“The economy is a long way from our employment and inflation goals,” Jerome Powell, chairman of the Federal Reserve, said in testimony to the Senate Committee on Banking, a statement he has repeated in recent weeks. Powell made clear to the Senate of his intention to keep interest rates near 0 and a large asset purchase by the Federal Reserve until “substantial progress” has been made.
Powell repeated the same statements on Wednesday during his hearing before the House Committee on Financial Services. The hearings came as vaccination moves forward and a potential third round of a COVID-19 relief bill is being pushed by President Biden and his Democratic allies in Congress.
Daily coronavirus infections have been declining since their latest peak in January, and economic indicators show that retail sales, industrial production, and service sector hiring are increasing, implying that the economy has been recovering from its December set back.
Although consumer confidence rose for the second time during February, the U.S. still reports more than 10 million fewer jobs than during the pre-pandemic era. Inflation remains below 2%. Jerome Powell said it will take more than three years to reach the Fed’s inflation target.
Powell warned Congress that inflation over the next few years could be somewhat more volatile, and in effect will be due to increased consumption as the economy strengthens.
“Inflation dynamics do change over time, but they don’t change on a dime. And so we don’t really think [INAUDIBLE] see how a burst of fiscal support or spending that’s not– that doesn’t last for many years would actually change those inflation dynamics,” Powell said.
Powell’s stance before the Senate was significantly more optimistic than his last congressional hearing on December 1, 2020, where he stated that COVID-19 cases were escalating, parts of the country were re-imposing restrictions and public vaccination campaigns had not begun. At the time, Powell warned that the future of the American economic was “extraordinarily uncertain.”
Powell also implied that the loose monetary policy would continue until “we get this pandemic under control,” adding that “the job is not done.”
Powell said that unemployment will have to fall further to convince the Fed’s Open Market Committee that the economic recovery has taken place. In January the unemployment rate was 6.3%, which is a steep decline from the 15.3% it reached in April. Before the pandemic, the unemployment rate was at an all-time low of 3.5%.
Likewise, the highest authority of the Federal Reserve clarified to Congress that the Fed will not only focus on the unemployment rate, but also on the number of employed people, that is to say, the percentage of economically active people. In January the percentage of the economically active population was 57.5% and before the pandemic it was 61%.
“When we talk about maximum employment, we’re not just talking about the unemployment rate,” Jerome Powell said, “we’re talking about the employment rate.”
Jerome Powell’s hearing comes as lawmakers in Congress schedule a new stimulus of more than $1.9 trillion to ease pandemic constraints. Despite the Fed’s fiscal stimulus and low interest rates, many analysts are skeptical of the extent to which monetary and fiscal policy is currently being presented as a solution to ease the economic situation caused by the quarantines imposed to counteract the spread of COVID-19.