Powell Says Swift Government Action Averted Deeper Economic Downturn -- Update
By Nick Timiraos
Federal Reserve Chairman Jerome Powell said the economic
response to the coronavirus alleviated the fallout from the
pandemic-induced recession but suggested Congress would likely need
to spend more money to shore up parts of the economy that continue
"Our economy will recover fully from this difficult period," Mr.
Powell said in prepared remarks posted Monday that are set for
delivery at a congressional hearing Tuesday morning. 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 begins three days of hearings on Capitol Hill on
Tuesday morning, beginning with the House Financial Services
Committee, where he will testify alongside Treasury Secretary
Steven Mnuchin. 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
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
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,"
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
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.
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
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 firstname.lastname@example.org
(END) Dow Jones Newswires
September 21, 2020 17:04 ET (21:04 GMT)
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