Federal Reserve Chairman Jerome Powell on Tuesday urged Congress to spend more money to limit the economic damage of the COVID-19 pandemic, the latest in a chorus of current and past Fed officials to tell lawmakers that inaction could lengthen the recession.
“There’s a reasonable probability that more will be needed both from you, and from the Fed,” Powell told the Senate Banking Committee, echoing nudges he has made in nearly every public statement since the pandemic began.
Powell has noted that COVID-19’s economic devastation has fallen hardest on low-income workers — 40 percent of individuals making under $40,000 lost their jobs during the crisis.
Sen. Chris Van Hollen, D-Md., asked whether congressional spending would be a more effective response than the Fed’s monetary policy.
“In the short and medium term, yes: fiscal policy,” Powell said, adding that, in the long term, fiscal and monetary policies encouraging maximum employment were the way to go.
Powell’s urging has been voiced more explicitly by other Fed leaders past and present in recent days. Former Fed Chairman Ben Bernanke co-wrote a letter to congressional leadership Monday that was also signed by Janet Yellen, another former leader of the Fed, and 131 other economists.
“Insufficiently bold congressional policy responses to the Great Recession unnecessarily prolonged suffering and stunted economic growth,” Bernanke wrote, along with Washington Center for Equitable Growth CEO Heather Boushey and Cecilia Rouse, dean of the Woodrow Wilson School at Princeton. “Congress should not make this mistake again.”
In the past week, regional Fed presidents have also asked Congress to do more — not just to respond to the pandemic, but to encourage more inclusive growth as Black Lives Matter protests continue across the nation.
“Systemic racism is a yoke that drags on the American economy,” Raphael Bostic, president of the Atlanta Fed and the only African American to lead a regional Fed bank, wrote in a blog post on the regional bank’s website. “A commitment to an inclusive society also means a commitment to an inclusive economy.”
Those comments have been matched by the heads of the Fed’s San Francisco, Richmond and Dallas branches in recent days.
“The fastest-growing demographics in this country are blacks and Hispanics. If they don’t grow equally, then we’re going to grow more slowly,” Dallas Fed President Robert Kaplan told CBS News on Sunday. “Fiscal policy is going to be critical from here.”
The Bernanke letter urged Congress to extend the economic support it provided in March, including, “at a minimum, continued support for the unemployed, new assistance to states and localities, investments in programs that preserve the employer-employee relationship, and additional aid to stabilize aggregate demand.”
Congress is now facing a number of deadlines on the relief programs it created. Deferred tax bills come due July 15, and an extra $600 a week on top of normal unemployment benefits will stop at the end of July. Many states and localities facing severe tax revenue shortfalls must turn in budgets by the end of June, which could lead to massive job losses on top of the 1.5 million already cut so far. Eviction and foreclosure moratoriums are set to end in the coming weeks too.
Democrats in the House passed a massive response package in May, but the GOP-controlled Senate has shown no interest in taking it up. Instead, Republican leaders have said they expect to work on their own measure in July.
Powell repeatedly declined Tuesday to say explicitly what Congress should do, but hinted broadly at what he’d like to see.
“I wouldn’t presume to tell you what the Fed thinks you should do, because it’s really not our role,” Powell told Sen. David Perdue, R-Ga., who asked about the disincentives to work caused by the expanded unemployment benefits. “I do think you’ll want to continue support for workers in some form. I think there are going to be an awful lot of unemployed people for some time.”
Powell also described what would happen if Congress didn’t bail out state and local governments, almost all of which have balanced-budget requirements that force layoffs and cuts to services during severe economic downturns.
“State [and] local governments amount to something like 13 percent of the labor force — they’re one of the largest employers. So it can really weigh on the economy,” he said. “It can be a drag. In fact, it was after the global financial crisis and during the Great Recession for a number of years. It’s pretty well documented now: It was a drag on growth.”
Powell noted in his opening remarks that COVID-19 had disproportionately hurt minorities, who were already less well off than white Americans.
“Low-income households have experienced, by far, the sharpest drop in employment, while job losses of African Americans, Hispanics, and women have been greater than that of other groups,” he said. “If not contained and reversed, the downturn could further widen gaps in economic well-being that the long expansion had made some progress in closing.”
Sen. Elizabeth Warren, D-Mass., used those comments to castigate Republican recalcitrance to quickly extending the economic rescue programs.
“Senate Republicans are eager to let this help expire, when we still have more than 20 million people out of work and the unemployment rate is going up for black Americans,” she said. “Inequality is not something that happens on its own. It is the result of policy choices, who we decide to help and whose pain matters.”
Senate Banking ranking member Sherrod Brown, D-Ohio, pressed Powell to commit to a “thoughtful and open-minded study” on the Fed’s role regarding racial inequalities. Powell said he’d have to ask his colleagues on the board first.
“There’s no doubt there’s more that all of us can do to address these issues, and this feels like a time when people are going to be looking for ways to do more, and we certainly are going to be doing that,” Powell added.
Powell dismissed Republican concerns about the size of the Fed’s balance sheet, which has nearly doubled to $7.2 trillion in the last few months.
“I don’t think the balance sheet at anything like its current size presents a real threat to inflation or financial stability,” he said. “What we’re thinking about now is providing the accommodation this economy needs for as long as it needs. That’s all we’re thinking.”
Powell added that he expects no inflation spikes in the near future, saying prices will remain depressed in the short term and will return to stability in time.
When the economic crisis ends, Powell said, the Fed would wind down its balance sheet similarly to how it did in the years after the Great Recession. “We just froze the size of the balance sheet, and as the economy grows, the balance sheet shrinks as a percent of the economy,” he said.
Powell also warned that a healthy economic recovery from COVID-19 can’t happen without a healthy population first.
“Much of that economic uncertainty comes from uncertainty about the path of the disease and the effects of measures to contain it,” he said. “Until the public is confident that the disease is contained, a full recovery is unlikely.”
Powell said the Fed’s projections, which see unemployment dropping from the 14.7 percent high in April to around 9 or 10 percent by the end of the year, depend on the assumption that the U.S. avoids a second coronavirus wave that leads to widespread lockdowns again.