Federal Reserve Chair Jerome Powell acknowledged recent signs of improvement in the economy during congressional testimony on Tuesday but cautioned that “significant uncertainty remains about the timing and strength of the recovery.”
During his semiannual testimony before the Senate Banking Committee, Powell noted some recent indicators have pointed to stabilization and even a modest rebound in economic activity following the coronavirus-induced downturn.
Powell specifically cited the Labor Department’s recent jobs report showing employment unexpectedly jumped by 2.5 million jobs in the month of May.
The Fed chief attributed the surprise job growth to some businesses reopening amid the easing of restrictions on mobility and commerce and the extension of federal loans and grants as well as stimulus checks and unemployment benefits supporting household incomes and spending.
However, Powell noted that output and employment levels remain far below their pre-pandemic levels and warned that there continues to be significant uncertainty about the economic outlook.
“Much of that economic uncertainty comes from uncertainty about the path of the disease and the effects of measures to contain it,” Powell said. “Until the public is confident that the disease is contained, a full recovery is unlikely.”
The Fed Chair cautioned that a prolonged economic downturn has the potential to create longer-term damage from permanent job loss and business closures.
“Long periods of unemployment can erode workers’ skills and hurt their future job prospects,” Powell said. “Persistent unemployment can also negate the gains made by many disadvantaged Americans during the long expansion.”
“If a small or medium-sized business becomes insolvent because the economy recovers too slowly, we lose more than just that business,” he added. “These businesses are the heart of our economy and often embody the work of generations.”
In light of the continued uncertainty, Powell said the Fed remains committed to using its full range of tools to support the economy and reiterated that interest rates will remain at current near-zero levels until the central bank is confident that the economy has weathered recent events.
The Fed’s latest economic projections indicated most central bank officials expect rates to remain at current levels through 2022.
Powell also touched on the Fed’s recent move to start buying individual corporate bonds, which he said is intended to support employment and spending.
When asked about the move in the question-and-answer portion of his testimony, Powell explained that decision was made out of an “excess of caution” to preserve gains for market function.
“If the market function continues to improve, then we are happy to slow or even stop the purchases. If it goes the other way, we will increase,” Powell said. “I don’t see us as wanting to run through the bond market like an elephant.”
Commenting on Powell’s prepared remarks, Michael Pearce, Senior US Economist at Capital Economics, noted there was no mention of potential future policy tools the Fed might turn to, including explicit caps on Treasury yields.
“With yields currently at very low levels, there is little need for such a policy yet, so for now we expect the Fed’s emphasis to remain on ensuring its lending programs are operating smoothly, while adding to calls for fiscal policy to provide more support,” Pearce said.
Powell is scheduled to make his second virtual appearance on Capitol Hill on Wednesday, when he testifies before the House Financial Services Committee.
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