The president of the Federal Reserve (Fed), Jeromme Powell, committed this Tuesday the support of that organism to revert the crisis of the coronavirus, but he said that it is also required more fiscal stimulus, something that is incumbent on the Congress.
In an appearance before the House Financial Services Committee, Powell said that since the crisis began, there has been a continuous improvement of economic conditions in the U.S., and pledged the support of the Fed “as long as necessary” to maintain the recovery.
However, he reminded lawmakers that the Fed has borrowing capacity but not spending capacity, which is a competency of Congress, an argument that has become one of his mantras for calling for approval of a new fiscal stimulus package.
“By supporting key credit markets, our programs have significantly increased the extension of credit from private lenders, but that’s just support?”
POWELL SUPPORTS MORE DIRECT FISCAL SUPPORT
The Fed president warned that many people, and the economy in general, will benefit from these programs, but for others “a hard-to-pay loan may not be the answer, and in these cases direct fiscal support may be required.
Following the passage of a $2.2 trillion stimulus plan in March, Congress has been unable to agree to a similar one once additional unemployment benefits have expired and financial support to households has been exhausted.
Also at the same hearing, Treasury Secretary Steven Mnuchin backed a new stimulus package, which Republicans value at $1 trillion and Democrats value at $3 trillion, and whose negotiation has run into partisan fights in an election year like this one.
“The reopening of the economy and the Cares Act (as the first stimulus plan was called) has allowed for a remarkable economic rebound, but some industries particularly affected by the pandemic require additional relief,” Mnuchin said.
A RECESSION THAT HITS THOSE MOST IN NEED
Powell, for his part, recalled that the recession has affected more “those least able to carry the burden” and that unemployment has been especially hard on “lower-wage workers, women, and African Americans and Hispanics.
“Economic activity has recovered from its depressed level of the second quarter … Many economic indicators show a marked improvement,” Powell said, but he warned that “both employment and overall economic activity remain well below their pre-pandemic levels.
According to the president of the U.S. central bank, thanks to the first fiscal stimulus package, household spending, which is the true engine of the country’s economy, has recovered “about three-quarters of its decline.
Powell promised that the Fed will continue to use its “tools” to do what it can, “for as long as necessary, to ensure that the recovery is as strong as possible and limit the permanent damage to the economy” due to this crisis.
As the pandemic crisis began, the Fed held a special meeting last March at which it lowered benchmark interest rates to a range of 0-0.25%, while drawing on its full monetary arsenal, with massive injections of liquidity into financial markets and massive purchases of debt.
Last week, Powell assured in a press conference that the Fed plans to keep interest rates close to 0% until 2023, after having varied the criteria of this body by making the 2% inflation target dependent on the recovery of employment.
11 MILLION JOBS HAVE ALREADY BEEN RECOVERED
According to Powell, the 2% inflation target set by the Fed will not be reached until 2023.
In June, the Fed anticipated a 6.5% contraction in real GDP and a 9.3% unemployment rate by the end of 2020, but the August employment report, which shows better than expected unemployment of 8.4%, suggests that the economic recovery may be faster than originally expected.
According to Powell, the labor market has already recovered about half of the 22 million permanent jobs that were lost in March and April due to the closing of the economy because of the pandemic, but what is worrying is the recovery of the other half without further stimulus.
The Fed now expects a 3.7% contraction in GDP by the end of the year and an unemployment rate of 7.6%.