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Powell Focuses on Economic Need at Key Moment in Markets and Politics

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The American economy is far from healed and the Federal Reserve is in no hurry to recall its support, Fed chairman Jerome H. Powell told lawmakers during a closely watched hearing Tuesday.

It’s a promise Mr Powell has made many times over the past eleven months, but Tuesday came against a tense backdrop: as the Democrats attempt to get a $ 1.9 trillion aid package through Congress , Republicans argue that it is too big and could lead to inflation that would harm consumers and businesses. Markets have also started to tremble as investors fear an overheated economy will cause the Fed to step back on its efforts to boost growth.

Before the Senate Banking Committee, Mr. Powell declined to weigh the Biden administration’s spending plans but pushed back on the idea of ​​several Republican senators that the economy was on the verge of getting too hot. The economy has shed nearly 10 million jobs since last February, inflation has been too low rather than too high for the past few decades, and prospects for a swift recovery – though better – are far from certain, he said.

“The economic recovery remains uneven and far from complete, and the way forward is highly uncertain,” said Powell. “It is a long way.”

The Fed plans to keep rates near zero, where they have been since March, and to continue buying government bonds at a pace of $ 120 billion a month while waiting for the economy to recover. Investors are increasingly concerned that the Fed may slow these bond purchases sooner rather than later if inflation starts to rise.

This concern helps to raise interest rates on longer-term government debt. They hit their highest point in a year this week. These rates form the basis of corporate bonds and mortgages, and their rise has also caused an uproar in the stock markets.

On Tuesday, however, Powell reiterated that the Fed plans to continue buying bonds until it sees “significant further progress” toward its two goals of full employment and stable inflation. America can “expect us to act carefully, patiently, and with plenty of forewarning” when it comes to slowing that support, Powell said.

The reassurance seemed to help. The S&P 500 closed higher Tuesday, bounced back from a loss of nearly 2 percent earlier in the day, and broke a week-long losing streak.

“We’re in one of those maddened moments where inflation is at the center,” and “he’s been very confident, very calm,” said Julia Coronado, founder of MacroPolicy Perspectives and former Fed economist. “He kept drawing attention to the job market.”

Unemployment has fallen sharply after rising last year, but the official unemployment rate remains almost twice as high as it was in February 2020. The loss of jobs was more acute for members of minorities and those with less education. Although spending has rebounded, activity in the service industry is still muted.

Vaccines raise 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 levels and possibly as consumers spend less on savings were amassed during the dinner and vacation lockdown at the restaurant.

However, it was clear to Fed officials that they did not expect inflation to pick up permanently and that they plan to look beyond temporary increases when considering their policies. For decades, and in many advanced economies, price pressures have been tepid rather than too high.

Mr Powell said Tuesday that longer-term inflation trends “do not change in an instant” and that the Fed has the tools to counter this when prices rise in alarming ways.

“I really don’t expect us to be in a situation where inflation will rise to problematic levels,” said Powell. “This is not a problem for this time, as close as I can imagine.”

He also pushed back on the idea that government spending is poised to drive prices out of control.

“There may have been a strong link between budget deficits and inflation once – there really hasn’t been one recently,” Powell said. He noted that, while he expects inflation to rise in the months ahead, a distinction is made between a temporary fall in prices and a sustained rise.

Still, he refused to weigh up how much more government support is appropriate.

“I’m really going to stay away from financial policy today,” he said at the start of the hearing. He tiptoed around or simply refused to answer questions about the minimum wage, size, and various components of the White House’s spending proposal. At some point he was asked whether he was “cool” with handing over the expense invoice or not.

“I think if I’m either cool or uncool I would have to have an opinion,” said Powell.

The Fed is politically independent and avoids partisan issues. However, she has advised policy makers in Congress, weighing the socio-economic disparities and financial risks associated with climate change over the past year. Some of that openness has caught Republicans’ attention.

Senator Patrick J. Toomey, Republican of Pennsylvania, warned Tuesday that the central bank should avoid going beyond its core duties.

“As noble as the goals may be, issues like climate change and racial inequality are simply not our central bank’s purview,” Toomey said.

Mr. Powell spoke about how strong labor markets help marginalized people – those who are untrained or have a criminal record – to succeed. He made it clear that the central bank hopes for a strong labor market like the one before the pandemic.

The Fed’s bond purchases can help strengthen the economy by lowering longer-term interest rates and driving investors out of safer assets like government bonds into stocks and other more active uses of their cash.

Mr Powell said the economy has not really made the substantial strides in the past three months that the Fed is aiming for as a prerequisite for slowing its purchases as employment growth has slowed. But he said there is an expectation that progress “should increase as the pandemic wears off”.

Mr. Powell was also cautious about the Fed’s main interest rate, the federal funds rate, which helps control the cost of borrowing across the economy. The Fed wants to hit full employment, hit 2 percent of inflation, and believes the economy is on its way to even faster price gains before increasing that rate.

“At the moment we are concentrating on giving the economy the support it needs,” said Powell, once summarizing his message.

Matt Phillips contributed to the coverage.

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Robert Dunfee