The US economy is far from being healed and the Federal Reserve is in no hurry to reverse its support, Jerome H. Powell, central bank chairman, told lawmakers in a closely watched hearing on Tuesday.
It's a promise Mr Powell has made many times over the past 11 months, but Tuesday it came against a tense background: As Democrats attempt to send a $ 1.9 trillion aid package through Congress, Republicans argue it's too big and can lead to inflation. that would harm consumers and businesses. Markets are also starting to shake as investors worry that an overheated economy will prompt the Fed to withdraw its efforts to support growth.
Speaking before the Senate Banking Commission, Mr. Powell declined to comment on the Biden administration's spending plans, but pushed back on the idea of several Republican senators that the economy is on the verge of getting too hot. The economy has contracted by nearly 10 million jobs since February, inflation has been too low rather than too high in recent decades, and the prospects for a speedy recovery – though better – remain far from assured, he said.
"The economic recovery remains uneven and far from complete, and the road ahead is highly uncertain," said Mr Powell. "There is still a long way to go."
The Fed plans to keep interest rates near zero, where they have been since March, while continuing to buy government-backed bonds at a rate of $ 120 billion a month in anticipation of the economic recovery. Investors have become concerned that the Fed would slow those bond purchases sooner rather than later if inflation starts to rise.
That concern helps drive interest on government debt in the longer term; they rose to their highest point in a year this week. Those interest rates are the basis for business loans and mortgages, and their rise has also sharpened stock markets.
But on Tuesday, Mr. Powell said the Fed intends to keep buying bonds until it sees "substantial further progress" toward its dual goals of full employment and stable inflation. America can "expect us to be careful, patient, and with much forewarning" when it comes to delaying that aid, Mr Powell said.
The reassurance seemed to help. The S&P 500 closed higher on Tuesday, breaking back from a loss of nearly 2 percent earlier in the day, breaking a week-long loss streak.
"Powell and the Fed have pushed back on the idea of pulling the carpet out of the markets," said Gennadiy Goldberg, senior US interest rate strategist at TD Securities. "We're not through this yet."
Unemployment has fallen sharply after an increase last year, but the official unemployment rate remains nearly double the level of February 2020. And job losses are more acute for members of minority groups and those with less education. Although spending has increased, activity in the services sector is still subdued.
Vaccines fuel hopes for a stronger and more complete recovery in 2021. Prices are expected to rise temporarily in the coming months, both compared to last year's weak results and, possibly, due to consumer savings made during the lockdown on restaurant dinners and holidays, spend lower.
But Fed officials have been clear that they do not expect inflation to pick up permanently and that they plan to look past temporary increases when thinking about their policies. Price pressure has been for decades and in many advanced economies stubbornly lukewarm instead of too high.
Mr. Powell said on Tuesday that longer-term inflation trends are not "changing on a dime" and that if prices start to rise in an alarming manner, the Fed has the means to combat it.
"I really don't expect that we will be in a situation where inflation is rising to alarming levels," said Mr Powell. "This is not a problem for this time, as close as I can think of."
He also pushed back on the idea that government spending is poised for prices to get out of hand.
“There may once have been a strong link between budget deficits and inflation – it really hasn't been of late,” said Mr Powell. He noted that while he expects inflation to jump around in the coming months, there is a distinction between a temporary fall in prices and a sustained rise.
Still, he declined to go into how much more government support is appropriate.
"I will really stay away from tax policy today," he said at the start of the hearing. He was tiptoeing or simply declining to answer questions about the minimum wage and size and various parts of the White House spending proposal. At one point he was asked if he would be "cool" with passing the expense bill or not.
& # 39; I think by being cool or uncool I should be expressing an opinion, & # 39; said Mr. Powell.
The Fed is politically independent and deviates from partisan issues, but it has been Provide advice to congressional policymakers and weigh in on socioeconomic inequalities and financial risks associated with climate change over the past year. Some of that outspokenness has caught Republican attention.
Senator Patrick J. Toomey, Republican of Pennsylvania, warned on Tuesday that the central bank should not go beyond its core duties.
"Noble as the goals may be, issues such as climate change and racial inequality simply do not fall within the remit of our central bank," said Mr Toomey.
Mr. Powell spoke about how strong labor markets help marginalized people – those uneducated or those with criminal records – to succeed. He made it clear that the central bank hopes to return to a strong labor market like the one that preceded the pandemic.
The Fed's bond purchases can support the economy by lowering interest rates over the longer term and by incentivising investors from safer assets, such as government bonds, into stocks and other more active uses of their money.
Mr Powell said the economy of the past three months was not "really" has made the substantial progress the Fed is looking for as a condition of slowing down its purchases, as job growth has slowed. But he said there is an expectation that progress should pick up as the pandemic abates.
When it comes to the Fed's main interest rate, the federal funds rate, which helps drive financing costs across the economy, Mr. Powell also took a cautious tone. The Fed wants to achieve full employment, hit 2 percent on inflation, and believes the economy is on track for even faster price hikes before that rate is hiked.
“Right now, our focus is on providing the economy it needs,” said Mr. Powell at one point, summing up his message.
Matt Phillips contributed to reporting.