Jay Powell, the chairman of the Federal Reserve, warned Congress that the US economic recovery would suffer if lawmakers failed to pass a new fiscal stimulus package, saying small businesses and lower-income households still needed government help.
Mr Powell appeared before the House financial services committee on Tuesday as prospects for a Capitol Hill compromise on a relief bill appeared dim, and issued his latest in a series of pleas for additional federal action in response to the pandemic-induced economic downturn.
Mr Powell said the US economy had so far proved “resilient” to the wave of coronavirus infections and the expiration of emergency federal jobless benefits over the summer. But he said that might not last.
“The risk is that over time [the unemployed] go through those savings . . . their spending will decline, their ability to stay in their homes will decline, so the economy will begin to feel those negative effects at some time,” said Mr Powell. “I think that it is likely that more fiscal support will be needed.”
The Fed chairman added that struggling small and medium-sized businesses hit by the coronavirus fallout might also need “direct fiscal support”, rather than loans from the central bank, which were not as well suited to helping certain parts of the economy.
“The recovery will go faster if we have both tools [fiscal and monetary] continuing to work together,” Mr Powell said.
He added that the crisis has not hit Americans equally. “Those least able to bear the burden have been the most affected,” he said.
Earlier in the year, most economists and policy analysts expected Congress and the White House to agree on a new fiscal package, in addition to the $3tn support approved at the start of the pandemic. But big differences over the size and details of a deal have led to a stalemate on Capitol Hill.
In addition, the chances for a compromise have been diminished by political tensions ahead of the November 3 general election — including the fight over a successor to Ruth Bader Ginsburg on the US Supreme Court, which is dominating conversations in Congress this week.
At Tuesday’s hearing, Maxine Waters, the Democratic chair of the panel, attacked the Trump administration and congressional Republicans for opposing a large new relief bill and for failing to deploy all the funds allocated in the first round of assistance to help struggling local and state governments and small businesses.
“Let me be blunt: this pandemic response has fallen badly short, and the Trump administration has sabotaged efforts to pass a relief package or address the major public health and economic crisis we face,” she said.
Patrick McHenry, the top Republican on the panel, said the government response had been “top notch” and urged both parties to “come to the middle”.
Some lawmakers have been especially critical of the Fed’s flagship $600bn fund, which is backed by the Treasury, to lend to medium-sized companies needing assistance, for having terms so strict that it has barely been used.
But Mr Powell stressed the limit of the Fed’s powers in lending directly to businesses, and said it was up to Congress to offer aid to stricken sectors of the economy.
The Fed chairman said its crisis lending facilities were only a “backstop” and reflected its “lending powers” rather than “spending powers”, which are the purview of Congress.
“Many borrowers will benefit from these programmes, as will the overall economy, but for others, a loan that could be difficult to repay might not be the answer ,” Mr Powell said.
Steven Mnuchin, the US Treasury secretary, said he would be open to lowering the loan limit for the facility to $100,000. But Mr Powell said demand for loans under $1m had been weak, dismissing the likelihood that this would be a solution.
Mr Powell said there had been a “marked improvement” in many economic indicators since the worst of the pandemic shock, partly thanks to the heavy dose of fiscal stimulus injected into the economy at the beginning of the downturn.
The Fed chairman mentioned better data on housing, investment, and the labour market, as well as consumer spending. But he also warned that economic activity remained “well below” pre-pandemic levels “and the path ahead continues to be highly uncertain”.
“A full recovery is likely to come only when people are confident that it is safe to re-engage in a broad range of activities,” he said. “The path forward will depend on keeping the virus under control, and on policy actions taken at all levels of government.”
Last week the Fed signalled it expected to keep interest rates near zero until at least the end of 2023. It also adopted dovish guidance saying it would not raise interest rates until inflation hit 2 per cent and was “on track” to exceed that target for some time — a milestone that could take years.
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