The economy has been down by nearly 10 million jobs since last February, prospects for a quick recovery – albeit brighter – remain far from certain, and as Democrats attempt to push through a In relief of $ 1.9 trillion by Congress, Republicans say it is too large and could cause inflation to hurt consumers and businesses.
Speaking against this tense backdrop on Tuesday, Federal Reserve Chairman Jerome H. Powell sent a direct message to lawmakers that the economic outlook remains extremely uncertain and that the central bank must continue its extraordinary efforts to support the economy.
It’s a pledge Mr Powell has made repeatedly over the past 11 months, but it has also resonated in financial markets, which had started to shake as investors feared a rapidly improving economy would prompt the Fed to give up its efforts to support growth. .
In testimony before 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 its way to get too hot and cause inflation.
“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.”
To support growth, the Fed plans to encourage lending and spending by keeping interest rates close to zero, where they have been since March, and continuing to buy large amounts of bonds to keep circulating. money in the financial system. Investors are increasingly concerned that the Fed will slow down these bond purchases sooner or later if inflation starts to rise.
These worried investors had driven stocks down for five consecutive days. On Tuesday, the S&P 500 fell nearly 2% before returning after Mr Powell’s remarks.
In the bond market, interest rates on long-term government debt have climbed to their highest level in a year this week. These rates are the basis of corporate borrowing and mortgages, and their rise has contributed to the nervousness of the stock market.
“We’re in one of those market manic moments where the focus is on inflation,” and “he was very optimistic, very calm,” said Julia Coronado, founder of MacroPolicy Perspectives and former economist at the Fed. “He continued to turn his attention to the job market.”
Mr 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.
Unemployment has fallen sharply after jumping last year, but the official unemployment rate remains close to double its February 2020 level. Job losses have been more severe for members of minority groups and those with less education. 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 longer-term inflation trends don’t “change on the fly,” and 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 phillipscontribution to reports.