By Nick Timiraos 

Federal Reserve officials said Wednesday the economy was likely to need additional government spending to avoid an uneven and protracted recovery from the coronavirus pandemic.

Fed Chairman Jerome Powell said the recovery would move along faster "if there is support coming both from Congress and from the Fed," he said during the second day of testimony on Capitol Hill. "The power of fiscal policy is really unequaled by anything else."

The Fed said last week it would hold interest rates near zero until inflation reaches 2% and is likely to stay somewhat above that level, something most officials don't see happening in the next three years.

Recent improvements in economic data reflect both the reopening of commercial activities that had been limited to suppress the virus as well as enhanced unemployment benefits, small-business grants and other relief measures Congress approved earlier this year, Mr. Powell said.

While around half of 22 million workers who lost jobs in March and April have returned to work, Mr. Powell said, "There's a long way to go.... We need to stay with it, all of us."

Separately, Fed Vice Chairman Richard Clarida said the economy had recovered "very robustly" as curbs this spring to slow the virus's spread had been lifted. "But we're still in a deep hole," he said in an interview on Bloomberg TV.

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 as much as $1 trillion in additional relief. The White House has indicated it could support legislation that cost somewhere around $1.5 trillion.

House Democrats released a report Wednesday that was critical of the Fed's emergency action to backstop an array of lending markets. The report, published by the House Select Subcommittee on the Coronavirus Crisis, suggested the Fed's approach to avoid severe increases in borrowing costs for large corporations should have been conditioned on those companies preventing all layoffs during and after the pandemic.

Mr. Powell said the Fed's corporate-bond purchases hadn't extended new credit to any companies and instead was designed to restore private-market functioning. He said the program had achieved that goal, as evidenced by records amounts of debt issued in capital markets. Mr. Powell implied that the program wouldn't have achieved such an outcome if it had instead been conditioned on encouraging firms to borrow money in order to save jobs.

Several other Fed officials warned on Wednesday that the economy would see slower growth, if not another downturn, without additional spending from Congress and the White House.

In a speech, Boston Fed President Eric Rosengren said he was less optimistic than many of his colleagues about the economy because of continued difficulties the U.S. faces containing the virus and because of reduced prospects for more spending. "Additional support from fiscal policy, which I believe is very much needed, seems increasingly unlikely to materialize any time soon," he said.

Chicago Fed President Charles Evans told reporters that his projection that the unemployment rate would fall to 5.5% by the end of 2021, from 8.4% in August, had been premised on around $500 billion to $1 trillion in additional fiscal relief. Without that, he said he expected higher levels of joblessness and a slower recovery.

The Fed last week said it was committed to holding rates near zero until the labor market is strong, inflation reaches 2% and Fed officials believe inflation will run slightly above 2% for some interval.

Mr. Clarida said Wednesday all three conditions needed to be met before the central bank would consider lifting short-term interest rates. The Fed has effectively abandoned its prior strategy of lifting rates to pre-empt anticipated price pressures before inflation hits 2% and has switched to a "whites of their eyes" approach.

"We want to see actual inflation" at 2%, said Mr. Clarida. Officials would also want to have some evidence that inflation was expected to remain moderately above 2%. "We don't want it to be a fleeting, you know, one quarter and done," he said.

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

(END) Dow Jones Newswires

September 23, 2020 14:10 ET (18:10 GMT)