Powell and Yellen tell senators economic support is still needed

Jerome Powell, chair of the Federal Reserve, testifies before before a Senate Banking Committee hearing in Washington on December 1, 2020. (Photo: NYTimes)
America’s top two economic officials told senators on Wednesday that the economy is healing but still in a deep hole and that continued government support is providing a critical lifeline to families and businesses.اضافة اعلان

The remarks by Jerome Powell, the Federal Reserve chair, and Janet Yellen, the Treasury secretary and Powell’s immediate predecessor at the Fed, before the Senate Banking Committee echoed their testimony before House lawmakers on Tuesday.

Powell said in his remarks that the government averted the worst possible outcomes in the pandemic economic recession with its aggressive spending response and super-low Fed interest rates.

“But the recovery is far from complete. So at the Fed, we will continue to provide the economy the support that it needs for as long as it takes,” he said.

Yellen, who pushed hard for the recently passed $1.9 trillion relief package, said responding to a crisis with a needed surge of temporary spending without paying for it was “appropriate.”

“Longer-run, we do have to raise revenue to support permanent spending that we want to do,” she said.

She said expanded unemployment insurance, part of the recent relief package, does not seem to be discouraging work and is needed at a time when the labor market is not at full strength.

“While unemployment remains high, it’s important to provide the supplementary relief,” Yellen said, noting that the aid lasts until the fall. She said the aid should be phased out as the economy recovers.

The Biden administration is also making plans for a $3 trillion infrastructure package, and Republicans on the committee expressed concern about the mounting deficits facing the United States.

They also confronted Yellen over her expected support for a new allocation of $650 billion of the International Monetary Fund’s Special Drawing Rights, an expansion of its reserves intended to help poor countries combat the pandemic.

Critics, such as Senator John Kennedy, a Republican from Louisiana, argued that the United States would be effectively spending money to help adversaries such as China and Russia. He argued, without explanation, that the decision would cost the United States $180 billion.

“There is no money to be paid back — it doesn’t matter,” Yellen told Kennedy. “I don’t know where you got a number like that from.”

Firing back, Kennedy said, “No disrespect, but I think you’re wrong.”

The fact that the government is spending so much, and contemplating spending more, at a time when the economy is recovering has also stoked concerns about inflation among some economists and lawmakers. A few have voiced concern that the Fed, which has interest rates at rock-bottom and is buying bonds in big quantities to help the economy, might be too slow to react if higher prices materialize.

“I do worry that the Fed may be behind the curve when inflation inevitably picks up,” Senator Patrick Toomey, a Republican from Pennsylvania, said during his opening remarks.

But Powell has consistently pushed back on warnings about runaway inflation and did so again on Wednesday.

“We think the inflation dynamics that we’ve seen around the world for a quarter-century are essentially intact — we’ve got a world that’s short of demand, with very low inflation,” Powell said. “We think those dynamics haven’t gone away overnight, and won’t.”

Asked specifically about potential supply and demand mismatches — particularly in the context of a ship that had gotten stuck in the Suez Canal, but also in general as the economy reopens — he struck a similarly unconcerned tone.

“A bottleneck, by definition, is temporary,” he said.

He also batted back concerns about a recent increase in market-based interest rates. The yield on 10-year Treasury notes, a closely watched government bond, has moved up since the start of the year.

“Rates have responded to news about vaccination, and ultimately, about growth,” Powell said. “That has been an orderly process. I would be concerned if it were not an orderly process, or if conditions were to tighten to a point where they might threaten our recovery.”