prices start to rise alarmingly, the Fed has the tools to fight that.

“I really don’t expect us to be in a situation where inflation is going to reach worrying levels,” said Powell. “It’s not a problem this time around, as close as I can imagine.”

He also pushed back against the idea that government spending is about to explode prices.

“There was perhaps once a strong link between budget deficits and inflation – there really hasn’t been any lately,” Powell said. He noted that while he expects inflation to rise in the coming months, there is a distinction between a temporary rise in prices and a sustained rise.

Still, he declined to comment on appropriate government support.

“Today I will really stay away from fiscal policy,” he said at the very start of the hearing. He tiptoed or simply refused to answer questions about minimum wage, size, and the various elements of the White House’s spending proposal. At one point he was asked whether he would be “cool” to pass the spending bill or not.

“I think that by being cool or not cool, I should be expressing an opinion,” Mr. Powell said.

The Fed is politically independent and avoids partisan questions, but it has provided advice to policymakers in Congress and weighed in on socio-economic disparities and financial risks associated with climate change over the past year. Some of this outspokenness has caught the attention of Republicans.

Pennsylvania Republican Senator Patrick J. Toomey on Tuesday warned that the central bank should avoid going beyond its core functions.

“No matter how lofty the goals may be, issues like climate change and racial inequality are simply beyond the remit of our central bank,” Toomey said.

Mr Powell explained how strong labor markets help marginalized people – those without training or those with a criminal record – to succeed. He said the central bank hopes to return to a solid job market, like the one that preceded the pandemic.

The Fed’s bond purchases can help support the economy by lowering long-term interest rates and causing investors to shy away from safer assets, like government bonds, and turn away. to stocks and other more active uses of their cash.

Mr Powell said the economy over the past three months had not “really made” the substantial progress the Fed expected as a prerequisite for slowing its buying, as job gains slowed. But he said progress is expected to “accelerate as the pandemic abates”.

When it comes to the Fed’s main interest rate, the federal funds rate, which helps steer borrowing costs throughout the economy, Powell also took a cautious tone. The Fed wants to achieve full employment, achieve 2% inflation and is convinced that the economy is on the right track for even faster price gains before raising this rate.

“Right now our focus is on providing the economy with the support it needs,” Powell said at one point, summing up his message.

Matt Phillips contributed reporting.

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