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)
Copyright (c) 2020 Dow Jones & Company, Inc.