Fed Tells Congress to Pony Up More Cash for COIVD-19 Aid

Vito J. Racanelli

The Federal Reserve chairman, Jerome Powell, beat the drums for more coronavirus (COVID-19) aid in Congressional testimony last week. Additionally, admonitions came aplenty. The $3 trillion Congress has already spent is not enough, the Fed head said. Of course, what all this new debt might mean for your grandchildren’s taxes was not discussed.

He warned the House Financial Services Committee that recent economic gains were at risk if Congress pulled back too quickly on aid for workers and businesses struggling due to COVID-19. That spending appears to have boosted hiring and consumer spending in recent weeks, Mr. Powell said, but ‘it would be wise to look at ways to continue to support people who are out of work and also smaller businesses.” Some 25 million American workers are currently unemployed.

The chairman reiterated the Fed would keep rates near zero at least through 2022 and that the unemployment rate would average around 9%-10% during the last three months of this year. If COVID-19 remains “reasonably well under control,” Powell expects the economy could already be moving toward a recovery marked by large increases in re-employment. Still, in the final phase, Americans must get comfortable again in activities involving close contact or large crowds. “Until the public is confident that the disease is contained, a full recovery is unlikely.”

Powell also played the bad cop, noting too that economy faces potentially significant long-term damage from higher unemployment and a wave of small business failures caused by COVID-19. He anticipates the economy stabilizing at a level below that than before the pandemic. “It’s all quite uncertain but we appear to be entering that second phase of the economy and businesses reopening and spending increasing,” Mr. Powell said, citing May retail sales as “more evidence.”

May’s retail sales increase (see page 1) follows three straight months of declining retail sales. It suggests the worst is over, something we’ve been saying would happen. Consumer spending is the main driver of the U.S. economy, accounting for more than two-thirds of economic output, and retail sales account for about a quarter of all consumer spending.

Most Fed officials projected the economy would contract by anywhere between 4% and 10% this year.

The central bank on Tuesday began purchasing individual bonds as part of a custom-built, diversified market index, regardless of whether companies want the Fed to own their debt. Many corporates don’t want to be seen asking the Fed to buy their bonds.

The Labor Department said 1.5 million Americans applied for unemployment benefits last week, higher than the 1.3 million figure the market expected.

The yield on the benchmark 10-year U.S. Treasury note dropped sharply last week to about 0.69% vs 0.71% one week previous. Next FOMC meeting on July 28-29.

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Vito J. Racanelli
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