Later today Fed Chair Powell and US Treasury Secretary Steven Mnuchin are to testify to the House Financial Services Committee as a quarterly requirement by the Cares Act, established by Congress in March. Ahead of what is expected to be a grilling of both the Fed and White House, Jerome Powell’s prepared remarks noted that although “Many economic indicators show marked improvement ... Both employment and overall economic activity, however, remain well below their pre-pandemic levels, and the path ahead continues to be highly uncertain”. The text also added: “We remain committed to using our tools to do what we can, for as long as it takes, to ensure that the recovery will be as strong as possible, and to limit lasting damage to the economy”. Interestingly, the Fed’s Kaplan says he would prefer to refrain from adding further monetary stimulus until there is strong evidence on the direction of recovery adding, “asset buying at this point may do more to stimulate financial markets than it helps the real economy."
The unprecedented USD 2tn pandemic bill has over the past six months been instrumental in boosting employment and growth, by providing food aid, unemployment benefits and support for working families, $600 a week unemployment insurance for millions (which would have previously not been eligible) and support for small- and medium-sized businesses. With limited uptake on the latter USD 600bn so called “Main Street” loans facility Powell noted that it “may not be the right solution for some businesses, in part because the Cares Act states clearly that these loans cannot be forgiven.” According to the text Powell says the central bank has taken note and has made appropriate adjustments to the loan programme.
On Friday, the Fed noted that the “extraordinary governmental measures in response to the pandemic seemed to have eased families’ financial strain.” However, with a number of the above benefits either now expired or coming to an end, there are growing concerns that there is still a lot to be done to support the economy. Powell has reiterated the need for “policy actions” to be “taken at all levels of government”. Investors are also wondering when exactly lawmakers will agree on a further stimulus package which has been in deadlock for over a month; Democrats are pushing for a USD 2.2tn fiscal bill while the majority of Republicans are supporting a USD 660bn package and pushing for employees to return to work. Powell has said that additional federal stimulus is required, however, the White House economic adviser Larry Kudlow says the recovery is “self-sustaining” without it.
We look forward to further updates later today, and on Wednesday and Thursday as Powell testifies to the House Select Committee and the Senate Banking Committee (alongside Mnuchin), respectively. In the interim USTs appear relatively unchanged, US equity futures are marginally lower and the dollar is trending stronger.