Powell voices cautious optimism as COVID-19 recovery ramps up
Federal Reserve Chairman Jerome Powell on Wednesday struck a note of cautious optimism as the central bank signaled it believes the recovery from the coronavirus recession is accelerating.
The Fed chief said the U.S. is poised to avoid much of the long-term damage economists feared would occur due to the pandemic thanks to trillions of dollars in support and is primed for a quicker recovery as the country makes progress toward herd immunity.
Fed officials on Wednesday upgraded their 2021 projections for growth and unemployment for the second consecutive quarter, indicating growing optimism in the path of the economy.
Even so, Powell said it would still be challenging to bring roughly 10 million people who lost their jobs due to COVID-19 back into the labor force and that process could be disrupted if new, more infectious coronavirus variants hinder the recovery.
“We’re clearly on a good path with cases coming down,” Powell said, “but we’re not done and I’d hate to see us take our eye off the ball before we actually finish the job.”
The Fed earlier Wednesday announced, as expected, that it would not raise interest rates or cut back on its monthly purchases of $120 billion in Treasury and mortgage bonds as the economy continued to recover from the COVID-19 recession.
Powell’s remarks were his first since President Biden signed a $1.9 trillion coronavirus relief plan into law. While Powell did not take a firm position on the bill, he said the substantial fiscal aid passed since the start of the pandemic will help the U.S. recover faster from the steepest and quickest downturn since the Great Depression.
“The size and the speed with which Congress has delivered [fiscal aid] is going to wind up very much accelerating the return to full employment,” Powell said.
“It’s going to make a huge difference in people’s lives and it has already,” he said.
The median estimate of Fed officials for 2021 gross domestic product (GDP) growth improved to 6.5 percent this month from the 4.2 percent median increase projected in the Fed’s December release.
The Fed’s median estimate of the 2021 year-end unemployment rate also declined from 5 percent in December to 4.5 percent this month, though Fed officials did not see the U.S. returning to its pre-pandemic jobless rate of 3.5 percent until 2023.
Powell said that despite the improving projections, the Fed would hold firm on its monetary support without major improvement in the labor market and inflation on track to exceed the bank’s 2 percent annual target. He also waived off concerns that the Fed could be pushed to hike interest rates before it saw its desired decline in unemployment across all racial and demographic groups, pointing to the challenges remaining for the recovery.
While the unemployment rate dipped to a deceptively low 6.2 percent in February, the labor force participation rate held at 61.4 percent, 1.9 percentage points lower than it was a year ago. The employment-to-population ratio was also unchanged in February at 57.3 percent, down 3.5 percentage points from February 2020.
Since last year, more than 4 million Americans have stopped looking for work due to the pandemic, according to the February jobs report, with many exiting the workforce to look after school-age children, take care of sick family members, or avoid contracting the virus.
“It’s just a lot of people who have—who need to get back to work and it’s not going to happen overnight,” Powell said.
“The faster, the better. We’d love to see it come sooner rather than later,” Powell said, “but realistically, given the numbers, it’s going to take some time.”