By Nick Timiraos 

Federal Reserve officials stepped up calls for additional government spending to avoid an uneven and protracted economic recovery from the coronavirus pandemic.

The recovery would move along faster "if there is support coming both from Congress and from the Fed," Chairman Jerome Powell said during the second of three days of congressional testimony Wednesday.

Chicago Fed President Charles Evans told reporters that his projection that the unemployment rate would fall below 6% by the end of next year had been premised on around $1 trillion in additional fiscal relief.

"If that doesn't happen, then I think it's going to be a lot harder, and much more unlikely that we make that much progress," he said.

The Fed committed last week to a much longer interval of low rates than it did initially after the 2008 financial crisis. Officials said they would hold short-term 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.

But Mr. Powell and his colleagues said Congress and the White House, more than the Fed, had the power to hasten a faster recovery. "The power of fiscal policy is really unequaled by anything else," Mr. Powell told lawmakers on a House panel overseeing the U.S. response to the coronavirus.

Bond investors have turned their attention to additional measures the Fed could take to lower borrowing costs, including adjusting the composition of the central bank's asset purchases to buy more longer-term securities as it did in so-called quantitative easing programs after the 2008 crisis.

Boston Fed President Eric Rosengren said it was premature to say whether the Fed needed to take such a step. "The lack of fiscal policy is a much bigger problem than what we're doing with our balance sheet," he said in an interview. "It's not that it won't help, but I don't think it is of the economic magnitude of fiscal policy."

In addition to its low-rate pledges, the Fed is buying $120 billion in Treasury and mortgage securities a month to hold down borrowing costs. Unlike in its previous quantitative easing program that lasted from 2012-14, the Fed is buying Treasurys of all maturities rather than concentrating on longer maturities, which can push down long-term yields. Those yields are much lower than they were at any time after the 2008 crisis.

"This is a time where a delay in fiscal policy, I think, is much more economically impactful than what we do because to be honest, the long rate is already quite low," said Mr. Rosengren. "There is a limit to how low we can get it."

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.

Around half of 22 million workers who lost jobs in March and April have returned to work, bringing the unemployment rate down to 8.4% in August from a high of 14.7% in April.

Mr. Powell said it was possible the unemployment rate understated labor-market weakness because it didn't include part-time workers who want more hours or those who stopped looking for work.

"There's a long way to go," he said. "We need to stay with it, all of us."

Mr. Rosengren said he was concerned that too many people had taken "too much comfort in how quickly the unemployment rate has fallen."

While most Fed officials expect the unemployment rate to fall below 6% next year, Mr. Rosengren said he was less optimistic, in part because of dimming prospects that Congress would pass additional relief measures. "The hard part is from here on out because the virus is still there," he said.

Mr. Rosengren raised additional concerns about a "second shoe" dropping on the economy from rising defaults on mortgages backing hotels and other commercial properties. In turn, this could lead small and medium-size banks that have extended such loans to tighten credit standards, creating more difficult conditions for any economic recovery.

"These things happen with a delay," he said. "And one of the major headwinds to the recovery is going to be banks' willingness to lend given their own challenges with their nonperforming loan portfolio."

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 relief to state and local governments and a package of more than $2 trillion. Republicans have balked at the size and some of the components.

Separately, 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 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 were designed to restore private-market functioning. He said the program had achieved that goal, as evidenced by record 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 an effort to save jobs.

"These were big American companies that were under tremendous strain, and they could have laid off hundreds of thousands of people and didn't because of this facility," said Mr. Powell.

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

(END) Dow Jones Newswires

September 23, 2020 20:15 ET (00:15 GMT)