Federal Reserve Chairman Jerome Powell began two days of congressional testimony Tuesday in an economic climate — not to mention political — that is very different from June, the last time the Fed chair gave his semiannual monetary policy report.
Powell presented the report to the Senate Banking Committee on Tuesday and will speak before the House Financial Services Committee on Wednesday.
“While we should not underestimate the challenges we currently face, developments point to an improved outlook for later this year,” Powell said in his prepared remarks delivered to the Senate on Tuesday. “Economic recovery remains uneven and far from complete, and the path ahead is highly uncertain."
In those remarks and the question-and-answer session that followed, Powell reiterated a commitment to the accommodative policy stance that has characterized the Fed’s approach to the economic disruption caused by the pandemic and emphasized that the central bank is open to seeing inflation run slightly above its 2 percent target for a period of time.
Powell also spoke more about how the pre-pandemic economy had benefited Americans at the lower end of the income spectrum, and how important it is to make sure that they can participate in the economic recovery.
“Powell has been very focused on the fact that millions of workers and their families have faced significant hardship because of the pandemic," said Steve Friedman, senior macroeconomist at MacKay Shields.
Powell fielded numerous questions from Republican senators who are reluctant to sign on to the $1.9 trillion relief package advanced by President Joe Biden and Congressional Democrats.
Elizabeth Warren, D-Mass., asked Powell if he agreed that inequality weighs the economy down and stunts economic growth, to which he replied that stagnation of income and low mobility are two factors on which he focuses.
Democratic Committee members pressed Powell to address party priorities such as a $15 minimum wage and climate change, questions Powell repeatedly said he deferred to fiscal policymakers.
In keeping with the Fed’s mandate for full employment, Powell reiterated his oft-repeated assertion that the current course of action — holding down interest rates and leveraging the central bank’s balance sheet to facilitate asset purchases — is the best way to ease the hurdles facing the labor market as well as the broader economy.
Powell downplayed concerns as to whether recent policy decisions and a post-pandemic boost in consumer spending could lead to higher inflation — an issue recently raised by former Obama-era National Economic Council director Larry Summers.
“I really do not expect we’ll be in a situation where inflation rises to troublesome levels” at this time, Powell said.
In spite of the economy’s current fragility, the recent emergence of green shoots prompted some committee members to push Powell to articulate how he envisions the Fed’s gradual withdrawal from its current level of market intervention without destabilizing a system that has come to expect, if not rely on, central bank support.
“How’s the market going to function when the Fed stops buying?” said Stifel chief economist Lindsey Piegza.
Republicans will be seeking evidence that too much stimulus could backfire, while Democrats will look for support for continued aggressive fiscal stimulus.
Both sides of the aisle were angling to have Powell articulate rationales for their preferred stances on fiscal policy: Republicans seeking evidence that too much stimulus could backfire, and Democrats pursuing lines of questioning to support an argument for continued aggressive fiscal stimulus.
“Traditionally the Fed doesn't like to wade into fiscal policy,” Friedman said, although he added that Powell has made it clear over the past several months that monetary policy alone cannot resuscitate the economy.
While Powell did not weigh in on the form and size of a relief package, he provided a snapshot of the economy rendered in broad brushstrokes while maintaining that "nothing is more important" than widespread vaccination.