Fed Chair Powell's congressional testimony: Stimulus, job losses and inflation

  • In Politics
  • 2021-02-23 15:18:00Z
  • By NBC News

Federal Reserve Chairman Jerome Powell began two days of congressional testimony Tuesday in an economic climate - not to mention political - that is very different from June, the last time the Fed chair gave his semiannual monetary policy report.

Powell presents the report to the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday. He'll be facing tough questions, experts say: Republicans will want to know if a $1.9 trillion stimulus package risks sending inflation skyrocketing, while Democrats are likely to push the central bank head to articulate how the pandemic has exacerbated economic inequality among Americans.

"We're not out of the woods yet when it comes to the virus, and the economy also remains quite far from a full recovery," said Steve Friedman, senior macroeconomist at MacKay Shields. "Powell has been very focused on the fact that millions of workers and their families have faced significant hardship because of the pandemic."

Powell has said top-line figures on job growth camouflage a falloff in labor force participation, estimating that the real unemployment rate is likely closer to 10 percent than the official 6.3 percent as calculated by the Bureau of Labor Statistics for January.

"The unemployment rate really overstates the amount of improvement in the labor market. I doesn't do a good job of accounting for the fact that a lot of people just left the labor market," Friedman said. "I think this is really what his testimony is going to be about."

In keeping with the Fed's mandate for full employment, Powell is almost certain to reiterate his oft-repeated assertion that the current course of action - holding down interest rates and leveraging the central bank's balance sheet to facilitate asset purchases - is the best way to ease the hurdles facing the labor market as well as the broader economy.

"While the situation is improving, the economy is far from the Fed's employment goals, and significant further progress is needed before beginning to remove policy support," said Bill Merz, head of fixed income research at U.S. Bank Wealth Management.

Charlie Ripley, senior investment strategist at Allianz Investment Management, said the topic of inflation is likely to generate some of the week's more pointed questions for Powell.

"It's likely lawmakers will touch the topic of inflation and asset bubbles as risks to the current policy," Ripley said. "Lawmakers are sure to question Powell on the unintended consequences and risks surrounding the current policy decisions," he said, particularly since former Obama-era National Economic Council director Larry Summers recently raised the concern.

"There is an argument to be made that if vaccinations pick up, employment will rise coupled with yet another round of stimulus money would lead to higher inflation," said Scott Cole, founder and president of Cole Financial Planning and Wealth Management. "But frankly, we didn't see that when employment was hitting record lows - and there is a lot of work to be done to get some sectors of our economy back up and running," he added.

In spite of the economy's current fragility, the recent emergence of green shoots also will likely prompt some committee members, particularly Republicans, to push Powell to articulate how he envisions the Fed's gradual withdrawal from its current level of market intervention without destabilizing a system that has come to expect, if not rely on, central bank support. "How's the market going to function when the Fed stops buying?" said Stifel chief economist Lindsey Piegza.

Both sides of the aisle will be angling to have Powell articulate rationales for their preferred stances on fiscal policy: Republicans will be seeking evidence that too much stimulus could backfire, while Democrats will pursue lines of questioning to support an argument for continued aggressive fiscal stimulus. "I do think there's going to be a lot of potential grandstanding," Piegza said.

Committee members are likely to jockey fiercely for any kind of statement that could be viewed as an endorsement, said Kenneth Kuttner, economics professor at Williams College. "I think the Republicans will be most eager to find some reason in the policy remarks to vote against the $1.9 trillion stimulus package," he said. Democrats are likely to press Powell to expound on the extent and drivers of economic inequality, both in the context of providing more financial support for individuals as well as advancing the party's goal of a $15 minimum wage.

"Traditionally the Fed doesn't like to wade into fiscal policy," Friedman said, although he added that Powell has made it clear over the past several months that monetary policy alone cannot resuscitate the economy. "I think he's going to avoid weighing in on the form and size of the relief, but he's going to be clear that he sees support for households as necessary," Friedman said.

This will amount to a verbal game of cat-and-mouse, with Powell aiming to provide a snapshot of the economy rendered in broad brushstrokes while trying to sidestep statements that appear to endorse a particular fiscal strategy or dollar amount.

"I think it's going to be a partisan discussion in this sense," said Brad McMillan, chief investment officer at Commonwealth Financial Network. "The Democrats are going to be asking leading questions asking him to expand on the weakness of the economy and the risk ahead, trying to lay the groundwork for the stimulus package, whereas the Republicans are going to be doing the opposite - they're going to try and lay the groundwork to attack the Fed if we do get inflation," he said.


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