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 biannual report on monetary policy.
Powell presented the report to the Senate Banking Committee on Tuesday and will speak to the House Financial Services Committee on Wednesday.
“While we should not underestimate the challenges we currently face, the developments indicate an improving outlook for later this year,” Powell said in his prepared remarks to the Senate on Tuesday. “The economic recovery remains uneven and far from complete, and the way forward is very uncertain.”
In these remarks and the question-and-answer session that followed, Powell reiterated his commitment to the accommodative policy that characterized the Fed’s approach to the economic disruption caused by the pandemic and stressed that the central bank was open. to a slight acceleration in inflation. above its 2% target for a while.
Powell also spoke more about how the pre-pandemic economy has benefited Americans at the lower end of the income scale, and the importance of ensuring they can participate in the economic recovery.
“Powell has been very focused on the fact that millions of workers and their families have faced considerable hardship as a result of the pandemic,” said Steve Friedman, senior macroeconomist at MacKay Shields.
Powell has answered numerous questions from Republican senators who are reluctant to sign the $ 1.9 trillion relief package put forward by President Joe Biden and the Democrats in Congress.
Elizabeth Warren, D-Mass., Asked Powell if it is appropriate that inequality weighs on the economy and slows economic growth, to which he replied that income stagnation and low mobility are two factors on which he concentrates.
Members of the Democratic Committee urged Powell to tackle party priorities such as a $ 15 minimum wage and climate change, issues Powell has repeatedly said he leaves to budget makers.
In line with the Fed’s mandate for full employment, Powell reiterated his oft-repeated assertion that the current course of action – keep interest rates down and leverage the central bank’s balance sheet to facilitate purchases of assets – is the best way to alleviate the barriers facing labor market as well as the economy at large.
Powell played down concerns about whether recent policy decisions and a post-pandemic spike in consumer spending could lead to higher inflation – a question recently raised by the former Obama-era National Economic Council director, Larry Summers.
“I really don’t expect that we will be in a situation where inflation will reach worrying levels,” said Powell.
Despite the current fragility of the economy, the recent emergence of green shoots prompted some committee members to push Powell to explain how he envisions the Fed phasing out from its current level of market intervention without destabilizing a system. which has come to expect, if not rely 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 were looking for Powell to articulate the justifications for their preferred fiscal policy positions: Republicans seeking evidence that too many stimulus could backfire, and Democrats pursuing questions to support an argument for continued aggressive fiscal stimulus.
“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.
While Powell did not weigh in on the shape and size of a relief package, he did provide an overview of the economy in broad brushstrokes while asserting that “nothing is more important” than the generalized vaccination.