Powell Faces Biden Policy Quiz With Renomination in Background

Jerome Powell, chairman of the U.S. Federal Reserve, speaks during a hearing in Washington. (Photographer: Graeme Jennings/Washington Examiner/Bloomberg)

Powell Faces Biden Policy Quiz With Renomination in Background

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U.S. Democratic lawmakers this week will invite Federal Reserve Chair Jerome Powell to support another big round of government spending -- testing him just months before President Joe Biden is expected to consider his renomination.

Powell appears before the House Financial Services Committee Wednesday at 12 p.m. in Washington and Chair Maxine Waters, a California Democrat, has already praised him for cooperating with the Treasury and Congress during the pandemic. He testifies before the Senate banking panel a day later.

Powell gave full support to robust fiscal spending as the pandemic raged last year, in the hope of minimizing the lasting labor-market scarring seen in previous recessions.

Democrats will want to talk up the promise of their economic agenda around infrastructure and social programs ahead of next year’s mid-term congressional elections and emphasize the economy still needs support. Republicans will point to the risks of deficit spending and inflation getting out of control, with data released Tuesday showing prices paid by U.S. consumers surged in June by the most since 2008.

Powell will likely have to answer to both.

Powell Faces Biden Policy Quiz With Renomination in Background

Maintaining U.S. job gains is critical to the Fed’s new strategy of letting the economy run hotter. That’s aimed at fixing a persistent problem of interest rates being too close to zero, which makes it harder to counter economic downturns by cutting borrowing costs alone because they’re already so meager.

“Low interest rates are no badge of honor -- they are indicative of something wrong, such as low productivity or low growth prospects,” said Mark Spindel, chief investment officer at the District of Columbia Retirement Board. The Fed and the Congress are “interdependent, especially now.”

Biden’s $4 trillion economic agenda includes rebuilding bridges, roads and rails, along with investing in a broad range of programs aimed at boosting educational attainment and helping low-income families. The White House has held back from forecasting a pick-up in longer-run growth, but economists say it’s investments such as these that could make a difference for productivity.

The proposals complement Fed objectives to some degree, as they invest in human and physical capital. That could lift longer-run economic growth, which might also nudge borrowing costs higher.

So far, the intertwined approach of the Fed’s ultra-easy monetary policy with an outpouring of fiscal spending has seen some success through the economy’s rebound.

“We are going to come out of this cycle with a much higher opinion about the efficacy and timeliness of fiscal policy as a counter-cyclical tool,” said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC. “Frankly, it was very effective -- almost too effective.”

While Powell has an interest in anything that could promote longer-run growth, endorsing a fiscal plan is risky. With his term as chair expiring February, this is Powell’s last semi-annual hearing before Biden makes his decision to give him another four years or pick someone else. Backing White House plans could look like a blatant quid pro quo.

Republicans warn Biden is already overheating the economy with too much fiscal largesse. Steve Scalise of Louisiana, a member of the Republican House leadership, calls it “the Biden inflation agenda.”

Powell Faces Biden Policy Quiz With Renomination in Background

Claudia Sahm, a former Fed economist who used to brief Powell, said he’s accomplished at talking to Congress and can find a way to “thread the needle,” without seeming to be working too closely with the White House.

“Jay has been friendly to ‘let’s go fix the economy’ views,” especially in ways that would promote more equality, said Sahm, now a senior fellow at the Jain Family Institute. “The two fiscal plans that are being discussed are about getting to some place better than February 2020. Frankly, the Fed needs those packages, too.”

Powell has become more restrained in recent hearings compared with his full support for emergency pandemic fiscal policy, and is likely to say the spending is for lawmakers to decide when pressed during the hearings.

Read More: Bond Market Bets Fed Won’t Ever Hike Enough to Hit Neutral

Yields on 10-year treasuries have fallen to around 1.36% from 1.74% in late March. In addition to various technical explanations for the decline is the pessimistic verdict of investors.

History isn’t encouraging.

Since the 1980s, the economy has slowed to lower average rates of growth after each recession and bond yields have followed. There are a range of reasons, but one lesson is that government penny-pinching in downturns hasn’t helped either American workers or companies.

“The record of austerity in response to business cycles wasn’t good either economically or politically,” said Adam Posen, the president of the Peterson Institute for International Economics. “It didn’t lead to rapid returns of confidence or a rapid return of business investment; it did lead to lasting damage, and it did lead to violent destabilizing revolts.”

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