–Fed to Keep Fully Using Monetary Tools
By Steven K. Beckner
(MaceNews) – Federal Reserve Chairman Jerome Powell continued Tuesday to lend his support to additional fiscal stimulus, although he did not say how much is needed as Republican and Democratic legislators remained far apart on the appropriate size of further federal spending to boost recovery from the pandemic-induced recession.
Powell, appearing with Treasury Secretary Steven Mnuchin before the Senate Banking Committee on the Coronavirus Aid, Relief and Economic Security (CARES) Act, vowed the Fed “will continue to provide very strong support to the economy through our tools” and added, “We remain committed to fully use our tools for as long as necessary.”
The Fed’s monetary tools include a near zero federal funds rate and $120 billion in monthly asset purchases – policies which are expected to be reaffirmed when the Fed’s rate-setting Federal Open Market Committee holds its final meeting of the year Dec. 15-16.
In an apparent reference to the Fed’s commitment to keep the funds rate very low until it achieves full employment and average 2% inflation, Powell declared that the Fed “will keep at it until we’re really done.”
In keeping with the Fed revised monetary policy framework, Powell said the Fed “is not going to preemptively raise rates” even if unemployment falls below the estimated “natural rate” unless there are signs of greater inflation pressure than the Fed expects and wants.
However, Powell made clear he does not consider monetary action to be adequate to address the economy’s needs. To the extent the economy has recovered, “fiscal policy, including the CARES Act, deserves the lion’s share of the credit,” he said.
“It may be we need more on that front,” he added, “The risk of overdoing it is less than the risk of underdoing it.”
Powell testified that the economy has recovered “faster than expected,” but said “there’s a long way to go.” He noted that there are still 10 million people who lost jobs due the pandemic – “more than were lost due to the financial crisis.” He said it is hard to know now how many people will remain “structurally unemployed” after the pandemic is over.
Powell made a distinction between near term and medium term risks.
“In the near term we see the spread of disease, and we’re hearing that a lot of small businesses are at risk of going out of business this winte,” he said. “At the same time we’re getting news about vaccine.”
“In the medium term there is upside risk,” he added.
Powell attributed the speed of the recovery in the second half to “the fact that the economy was in good shape at the beginning of the pandemic.” But he said people “at the lower end of the income spectrum” are at risk.
So “parts of the economy might need help to get the last span of the bridge in place to get to other side of the pandemic,” he said. “There may be light at the end of the tunnel by the middle of next year, but they may need more help to get to that place.”
While the Fed will continue to use its tools, including Section 13-3 special lending programs, Powell said “some of these businesses what they need is a grant to get through this last bit of pandemic rather than borrowing more through a Federal Reserve facility.”
Powell also promised to continue to grant regulatory relief to banks facing potential pandemic-related loan losses, without endangering “safety and soundness.”
Earlier, in prepared testimony, Powell repeated the Fed’s commitment to “using our full range of tools to support the economy and to help assure that the recovery from this difficult period will be as robust as possible on behalf of communities, families, and businesses across the country.”
Powell gave the panel a lukewarm assessment of the economy and its outlook. After noting that “economic activity has continued to recover from its depressed second-quarter level” and that GDP rose 33.1% in the third quarter,” the Fed chief observed, “In recent months, however, the pace of improvement has moderated.”
Powell noted that “household spending on goods, especially durable goods, has been strong and has moved above its pre-pandemic level,” but that “in contrast, spending on services remains low largely because of ongoing weakness in sectors that typically require people to gather closely, including travel and hospitality.”
And he added that “the overall rebound in household spending is due, in part, to federal stimulus payments and expanded unemployment benefits, which provided essential support to many families and individuals.”
While the labor market has rebounded and half of the 22 million thrown out of work in March have returned to their jobs, Powell said, “we will not lose sight of the millions of Americans who remain out of work.”
Returning to another familiar theme, Powell said “the outlook for the economy is extraordinarily uncertain and will depend, in large part, on the success of efforts to keep the virus in check.” He added that the rise in new COVID-19 cases “is concerning and could prove challenging for the next few months.”
“A full economic recovery is unlikely until people are confident that it is safe to reengage in a broad range of activities,” he asserted.
Powell did not dispute Mnuchin’s recent decision to pare back the special Fed lending facilities funded through the CARES Act.
That $2.2 trillion legislation, enacted in March 2020 to address financial needs caused by coronavirus-related business shutdowns, authorized the Treasury to backstop a host of special Fed lending and liquidity facilities with $454 billion of capital. But most of the money was not used, and two weeks ago, Mnuchin said he would not extend the corporate credit, municipal lending and Main Street lending programs beyond Dec. 31, although he announced plans to extend several other Fed emergency credit and liquidity programs until March 31.
In a Dec. 19 letter, Mnuchin wrote to Powell asking the Fed to return unused funds to the Treasury, saying. “This will allow Congress to re-appropriate $455 billion, consisting of $429 billion in excess Treasury funds for the Federal Reserve facilities and $26 billion in unused Treasury direct loan funds.”
Mnuchin also told Powell, “In the unlikely event that it becomes necessary in the future to reestablish any of these facilities, the Federal Reserve can request approval from the Secretary of the Treasury and, upon approval, the facilities can be funded with Core ESF (Exchange Stabilization) funds, to the extent permitted by law, or additional funds appropriated by Congress.”
Powell told the Committee the Fed would honor Mnuchin’s request and “return the unused portion of funds allocated to the lending programs that are backstopped by the CARES Act in connection with their termination at the end of this year.”
In his testimony Tuesday, Mnuchin defended the economy’s recovery from the pandemic-induced recession and Trump administration’s call for a “targeted” fiscal stimulus bill in lieu of the much larger package being pushed by House Democrats.
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Contact this reporter: steve@macenews.com.
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