Fed’s Powell: Recovery incomplete, higher inflation unlikely

Most economists say they think the Fed’s continued low rates, further government financial aid and progress in combating the viral pandemic could create a mini-economic boom as soon as this summer. Powell acknowledged the potential for a healthier economy. But he stressed the personal hardships caused by the pandemic, especially for unemployed Americans.

“As with overall economic activity, the pace of improvement in the labor market has slowed,” Powell said. “Although there has been much progress in the labor market since the spring, millions of Americans remain out of work.”

Powell’s focus on the economy’s challenges reflects his reluctance to send any signal that the Fed is considering pulling back on its efforts to boost economic growth and hiring. The Fed cut its benchmark short-term interest rate to nearly zero last March in response to the pandemic recession. It is also purchasing $120 billion a month in bonds in an effort to hold down longer-term rates.

Powell reiterated that those purchases will continue until “substantial progress” has been made toward the Fed’s goals of low unemployment and stable inflation at about 2% annually.

The economy may improve rapidly later this year, Powell said, “but the job is not done yet, the job is not done.”

Powell also downplayed concerns about rising longer-term interest rates and potentially higher inflation, which some analysts worry will result from a burst of spending and growth if the pandemic is brought under control later this year.

The Fed chair also refused to endorse or condemn President Joe Biden’s $1.9 trillion economic rescue package, which is beginning to make its way through Congress. When asked by Sen. John Kennedy, R-La., if he would “be cool” with Congress approving or voting down Biden’s proposal, Powell said, “By either being cool or uncool, I would have to be expressing an opinion. … which I’m not doing.”

Powell has previously endorsed government spending in general to offset the impact of the recession.

The Fed chair also acknowledged that prices could rise later this year if Americans engage in a burst of spending as the coronavirus comes under control.

But Powell emphasized that he doesn’t expect sustained price increases. Inflation has been held down for decades by greater international competition, growing online commerce, and other trends that take time to change, he said.

“I do not expect that we’ll be in a situation where inflation rises to troublesome levels,” Powell said.

Powell’s remarks to the Banking Committee are coming on the first of two days of semiannual testimony to Congress that is required by law. On Wednesday, he will testify to the House Financial Services Committee.

His testimony comes as the economy is showing gradual improvement in key areas, with manufacturing and retail sales rebounding despite a stagnant job market. Still, the steady rise in interest rates has unsettled the stock market. On Monday, the tech-heavy Nasdaq index tumbled a steep 2.5% as the yield on the 10-year Treasury note surged to nearly 1.37%. At the start of the year, the 10-year yield was below 1%.

Powell attributed that increase to optimism about a potential acceleration in growth.

“In a way it’s a statement of confidence on the part of markets that we will have a robust recovery,” Powell said.

Rising rates typically reflect optimism that the economy is poised to expand more quickly. But they can also weaken growth, especially if the Fed were to respond to rising inflation by raising its benchmark rate faster than markets expect.