Powell: Fed Will Fight Next Recession with Aggressive QE; Monitoring Economic Growth for Coronavirus Impact“The real question for the Fed is: What is the likely effect on the U.S. economy? And I think we’ll begin to see that in economic data coming up fairly soon.
Federal Reserve Chairman Jerome Powell wrapped up his semi-annual testimony before the Senate Banking Committee on Wednesday, noting the central bank should have an idea of the coronavirus’ impact on the U.S. economy ‘fairly soon.”
Powell also came close to acknowledging that the Fed has run out of ammo to fight the next recession and called on fiscal policy to support the economy if it weakens.
On Tuesday, Chief Powell testified in front of the House Financial Services Committee that the American economy is in a good place, but that the central bank is “closely monitoring” the potential global economic fallout from the virus.
Powell Calls Addressing Inequality ‘An Important National Priority’
Powell said on Wednesday that income inequality should be “an important national priority” as the economic expansion continues. “It’s been a particularly good time to be at the top end of the income spectrum,” the central bank chief told members of the Senate Banking Committee.
“This is not our self-image as a country. It’s something we need to address, Powell said.
The Fed chief also said, “We want, of course, prosperity to be broadly shared. It comes down to really education and training that enables people to do well in the modern economy, which is a globalized economy that is less about manufacturing. Manufacturing jobs are more technical than what they were. We need a workforce that can benefit from technology and globalization,” he said.
How the Fed Will Fight the Next Downturn – ‘Large-Scale Asset Purchases’
Powell said the Fed must use forward guidance, purchases in future downturn.
“Our traditional tool, of course, is interest rates. And low rates are not really a choice anymore: They are a fact of reality. So we will have less room to cut. That means it’s much more likely that we’ll have to turn to the tools that we used in the financial crisis when we hit the lower bound. Which is forward guidance – which says it will keep rates low – and then it’s also large-scale asset purchases of longer-term securities to drive longer-term rates down and support the economy. We will use those tools, I believe we will use them aggressively should the need arise to do so. There’s no need to do that now. But we will use those tools aggressively.
Productivity the Key to Wage Growth, Powell Says.
Productivity will have to rise before wages can see a meaningful increase, Powell said in addressing multiple questions about low pay. “We’ve seen relatively low productivity in the wake of the financial crisis. It appears to be persistent, and that’s going to mean lower wages. Ultimately, you need rising productivity to create a rising standard of living.”
Fed Should Soon See if Coronavirus is Affecting U.S. Growth ‘Fairly Soon’
Asked by Arkansas Republican Tom Cotton to detail how the coronavirus could impact U.S. growth, Powell said.
“The real question for the Fed is: What is the likely effect on the U.S. economy? And I think we’ll begin to see that in economic data coming up fairly soon. It’s too uncertain to even speculate about what the level of that will be, and whether it will be persistent, or whether it will lead to a material change in the outlook. But we do expect that there will be some effects. The effects should be substantial in China, important but maybe less substantial in their immediate trading partners. And we’ll be looking at the economic data.”