Federal Reserve Chairman Jerome Powell told the Senate banking committee on Tuesday that there is still “significant uncertainty” about an economic recovery, while adding that the Fed will let the market dictate the pace of its corporate bond purchases.
During the first day of his semiannual testimony before Congress, Powell warned that there’s still a long way to go before the U.S. economy recovers from the coronavirus pandemic.
“The levels of output and employment remain far below their pre-pandemic levels, and significant uncertainty remains about the timing and strength of the recovery,” he said, echoing the tone expressed after last week’s Fed meeting.
Powell was grilled by senators about the Federal Reserve’s pledge to buy individual corporate bonds (which it began doing on Monday) along with the start of its Main Street Lending Program.
“It’s out of an excess of caution to preserve these gains for market function by following through,” Powell said, but also warned: “I don’t see us wanting to run through the bond market like an elephant snuffing out price signals, things like that.”
The Fed chairman shot down the possibility of negative interest rates: “We’ve pretty much decided that it’s not something we think is attractive for us here in the United States,” Powell reiterated on Tuesday.
The Fed is not yet winding down its balance sheet, he also confirmed, adding that it doesn’t yet pose “any real threat to either inflation or financial stability.”
What to watch for
The pace of corporate bond purchases. The Fed will watch to see how investors respond and let market conditions dictate the pace of corporate bond purchases, Powell said. While the Fed is operating an open-ended buying program with its purchase of least $120 billion of Treasurys and mortgage-backed securities each month, Powell did not commit to a similar effort on the corporate bond-buying front. “It’s really going to depend on the level of market function. If the market function continues to improve, then we are happy to slow or even stop the purchases,” Powell confirmed. “If it goes the other way, we will increase.”
Powell continued to emphasize that the Fed will continue to do everything in its power to help the economy recover from the coronavirus pandemic. The Federal Reserve left interest rates unchanged last week and indicated that they’ll likely remain near zero until at least 2022. It also gave a grim update on the economy, forecasting a long recovery with unemployment likely to remain high for many years. The Fed, which has injected nearly $3 trillion into financial markets since late February, pledged to continue its unprecedented stimulus plan until the economy has weathered the coronavirus recession.
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