WASHINGTON (PA) Federal Reserve Chairman Jerome Powell on Tuesday highlighted the continued weakness in the US economy in remarks suggesting that the Fed sees no need to change its ultra-low interest rate policies anytime soon.
The economic recovery remains uneven and far from complete, and the way forward is highly uncertain, Powell said in testimony before the Senate Banking Committee.
Powells’ comments contrast with the growing optimism of many analysts that the economy will grow rapidly later this year. The outlook also raised concerns about a possible surge in inflation and fueled a sharp rise in long-term interest rates this year.
Most economists say they think the federal government has kept rates low, additional government financial assistance and progress in tackling the viral pandemic could create a mini economic boom as early as this summer. Powell recognized the potential for a healthier economy. But he highlighted the personal hardships caused by the pandemic, especially for unemployed Americans.
As with overall economic activity, the pace of labor market improvement has slowed, Powell said. Although there has been a lot of progress in the job market since the spring, millions of Americans remain out of work.
Powells’ focus on economic challenges reflects his reluctance to send any signal that the Fed is planning to reverse its efforts to spur economic growth and hiring. The Fed cut its benchmark short-term interest rate to near zero last March in response to the pandemic recession. It also buys $ 120 billion in bonds per month in an attempt to keep long-term rates down.
Powell reiterated that these purchases will continue until substantial progress has been made towards the federal government’s goals of low unemployment and stable inflation at around 2% per year.
The economy could improve quickly later this year, Powell said, but the job isn’t done yet, the job isn’t done.
Powell also downplayed concerns about rising long-term interest rates and potentially higher inflation, which some analysts say will result from an explosion in spending and growth if the pandemic is brought under control later this year.
The Fed chairman has also refused to endorse or condemn President Joe Bidens’ $ 1.9 trillion economic bailout package, which is starting to make its way to Congress. When asked by Senator John Kennedy, R-La., If he would be cool with Congress approving or voting against Bidens’ proposal, Powell said: By being cool or not cool, I should express an opinion . … which I don’t do.
The division in Congress over the state of the economy was clearly visible, a key part of the stimulus debate. Committee chair Senator Sherrod Brown, D-Ohio spoke about Americans facing eviction, struggling small businesses, and state and local governments in need of financial help.
Senator Pat Toomey, R-Pa., However, noted that 18 states have unemployment rates below 5% and argued that incomes have returned to pre-pandemic levels.
We are well past the point where our economy is collapsing, Toomey said. In fact, our economy is growing rapidly … There is also a real danger that we have overheating … which can lead to inflation.
Powell has already approved general government spending to offset the impact of the recession. Fed chairmen generally avoid commenting on specific legislation.
The Fed chairman also acknowledged that prices could rise later this year if Americans engage in a spending explosion while the coronavirus is under control.
But Powell stressed that he doesn’t expect sustained price increases. Inflation has been held back for decades by increased international competition, growth in e-commerce and other trends that are slow to change, he said.
In response to a question from Sen. Kyrsten Sinema, D-Ariz., Powell said: We expect inflation to rise. But we do not expect the effects on inflation to be particularly large or persistent.
Powells’ remarks to the Banking Committee come on the first of two days of semi-annual testimony to Congress, which is required by law. On Wednesday, he will testify before the House financial services committee.
His testimony comes as the economy shows gradual improvement in key areas, with manufacturing and retail sales rebounding despite a stagnant job market. Yet the steady rise in interest rates has disrupted the stock market. On Monday, the highly technological Nasdaq index fell 2.5% as the yield on the 10-year Treasury bill jumped to nearly 1.37%. At the start of the year, the 10-year yield was less than 1%.
Powell attributed the increase to optimism about a potential acceleration in growth.
In a way, it’s a statement of confidence from the markets that we will have a robust recovery, said Powell.
In response to a question from Toomey, Powell acknowledged that there is certainly a link between the federal government’s low interest rate policies and rapid increases in the prices of stocks, houses and certain commodities. But he also attributed a large part of the price gains to growing optimism.
For now, interest rates remain extremely low by historical standards. As recently as the fall of 2018, for example, the 10-year yield briefly exceeded 3%. But over the past year, the economy and markets have drawn strength from near record lending rates.
Many analysts are optimistic about the outlook for this year. On Monday, Michelle Meyer, an economist at the Bank of America, raised her forecast for growth this year to 6.5%. It would be the strongest economic growth of the calendar year since 1984.
Yet the job market remains essentially stuck, with employers adding an average of just 30,000 jobs per month over the past three months. The economy is around 10 million jobs below its pre-pandemic level.
Powell was also asked about the Fed’s prospects for creating a digital currency, an initiative that is gaining traction among other central banks. Powell said the Fed is carefully considering whether to issue a digital dollar.
Fed Governor Lael Brainard said last year that the central bank had conducted in-house experiments on a digital currency, in addition to cash. Providing a digital dollar would ensure the public has access to a range of payment options, she said.
Copyright 2021 The Associated Press. All rights reserved.
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