Fed’s Powell adds urgency to Biden’s call for strong stimulus

Federal Reserve Chair Jerome Powell said the U.S. job market remains a long way from a full recovery and called on both lawmakers and the private sector to support workers.

“We are still very far from a strong labor market whose benefits are broadly shared,” Powell said Wednesday in a speech to the Economic Club of New York, noting that employment last month was nearly 10 million below February 2020 levels. “Achieving and sustaining maximum employment will require more than supportive monetary policy.”

Powell’s remarks echo the urgency voiced by President Joe Biden for his $1.9 trillion in additional pandemic aid, a package that is moving ahead in Congress despite Republican opposition. In doing so, he also delivered a nuanced rebuttal to the minority of Democrats, as exemplified by former Treasury Secretary Lawrence Summers, who view that relief proposal as too large.

“The Fed is in full risk-management mode,” said Diane Swonk, chief economist at Grant Thornton LLP. “The reality is setting in that the virus will be managed instead of eradicated. That leaves a lot of uncertainty about the pace of reopening and what the world will look like on the other side of the pandemic.”

Repeating that monetary policy would remain very supportive of the economy, the Fed chair cited a need for continued fiscal policy support.

Returning to maximum employment “will require a society-wide commitment, with contributions from across government and the private sector,” Powell said. “The potential benefits of investing in our nation’s workforce are immense.”

Powell’s comments did little to move markets. Treasury yields maintained the decline prompted earlier in the day by weaker-than-expected inflation data, while the Bloomberg dollar index held its decline. U.S. stocks are up marginally after being lower for much of the day.

As the risk of the year-long pandemic recedes with vaccinations rolling out, it’s unclear if employers will make do with smaller workforces, or if job growth will pick up.

Service-sector jobs have been particularly hard hit. And while unemployment was 6.3% in January compared to a 14.8% peak, the statistic doesn’t capture the full extent of labor market slack.

Hidden Slack

Powell said a broader measure of unemployment would put the rate at about 10%.

The share of working-age Americans who are participating in the labor force has plunged 2 percentage points from a year ago to 61.4%. The pandemic has also exacerbated inequality, hitting younger workers, women, low-income earners and minorities harder.

The unemployment rate for Black Americans was 9.2% in January versus a 5.7% White rate. Powell cited several of these benchmarks in his text, giving a sense of the diverse array of data on his dashboard that he is watching for progress toward the Fed’s maximum employment goal.

He also leaned against the idea that the economy might overheat with additional stimulus. He said it could take “many years” to overcome scars from long-term unemployment, and even with the jobless rate at 3.5% in February, signs of inflation were scarce.

‘Every Reason’

“There was every reason to expect that the labor market could have strengthened even further without causing a worrisome increase in inflation were it not for the onset of the pandemic,” he said.

The Fed failed to sustainably achieve its 2% target since it was adopted in 2012. Frustrated by the lack of progress, Fed officials in 2020 moved to a strategy where they would attempt to overshoot the goal to make up for shortfalls and average 2% over time.

Many economists say it will take years to achieve average inflation of 2%, meaning monetary policy will remain easy for a long time.

The Fed has signaled it expects to hold interest rates near zero at least through 2023 and Powell repeated the central bank’s commitment not to adjust its $120 billion monthly pace of bond purchases until it had seen “substantial further progress’ on employment and inflation.