Fed’s Powell says economy could improve later this year but sees no change in policy

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Fed’s Powell says economy could improve later this year but sees no change in policy


There are signs that the economy is on the mend from the coronavirus pandemic but the central bank is likely to keep its easy policy in place for some time, said Fed Chairman Jerome Powell on Tuesday.

“While we should not underestimate the challenges we currently face, developments point to an improved outlook for later this year,” Powell said, in remarks prepared for delivery to the Senate Banking Committee.

In the wake of the pandemic that struck almost one year ago, the Fed has cut its main interest rate close to zero. In addition, the central bank has been buying $120 billion per month of Treasurys and mortgage-backed securities to keep financial conditions easy and help the economy recover.

The Fed has said it will continue this bond buying, or quantitative easing, until there has been “substantial progress” in the labor market and inflation has gotten closer to the Fed’s 2% longer-run objective.

Follow along the questions and answers from Powell hearing in our MarketWatch live blog

In his testimony, Powell said “the economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved.”

Wall Street experts think the Fed will keep buying bonds until early 2022. But some economists, notably former Treasury Secretary Larry Summers, want the Fed to start to reverse course this year.

Read: Inflation worries are back. Here’s what you should worry about — and what you shouldn’t

Powell showed no sign in his testimony that he is having second thoughts. He noted that millions of Americans remain out of work due to COVID-19 and that inflation remains below the central bank’s target.

“The economic recovery remains uneven and far from complete, and the path ahead is highly uncertain,” he said.

Yields on the 10-year Treasury note
TMUBMUSD10Y,
1.368%

have risen markedly since the start of the year. Fed officials have said recently they think this is due to optimism about the economy, as more Americans get vaccines. It’s a market move that doesn’t demand counteraction, they’ve said.

Stocks
SPX,
-0.81%

traded lower ahead of Powell’s delivery of the remarks.

Powell noted that the path of the economy depends on the course of the virus.

At the moment, the wave of COVID-19 cases seen since the fall, along with the hospitalizations and deaths in recent months, “is weighing on economic activity and job creation,” the Fed chairman said.

“In recent weeks, the number of new cases and hospitalizations has been falling, and ongoing vaccinations offer hope for a return to more-normal conditions later this year,” Powell said.

Ongoing vaccinations should help speed that return, he added.



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