By Nick Timiraos 

Federal Reserve Chairman Jerome Powell and Treasury Secretary Steven Mnuchin are set to testify at a congressional hearing Tuesday on the impact of efforts to alleviate the fallout from the pandemic-induced recession amid debate over the need for additional stimulus.

Mr. Powell, in prepared remarks, said the economic response to the coronavirus has been effective but suggested Congress would likely need to spend more money to shore up parts of the economy that continue to struggle.

"Our economy will recover fully from this difficult period," Mr. Powell said. The Fed will "do what we can, for as long as it takes, to ensure that the recovery will be as strong as possible, and to limit lasting damage to the economy."

Mr. Powell and Mr. Mnuchin begin three days of hearings on Capitol Hill on Tuesday morning, beginning with the House Financial Services Committee. Both men will also appear before the Senate Banking Committee on Thursday. Mr. Powell testifies Wednesday before a separate House panel overseeing the U.S. response to the coronavirus pandemic.

Stocks plunged Monday, as investors assessed an array of risks. Those include delays to additional fiscal-relief packages, an increasingly heated U.S. presidential campaign, continuing tensions with China and the threat that more curbs on commerce might be reimposed in many places because of the country's difficulty controlling the virus.

Mr. Powell said the economy had rebounded in recent months following the end of lockdowns imposed to slow the spread of the virus, and that gains in household spending likely reflected federal stimulus efforts that included expanded unemployment benefits.

Mr. Powell has said the government will need to do more to support hard-hit businesses, state and local governments, as well as unemployed workers in those sectors to prevent deeper scars from slowing any rebound.

"The path forward will depend on keeping the virus under control, and on policy actions taken at all levels of government," he said.

The Fed cut rates to near zero in March and has purchased trillions of dollars of securities after the coronavirus pandemic threatened to touch off a financial panic after investors and businesses sought to raise cash. The central bank also backstopped an array of lending markets.

But with short- and long-term interest rates at historically low levels, the Fed could have fewer tools to spur a recovery than it did after the 2008 financial crisis. Some officials have consequently called for continued fiscal relief measures to spur a faster rebound.

Congressional Democrats have been at a stalemate for months with Republicans and the White House over the size of another spending package. Democrats are pushing for significant relief to state and local governments and a package of at least $2.2 trillion, the size of the bipartisan measure approved in March.

Republicans have balked at the size and some of the individual components and have proposed spending of up to $1 trillion in additional relief. The White House has indicated it could support legislation that cost somewhere around $1.5 trillion.

Mr. Mnuchin said in his testimony that the administration was ready to reach a bipartisan agreement. "I believe a targeted package is still needed," he said.

Tuesday's hearing could also focus on the performance of emergency loan programs the Fed and the Treasury set up after an especially intense period of the crisis gripped financial markets in late March and early April.

In his testimony released Monday, Mr. Powell said those programs were designed to backstop or support the functioning of private markets and not to replace them. Some businesses or would-be borrowers may not benefit from a loan, he said. "In these cases, direct fiscal support may be needed," Mr. Powell said.

Congress curbed these emergency-lending authorities 10 years ago in response to criticism of how the Fed exercised them to address the looming collapse of Bear Stearns Cos. and American International Group Inc. in 2008. Lawmakers required future lending initiatives be jointly undertaken with the Treasury secretary.

The Fed has also joined with the Treasury because the central bank doesn't believe it can incur capital losses, limiting its ability to lend against all but the safest assets.

To turbocharge the lending efforts, Congress in March provided $454 billion to the Treasury to backstop losses in Fed lending programs. Within days, Mr. Mnuchin authorized $195 billion for five different lending programs. He hasn't said how the remaining $259 billion will be used, leading lawmakers in both parties to propose repurposing those funds for other spending programs.

The five lending programs the Fed and Treasury established using that support would theoretically allow for nearly $3 trillion in new borrowing, but the Fed has extended less than $20 billion in such loans.

In some cases, such as the Main Street Lending Program for small and midsize businesses, low uptake reflects complications the Fed and Treasury encountered launching the program and enticing banks and borrowers to use it. For others, lower volumes reflect the success the mere announcement of the Fed backstops have had in spurring private investors to buy assets.

"It's very clear that we are to make loans only to solvent borrowers," said Mr. Powell at a news conference last week. He pointed to how Congress in the last decade wanted to make it harder to extend emergency loans, particularly to banks. "Now we're using that same law for smaller business borrowers, and you know, it's not a perfect fit."

Write to Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

September 22, 2020 09:44 ET (13:44 GMT)

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