By Paul Kiernan and Kate Davidson
WASHINGTON -- Federal Reserve Chairman Jerome Powell indicated Wednesday that he isn't concerned about a recent rise in long-term bond yields, saying they appear to reflect growing optimism about the economy's prospects.
"It seems that rates have responded to news about vaccination and ultimately about growth," Mr. Powell said in a hearing before the Senate Banking Committee. "And that has been an orderly process."
The yield on 10-year Treasury notes stood at 1.64% on Wednesday, up from 0.92% at the beginning of the year but down from a peak last week of 1.76%. Some economists and market participants have worried that a rapid or sustained climb in rates could weigh on the economy by making it more expensive for consumers and businesses to borrow.
Mr. Powell on Wednesday said he "would be concerned if it were not an orderly process or if conditions were to tighten to the point where they might threaten our recovery." But he reiterated the Fed's view that the recent increase has come from "extraordinarily low levels...back up toward a level that we're more likely to see."
Mr. Powell and Treasury Secretary Janet Yellen appeared before the panel for their second day of joint testimony to Congress about the government's efforts to restore the economy to health in the midst of the Covid-19 pandemic.
Their message to the panel was similar to the one they delivered Tuesday before the House Financial Services Committee: The economy is poised for a strong recovery, but reinvigorating the labor market will take time.
The top Republican on the Senate panel, Pat Toomey of Pennsylvania, questioned the Fed's plan to maintain its easy-money policies until the recovery progresses further.
"The Fed has signaled that its dovish monetary policy is here indefinitely," Mr. Toomey said, noting a recent uptick in commodity prices and a brightening outlook for economic growth. "I worry that the Fed will be behind the curve when inflation picks up."
Mr. Powell, however, reiterated that he doesn't expect supply-chain bottlenecks or an expected surge in consumer demand later this year as the economy reopens to change in long-term price trends. The Fed generally doesn't alter its policies in response to temporary price pressures.
"In the near term, we do expect, as many forecasters do, that there will be some upward pressure on prices," Mr. Powell said. "Long term we think that the inflation dynamics that we've seen around the world for a quarter of a century are essentially intact. We've got a world that's short of demand with very low inflation...and we think that those dynamics haven't gone away overnight and won't."
Sen. Richard Shelby (R., Ala.) pressed Ms. Yellen on her changing views on the risks of high and rising federal debt. Government red ink has swelled over the past year as economic activity stalled and Congress ramped up spending to combat the pandemic.
Ms. Yellen said she believes the U.S. has more capacity to borrow than once thought, in part due to a decadeslong trend in falling interest rates, "but it certainly doesn't mean that anything goes."
"Longer run, we do have to raise revenue to support permanent spending that we want to do," she said.
In prepared remarks for both hearings, Mr. Powell said the Fed "will continue to provide the economy the support that it needs for as long as it takes." The central bank has held overnight interest rates near zero for the past year and doesn't plan to raise them until the economy reaches full employment and inflation rises moderately above its 2% target.
Under the Cares Act relief package passed last March, the two officials are required to testify once a quarter on efforts to support the economy during the pandemic. Several of the largest programs created by the legislation wound down at the end of last year, however, giving lawmakers greater scope to raise wider policy issues.
Ms. Yellen, in her first appearance before the Senate since her January confirmation, faced calls from several lawmakers to provide guidance on how state and local governments may use aid provided by the $1.9 trillion Covid relief package enacted this month.
Republicans have said a provision in the law restricting states' ability to cut taxes if they accept pandemic aid is an unfair and perhaps unconstitutional move by the federal government. Some states that are contemplating tax cuts for the next fiscal year have only weeks to make those decisions before their legislatures adjourn.
"The states are hamstrung right now. They can't do anything until they get this guidance," said Sen. Mike Crapo (R., Idaho), who urged Ms. Yellen to give states as much flexibility as possible.
Ms. Yellen declined to commit to providing guidance sooner than the 60 days required under the law. Treasury officials face a host of thorny questions, she said, including defining what it means to use pandemic relief as an offset for tax cuts. "Given the fungibility of money, it's a hard question to answer," she said.
Write to Paul Kiernan at paul.kiernan@wsj.com and Kate Davidson at kate.davidson@wsj.com
(END) Dow Jones Newswires
03-24-21 1417ET
