Fed Chair Urges Patience as Economy Heals, Says Recovery Will Take a While

Chris Gaetano
Published Date:
Jun 16, 2020

Fed Chair Jerome Powell

Federal Reserve Chairman Jerome Powell said in today's Senate hearing that while recent economic data has been encouraging, it will take a long time before the economy is back to where it was in the pre-pandemic days, particularly where it concerns employment. So while he is confident that the country will eventually recover from what he called the biggest economic shock in living memory, it will take a while.

"Long run, don't sell the U.S. economy short. I am confident we will have a full recovery. ... But we just have to be a little patient with it. You'll see a lot of people coming back to work, but there will be significant numbers who will not because they're in those industries [hard hit by the pandemic], and that's where we'll see less employment. Those people will need help to get back to work," he said.

At several instances, senators pressed him to share his thoughts on further targeted stimulus measures in response to issues such as the economic challenges faced by the service industry or rural America. Powell each time demurred on making those sorts of specific comments, saying that these issues were more in the realm of fiscal rather than monetary policy. However, while he would not comment on specifics, in general, he seemed to believe that further aid measures will be necessary for a full recovery to take place. In response to a question from Sen. Brian Schatz (D-Hawaii) on whether the greater risk stems from doing too much or too little, Powell appeared to learn toward the latter.

"The question we'll have to deal with is, 'Is it enough?' There's a reasonable probability more will be needed both from you and from the Fed, and I would say the things you already passed are having a positive effect now, and we should see more of it," he said.

He agreed with concerns about how much these aid programs will ultimately cost and how they will be paid for, but reasserted earlier statements that this is not the time to have this conversation, as the crisis is still ongoing despite some improvement.

"The time to work on that is when the economy is strong, unemployment is low, and there is growth. That's when you want to work on that. Those concerns are always there, but I won't prioritize them at a time like this," he said.

Powell also addressed concerns and questions regarding the Main Street Lending Facility, one of several new programs that the central bank developed to ease credit market conditions and prop up the economy. Sen. Richard Shelby (R-Ala.), for instance, expressed worry about how much programs like this have expanded the Federal Reserve balance sheet, noting it will be a great challenge to deleverage over time. But Powell said he is unconcerned about the size of the balance sheet in terms of inflation or financial stability, based on lessons from the previous financial crisis.

"What we're thinking about now is providing the accommodation this economy needs for as long as it needs it. When the time comes, what we did from 2014 to 2017 was we just froze the size of the balance sheet, and as the economy grows, the balance sheet shrinks as a [part of] the economy, and that's a very passive way that didn't cause any reaction from the market," he said, contrasting iy with the times when "there have been market reactions from trying to [actively] shrink the size of the balance sheet."

Sen. Thomas Cotton (R-Ark.), meanwhile, critiqued the Fed's plans for its corporate bond- buying program, saying it privileges those firms that have gone out to get a public company rating from one of the big three ratings agencies. The senator said there are many companies with strong balance sheets that employ tens of thousands of people but do not have an agency rating and yet, in many ways, are in the same position as those that did. Powell said the central bank has expanded its use of ratings beyond just the primary ratings agencies but noted that there is still the issue of those that don't have ratings at all. He said that, "as we open these facilities, we're looking for answers there" and pledged that they would have an idea regarding this "soon."

Sen Pat Toomey (R-Pa.) wondered, however, why the Fed needed a bond-buying program at all, now that certain parts of the economy were recovering, especially the credit markets the bond-buying program was meant to help. Now that market function appears to be smoothing out, he said firms' needs are already being met. In response, Powell pointed to psychology as a big reason why these programs must continue.

"This was something we said we would do at the beginning, and as you pointed out, markets reacted very strongly to the announcement, and that was because they believe we will do what we said we were going to do," he said.

The Senate hearing also had a lot of discussion on inequality and the effects of systemic racism on the economy. Powell, in his opening statement, noted that "The Federal Reserve serves the entire nation" and so "I speak for my colleagues throughout the Federal Reserve System when I say, there is no place at the Federal Reserve for racism and there should be no place for it in our society. Everyone deserves the opportunity to participate fully in our society and in our economy.

At several other points during the hearing, he also acknowledged that communities of color have been disproportionately affected by both the coronavirus and its economic impact. Therefore, he said in response to a question from Sen. Elizabeth Warren (D-Mass.), that ending the expanded unemployment benefits passed as part of the CARES Act will disproportionately hurt people within those communities.

He also pointed to the importance of specifically black-owned businesses in response to Sen. Robert Menendez (D-N.J.), agreeing with him that there would be a long-term economic impact if 40 percent of black-owned businesses shut their doors. Similarly, he also agreed that there would be a long-term economic impact if many black and Latino renters were unable to pay their rents due to the pandemic's economic effect.

At the same time, he said that the Fed does not have plans to focus on these communities in particular, even though he acknowledged the importance of the Community Development Financial Institutions Fund and minority business initiatives in these areas. When Sen. Mark Warner (D-Va.) asked whether the Fed might lean more heavily into helping these types of entities, Powell emphasized that the central bank's programs were developed with a broad base in mind.

"We don't intend to target particular beneficiaries, but rather broad institutions where anyone who meets the requirements can take part," he said.

Senator Sherrod Brown (D-Ohio) asked Powell whether the Federal Reserve would be interested in what he said would be an open-minded study into how Fed policies contributed to systemic racism through history. Powell wouldn't commit one way or the other, saying that he would need to discuss the idea with his colleagues at the Fed, but he said that the central bank is committed to the goals of diversity and inclusion in general.

"As an institution, we're very focused on diversity and inclusion, and we try to make that a very high principle for us here at the Fed, and we do consider racial disparities as a routine matter in our work now," he said.

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