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Jerome Powell Sees Easy-Money Policies Staying in Place -- 3rd Update

02/23/2021 | 12:24pm EST

By Paul Kiernan

WASHINGTON -- Federal Reserve Chairman Jerome Powell reaffirmed the central bank's commitment to maintaining easy-money policies until the economy has recovered further from the effects of the coronavirus pandemic.

"The economy is a long way from our employment and inflation goals," Mr. Powell said in testimony to the Senate Banking Committee, a statement he has repeated in recent weeks. The Fed will therefore continue to support the economy with near-zero interest rates and large-scale asset purchases until "substantial further progress has been made," a standard that Mr. Powell said "is likely to take some time" to achieve.

Mr. Powell delivered the Fed's semiannual monetary-policy report to members of the committee Tuesday and is set to do the same Wednesday at a hearing of the House Financial Services Committee.

The hearings come as steady progress on vaccinations and multiple rounds of fiscal stimulus have improved the outlook for the economy, the Fed chief noted.

Daily coronavirus cases have fallen from their early-January peak, and recent economic data including retail sales, industrial production, hiring and service-sector activity have indicated economic growth picked up in the new year after slowing in late 2020. Consumer confidence in the U.S. rose in February for the second consecutive month as Americans grew more upbeat about current business and labor-market conditions, the Conference Board reported Tuesday. Still, nearly a year after the crisis erupted in the U.S., the nation has about 10 million fewer payroll jobs than in February 2020.

Inflation also remains stuck below the Fed's 2% goal, a source of long-running worry among policy makers.

Mr. Powell painted a brighter picture of the economy Tuesday than the last time he appeared before lawmakers, Dec. 1. Covid-19 cases and deaths at the time were surging, parts of the country were tightening lockdowns and public vaccination campaigns had not yet begun, prompting Mr. Powell to warn that the outlook for the economy was "extraordinarily uncertain."

The virtual appearances come as lawmakers are negotiating President Biden's proposed $1.9 trillion coronavirus relief package, which could prompt questions to Mr. Powell about his assessment.

In recent appearances, the Fed chairman has stressed the role of fiscal policy in fueling a recovery that has been faster than many economists expected. But he has declined to recommend any specific amount or type of government stimulus, and his prepared remarks didn't address the question of whether he thinks more will be needed.

Sen. John Kennedy (R., La.) asked Mr. Powell whether he would be "cool with" Congress not passing Mr. Biden's stimulus package.

"I think by being either cool or uncool, I would have to be expressing an opinion," Mr. Powell said. "As I've said, it's not appropriate for the Fed to be playing a role in these fiscal discussions."

While he reiterated his view that reducing the federal budget deficit would be necessary at some point in the future, he added that achieving a full economic recovery should be the higher priority right now.

With overnight interest rates near zero, the Fed has limited room to cut them further to provide more stimulus. Officials have often noted that Fed tools such as low rates and bond-buying are poorly suited to provide targeted relief to the parts of the workforce and economy hardest hit by the coronavirus pandemic. These include women and minorities, low-wage workers and hard-hit sectors including tourism, hospitality and leisure.

Mr. Powell also faced a number of questions related to financial stability, in particular about the risks that very low interest rates could fuel asset bubbles and cause inflation to take off.

A quarterly financial-stability review by Fed staff economists in January characterized the "vulnerabilities of the U.S. financial system as notable," with asset valuations seen as elevated, particularly in corporate bonds, according to minutes of the Fed's policy meeting last month. That reflected more concern than expressed in the staff's previous assessment, in November, which characterized asset valuations as moderate.

But Mr. Powell played down such risks at a press conference after that meeting, saying that the Fed's main priority should be to address the economic distress caused by the pandemic. "I would say that financial stability vulnerabilities overall are moderate," he said then.

The Fed's semiannual report delivered Tuesday said business leverage "now stands near historical highs" and that insolvency risks at small and midsize companies remain considerable.

Noting that asset bubbles triggered recessions in 2001 and 2007-09, Sen. Pat Toomey (R., Pa.), the top Republican on the panel, asked Mr. Powell if he sees a link between elevated asset prices and the Fed's easy-money policies.

"There's certainly a link," Mr. Powell said. "I would say, though, that if you look at what markets are looking at, it's a reopening economy with vaccination, it's fiscal stimulus, it's highly accommodative monetary policy, it's savings accumulated on people's balance sheets, it's expectations of much higher corporate profits...So there are many factors that are contributing."

Write to Paul Kiernan at paul.kiernan@wsj.com

(END) Dow Jones Newswires

02-23-21 1224ET

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