Federal Reserve Chairman Jerome Powell, who is due to testify Tuesday morning to a congressional panel on the central bank’s response to the pandemic, will tout an economy that has improved rapidly and has spurred hot inflation but requires a continued support for monetary policy.
Since the last time the periodic review took place before the restricted sub-committee on the coronavirus crisis in September, Powell says in prior testimony, widespread vaccinations have spurred the “unprecedented monetary and fiscal policy actions” taken to help the economy weather the Covid-19 pandemic. Indicators of economic production, labor market and consumer spending all came out of depressed levels.
Powell also plans to acknowledge the rapid rise in inflation over the past few months, while continuing to stress that Fed officials believe it will be transitional and move closer to the longer-term target of 2%. It highlights the base effects, or the comparative impact of the low readings of the onset of the pandemic, and supply bottlenecks that are expected to ease among the factors behind recent price gains.
However, as conditions have improved, the pace of gains has been uneven and many economic indicators remain above pre-pandemic levels, he warns. For example, while he expects vaccinations to help the job market, he says that “the unemployment rate remained high in May at 5.8%, and that figure underestimates the lack of jobs, especially since labor market participation has not increased from the low rates that prevailed for most of last year.
Additionally, he notes, the downturn has affected low-wage workers, blacks and Hispanics more disproportionately than other income groups or racial cohorts. “The Fed pursues a monetary policy designed to foster a strong and stable economy that can improve economic outcomes for all Americans. Those who have historically been left behind have the best chance of prospering in a strong economy with plenty of employment opportunities, ”he said.
Still, he credits the Fed’s actions and emergency lending programs for helping the economy get through the initial shock of the pandemic and keeping businesses and markets afloat. “Our actions, taken together, have helped unlock more than $ 2 trillion in funding to support businesses large and small, nonprofits, and state and local governments between April and December 2020. That, at in turn, has helped prevent organizations from shutting down and put employers in a better position to keep workers and hire them as the recovery continues. “
The Fed’s lending facilities have also done their job, he says, supporting markets that had started to seize up at the start of the pandemic. “For example, yields and spreads on municipal bonds began to drop dramatically after it was announced that certain municipal notes would be eligible for our money market fund facility and that we were opening the municipal liquidity facility,” he writes. . This allowed the market to function and state and local governments to access private markets for nearly $ 380 billion at attractive rates from April to December 2020.
Many of those programs are now closed, he adds, as funding through the Cares Act has ended. He says the Fed is reviewing the programs to assess their effectiveness and draw lessons for potential future use.
The Fed released its monetary policy statement last week, prompting the
Dow Jones Industrial Average
to suffer his worst weekly loss since October.
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