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Federal Reserve Chairman Jerome Powell began two days of testimony in Congress on Tuesday, in an economic climate – not to mention political – very different from June, the last time the Fed chairman presented his semi-annual report on monetary policy.

Powell makes a presentation to the Senate Banking Committee on Tuesday and to the House Financial Services Committee on Wednesday. He will face tough questions, experts say: Republicans will want to know if a $ 1.9 trillion stimulus package risks exploding inflation, while Democrats will likely push the central bank chief to explain how the pandemic has exacerbated economic inequalities among Americans.

“We’re not out of the woods yet on the virus, and the economy is also quite far from a full recovery,” said Steve Friedman, senior macroeconomist at MacKay Shields. “Powell has been very focused on the fact that millions of workers and their families have faced significant hardship due to the pandemic,” he said.

Powell said the employment growth figures camouflaged a decline in labor force participation, estimating that the actual unemployment rate is likely closer to 10% than the official 6.3% calculated by the Bureau of Labor Statistics for January.

“The unemployment rate really overstates the improvement in the job market. I’m not doing a good job of accounting for the fact that a lot of people have just left the workforce, ”Friedman said. “I think that’s really what his testimony will be about.”

In line with the Fed’s mandate for full employment, Powell is almost certain to reiterate his oft-repeated assertion that the current course of action – keep interest rates down and leverage the central bank’s balance sheet to facilitate asset purchases – is the best way to ease the obstacles facing the labor market as well as the economy in general.

“As the situation improves, the economy falls short of the Fed’s employment targets, and significant progress is needed before we start removing political support,” said Bill Merz, head of research. on fixed income securities at US Bank Wealth Management.

Charlie Ripley, senior investment strategist at Allianz Investment Management, said the topic of inflation is likely to generate some of the most cutting edge questions of the week for the Powell.

“It is likely that lawmakers will address the subject of inflation and asset bubbles as risks to current policy,” Ripley said. “Lawmakers are sure to question Powell about the unintended consequences and risks surrounding current policy decisions,” he said, especially since former Obama-era National Economic Council director Larry Summers, recently raised this concern.

“There is an argument to be made that if vaccinations resume employment will increase, coupled with another round of stimulus funds would lead to higher inflation,” said Scott Cole, founder and chairman of Cole Financial Planning and Wealth Management. “But frankly, we haven’t seen this when employment was at record levels – and there is a lot of work to be done to get some sectors of our economy back on track,” he added.

Despite the current fragility of the economy, the recent emergence of green shoots is also likely to prompt some committee members, especially Republicans, to push Powell to explain how he envisions the Fed phasing out its current level of intervention. in the market without destabilizing a system that has expected, if not counted on, central bank support. “How will the market work when the Fed stops buying?” said Lindsey Piegza, chief economist at Stifel.

Republicans will look for evidence that too many stimulus could backfire, while Democrats will seek support for continued aggressive fiscal stimulus.

Both sides of the aisle will seek Powell to articulate the justifications for their preferred positions on fiscal policy: Republicans will seek evidence that too many stimulus could backfire, while Democrats will pursue questions to support an argument in favor of continuing aggressive fiscal stimulus. “I think there will be a lot of potential stands,” Piegza said.

Committee members are likely to fight fiercely for any kind of statement that could be considered endorsement, said Kenneth Kuttner, professor of economics at Williams College. “I think Republicans will be very keen to find a reason in the political remarks to vote against the $ 1.9 trillion stimulus package,” he said. Democrats are likely to pressure the president to explain the extent and drivers of economic inequality, both in the context of providing greater financial support to individuals and advancing the goal of left with a minimum wage of $ 15.

“Traditionally, the Fed doesn’t like getting into fiscal policy,” Friedman said, adding that Powell has made it clear in recent months that monetary policy alone cannot resuscitate the economy. “I think he’s going to avoid weighing in on the shape and size of the relief, but it’s going to be clear that he sees the household support as necessary,” Friedman said.

This will amount to a verbal cat-and-mouse game, with Powell aiming to provide a sweeping snapshot of the economy while trying to avoid statements that appear to endorse a particular budget strategy or dollar amount.

“I think it will be a partisan discussion along those lines,” said Brad McMillan, chief investment officer at Commonwealth Financial Network. “The Democrats are going to ask him leading questions asking him to develop the weak economy and the risks ahead, trying to lay the foundation for the stimulus package, while the Republicans are going to do the opposite – they are gone.” to try to lay the groundwork to attack the Fed if we get inflation, ”he said.

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