U.S. Federal Reserve Chairman Jerome Powell confirms the central bank’s intention to continue its policy of cheap money. He says it will continue until the economy has recovered from the effects of the coronavirus pandemic to a greater degree.
“The economy is a long way from reaching its goals for employment and inflation,” according to text prepared for Powell’s speech to the U.S. Senate Banking Committee.
As such, the Fed will continue to support the economy with near-zero interest rates and large-scale asset purchases. Powell is scheduled to make that announcement Wednesday, Jan. 24, before the House Financial Services Committee.
It should be noted that the hearing will take place against a backdrop of improved prospects for the U.S. economy, thanks to progress on vaccinations and several rounds of fiscal support.
According to Prime, the daily number of detectable coronavirus cases has declined from peaks in early January, and recent economic data, including retail sales, industrial production, job creation, and service sector activity, point to an acceleration in economic growth after its downturn in late 2020. And yet, nearly a year since the U.S. coronavirus crisis began, the U.S. economy is still about 10 million fewer jobs than it was in February 2020. Inflation, too, is stuck below the 2% target, which has long been a cause for concern at the Fed.
As the agency notes, lawmakers may ask the Fed chairman about his attitude toward President Joe Biden’s proposed $1.9 trillion stimulus package now being debated in Congress. Powell may also be asked questions about financial stability. In particular, the risk that low-interest rates will encourage asset bubbles and fuel inflation.
The quarterly report on financial stability, prepared in January by Fed economists, characterizes the risks to the U.S. financial system as “significant,” noting the overvaluation of assets (especially corporate bonds). This is evidenced by the minutes of the last meeting of the Fed. This assessment reflects an increased level of concern compared to the November report, where asset valuations were described as moderate.
Meanwhile, at a press conference after that meeting, Powell himself brushed off these risks, saying that the Fed’s top priority should be getting the economy out of the misery caused by the pandemic. The Fed’s semi-annual report to Congress notes that the debt burden on businesses is “close to historic highs,” and insolvency risks among small and medium-sized businesses remain significant.