Congressional testimony from Federal Reserve Chairman Jerome Powell indicates that the resurging COVID-19 is still hampering the economic recovery and enforcing conditions that could lead to prolonged inflation.
COVID-19 Still Hampers The Economy, Powell Tells Congress
Ahead of his testimony before the Senate Banking Committee, Powell pointed out that the sectors most negatively affected by the pandemic have improved, especially in the last few months, but the proliferation of cases of COVID-19 has slowed their recovery.
In the first half of the year, household spending rose rapidly, but slumped in the second and third quarters due to softening in COVID-sensitive sectors, Powell explained. Further, there are constraints on supply in some industries shortly.
In his testimony, he stated that the Federal Reserve has begun winding down its monthly purchases of Treasury securities and mortgage-backed securities of $120 billion. Beginning later this year or early next year, it is expected to be completed by the middle of 2022. The “tapering” is likely to lead to an increase in interest rates.
In its last meeting, the Federal Reserve cut its projection for U.S. growth in 2021 to 5.9% from 7% previously while raising its estimate for 2022 to 3.8% from 3.3%. Meanwhile, it raised its inflation forecasts for 2021 to 3.8% from 3.3%.
A Senate that on Monday evening blocked a Democratic effort to raise the debt ceiling, prompting warnings of a government shutdown that might cause the stock market to tremble, is the background for Powell’s appearance before the committee.
This week did begin with some positive economic news, as has been the case with many recent economic reports. The Commerce Department reported on Monday that orders for durable goods, such as computers and aircraft, increased 1.8% in August after increasing 0.5% in July.
Ameriprise Chief Market Strategist David Joy said Monday that the economy remains sound despite the headlines out of Washington this week. In addition to the resignations of Robert Kaplan from Dallas and Eric Rosengren from Boston, Powell will also be questioned about the resignations of Federal Reserve regional bank presidents. A probe was conducted into Kaplan’s stock dealings, and Rosengren’s health issues were involved. The benchmark 10-year Treasury yield rose to 1.537% late Monday into Tuesday, its highest level since June.
The progress made so far in the recovery and recession
The pandemic recession, which lasted just two months yet resulted in the displacement of 30 million employees. Two times as much output had been lost in the second quarter of 2020 as there was during the Great Recession of 2007-2009. After only four quarters of recovery, the economy has already exceeded its previous peak, half the time resulted in the Great Recession. Normal for the recovery in employment to lag behind output, but job gains have also exceeded expectations.
There has been a greater impact on those least able to carry the burden of the economic downturn than on all Americans. The unemployment rate still falls disproportionately in the service sector, especially in the black and Hispanic communities.
The unevenness of the recovery can be further highlighted by the shift from services, particularly in-person services, to goods in the form of appliances, furniture, and vehicles. After the pandemic struck, airline travel had dropped 95 percent, and dental visits had dropped 65 percent. Today, consumers and businesses are spending more than fully recovered on goods and services. There are now six million fewer jobs than February 2020, with 5 million in the still-depressed service sector. During the recovery, consumer spending on durable goods has grown faster than it did before the pandemic and is now nearly 20 percent higher than it was before the pandemic. The shortage of durable goods caused by the pandemic is one of the main factors pushing inflation above our 2 percent target.
With the economy in turmoil, some surprises and strains are inevitable. The goal of monetary policy is to maintain price stability and maximum employment throughout the current economic crisis. My next topic will be to talk about progress towards these goals.