–Don’t Want to Run Through Corporate Bond Market ‘Like an Elephant’
WASHINGTON (MaceNews) – Federal Reserve Chairman Jay Powell Tuesday underlined his question whether government’s coronavirus response will be sufficient, suggesting more will be needed, and he conceded the new “Main St.” lending program’s corporate bond purchases may no longer be as necessary as originally envisioned.
Powell, in semiannual testimony to the Senate Banking Committee, repeated that even as workers return to their jobs, some industries like travel and tourism will be slow to welcome them back.
“Right now we seem to be in the beginning of that second stage,” Powell said, which he called the “bounceback” phase of rehiring and reopening, with the beginning stage having passed of cushioning the effect of the sudden lockdown of the economy.
“There’s going to be a large number of people who will not be able to immediately go back to work at their old job or even in their old industry,” Powell said. “It will be a significant group that’s left over.”
Close to 25 million people have been “displaced in the workforce either partially or through unemployment,” he said, “and so we have a long road ahead of us to get those people back to work.”
The latest monthly jobs report suggested, he said, “We’re starting earlier than we thought” to see workers back on the job.
“There is a broad expectation that we’ll see big numbers of people coming back this summer and we certainly hope that turns out to be right,” he said. “Those people who work in the service industries … are going to take longer to recover” and they will continue to need unemployment benefits.
The third stage, he said, will be renewing the push back toward full employment.
Meanwhile, of the Fed and Capitol Hill relief programs, “The question we all will have to answer over time is, is it enough,” Powell said. “I would say there’s … a reasonable probability that more will be needed.”
Powell also said the new program to purchase individual corporate bonds is primarily intended to ensure the market for corporate debt is functioning properly.
So, “It’s really going to depend on the level of market function,” he said, and if the corporate bond buying program proves not to be needed “then we’re happy to slow or even stop the purchases.”
He continued, “I don’t see us as wanting to run through the bond market like an elephant, you know, doing things that … snub out price signals or things like that.”
He added, “We just want to be there if things turn bad in the economy or, you know, if things are going in a negative direction.”
The “Main Street” lending program formally began operating Monday with a call for lending institutions to get certified so they can begin extending credit “in about a week,” Powell said.
The Fed already has been purchasing Exchange Traded Funds composed of corporate bonds and has as much as $750 billion available for the total corporate bond support facility.
But much of the remedy for that market appears to have been provided by simply establishing the purchase facility and reassuring market participants of the Fed’s backing. Some observers, including some members of Congress, have suggested the justification for the program’s actual implementation no longer exists.
Other than corporate bond purchases, the Fed has stated it will maintain purchases of Treasury securities and mortgage-backed securities “over the coming months” at its current, though somewhat reduced, pace.
Asked about whether the massive amount of government spending and Fed lending will be inflationary, Powell said that so far the opposite has happened.
“With weak demand and large price declines for some goods and services such as apparel, gasoline, air travel, hotels consumer price inflation has dropped noticeably in recent months,” he said.
“But indicators of longer term inflation expectations have remained fairly steady. As output stabilizes in the recovery moves ahead,” he said, “inflation should stabilize and then gradually move back up over time” closer to the Fed’s 2% objective.
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