Fed chief voices concern over deficits and coronavirus

United States Federal Reserve Chair Jerome Powell assured Congress on Tuesday that the national economy is in a “very good place”, but also cautioned that the potential threat from the coronavirus in China and concerns about the toll deficits could take on the world’s largest economy.

“We find the US economy in a very good place, performing well,” Powell told the US House of Representatives Financial Services Committee.

The US economic expansion, now in its 11th year and the longest on record, has continued to be boosted by receding trade war risks and stabilizing global growth, Powell noted, adding that the Fed’s current target range for short-term borrowing cost “appropriate” to keep the expansion on track.

But the Fed chair did not shy away from potential growth disrupters on the horizon.

Powell warned that there will “very likely be some effects on the United States” of the coronavirus outbreak that is expected to dent growth in China and is spreading economic pain beyond China’s borders through supply chain disruptions. 

“The question we will be asking is will these be persistent effects that could lead to a material reassessment of the outlook,” he said, adding that it is too early to know. 

Powell noted the continued strength in the US jobs market where unemployment continues to hover near 50-year lows. But he did highlight areas of concern including disparities across racial and ethnic groups and a lower number of prime working-age individuals in work or actively looking for jobs compared with most other advanced economies. 

Powell further noted that productivity gains have been “subpar throughout this economic expansion,” and that business investment and exports were weak in the second half of 2019 after disputes with major trading partners. US factory output also declined for the same reason.

The Fed chair also warned about the growing federal deficit, which is forecast to reach more than one trillion dollars this year despite a relatively strong economy, after a Republican-led overhaul of the tax system reduced revenues.

“Putting the federal budget on a sustainable path when the economy is strong would help ensure that policymakers have the space to use fiscal policy to assist in stabilizing the economy over a downturn,” he said.

Powell’s characterisation of modest US economic growth did not support President Donald Trump‘s claim during last week’s annual State of the Union Address when he declared, “We are moving forward at a pace that was unimaginable just a short time ago, and we are never going back.”

What Trump characterised as an unprecedented economic boom is by most measures in line with the steady, modest growth trajectory he inherited from the previous administration of President Barack Obama.

The economy grew a respectable but unspectacular 2.3 percent in 2019, matching the average pace since the Great Recession ended a decade earlier.