At some moments practically cheery and at others his familiar dour self, U.S. Federal Reserve Chair Jerome Powell on Wednesday seemed delighted by the economy’s speedy recovery so far but pessimistic that the pace can continue.
For Canadians weighed down with mortgage debt or for those looking to buy a home, the best news was that Powell and his advisers predict that North America’s record-low interest rates — sitting at below one-quarter of a per cent — will continue at least until the end of 2023.
While the Bank of Canada sets rates independent of its U.S. counterpart, Canadian lending is closely tied to commercial rates set in New York, which in turn are guided by the Fed.
But on the pessimistic side, there’s the reason for those continued low rates. Powell warned that the unexpectedly quick recovery in the economy following the outbreak of COVID-19 earlier this year is not likely to persist and that without more government spending, it will be even longer before the other half of the 22 million people thrown out of work in the U.S. find jobs again.
Fiscal boost worked
“There’s been a really positive effect,” Powell said, referring to government spending so far that has already knocked the U.S. unemployment rate to just above eight per cent — down from nearly 15 per cent in April.
Not only that, but the U.S. housing market, just as in Canada, has bounced back strongly. There are also signs of renewed business spending.
“That said, my sense is that more fiscal support is likely to be needed,” Powell told reporters at Wednesday’s news conference in Washington following the release of the Fed’s latest policy statement. “Of course, the details of that are for Congress, not the Fed, but I would just say there are still roughly 11 million people still out of work due to the pandemic.”
Just like the Bank of Canada’s governor, Tiff Macklem, last week, Powell expressed strong concern for the growing gap between rich and poor that has been accentuated by the economic crisis due to COVID-19. Just as Macklem suggested the best he could do was stimulate the economy in an attempt to “raise all boats,” Powell admitted it was hard for the Fed to correct wealth differentials.
But he made it clear that the central bank’s research shows that a spreading gulf in relative wealth was not just a social concern but something that was bad for the entire economy.
“The productive capacity of the economy is limited when not everyone has the opportunity, the educational background and the health care — all the things you need to be an active participant in our workforce,” he said.
Once again, Powell said tinkering with redistribution was the job of elected officials, not the Fed. But he said the recovery after the Great Recession, which followed the 2008 financial crisis, showed that the strategy used by the bank at that time could work again.
By pumping up the economy with monetary stimulus, the Fed helped bring unemployment down to record lows, and statistics now show that before the latest crisis, low unemployment had begun to push wages up.
No nipping inflation in the bud
Unlike after that recovery, the bank’s innovation this time is that it will make no attempt to nip inflation in the bud with precautionary rate hikes. Instead, the Fed’s new policy will be to welcome inflation above two per cent until such time as jobless rates fall again.
One reporter at the news conference expressed concern that such low rates for so long would create an asset bubble in stock markets, leading to a crash. The same worry has been expressed in Canada as home prices soar to new heights.
But Powell said the Fed would keep a close eye on markets and watch for instability.
An interesting question that Powell never really answered was whether those 11 million unemployed would get their jobs back only when the face-to-face industries where many had been employed resumed, or whether the economy would have to create new and different jobs.
“All of this recovery we’ve seen is in a context where people are still at risk of catching it, and yet we’re able to resume lots and lots of economic activities,” Powell said, referring to the coronavirus. Defeating the disease with a vaccine or by some other means could mean a sharp rebound.
But until that time, without government support to tide over those from industries where millions remain jobless, “that will show up in economic activity,” he said.
“It will also show up in things like evictions and foreclosures and, you know, things that will scar and damage the economy.”
Follow Don Pittis on Twitter: @don_pittis