Yellen, Powell to Face Deficit, Inflation Fears at Congress
(Bloomberg) -- Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell will enter a heatedly partisan arena on Tuesday to kick off two days of congressional hearings assessing the economic policy response to the Covid-19 crisis.
Less than two weeks after President Joe Biden signed a $1.9 trillion pandemic relief bill that failed to win a single Republican vote in Congress, the hearings will feature lawmakers positioning over the impact of the package and plans for the next one. Biden’s advisers are preparing a long-term program that could be as much as $3 trillion, though no decisions have been made, people familiar with the talks said Monday.
Yellen is expected not only to highlight the improved economic outlook and dramatic expansion in help to households from the bill, but also telegraph the need for more spending -- partly paid for with higher taxes. The administration is now working on a longer-term support program for the economy, and Democrats may use the hearings to advocate inclusion for their preferred measures.
GOP members will assail the Democrats for piling on debt for a far-left agenda at a time when an economic rebound was already under way -- risking a spike in inflation. Powell, meantime, will be looking to stay out of the political crossfire, while repeating his pledge to hold off on tightening monetary policy until deep into the recovery.
“I suspect there will be lots of questions on the sustainability of deficits and the debt -- and ‘aren’t the deficits and debt big problems that will come back to haunt the United States?’” said Seth Carpenter, chief U.S. economist at UBS Group AG.
Yellen’s already made her answer clear, repeatedly saying over the past two months that the U.S. can afford to borrow more with interest rates historically low. Expect her to point out that despite much higher debt, the cost to service those obligations is the same is it was in 2007.
Powell’s take has been to set aside addressing debt sustainability for now. He said last month that “the time to prioritize those concerns is when we’re close to full employment, when the taxes are rolling in and we can do it without so much pain.”
The duo testify before the House Financial Services Committee at noon Tuesday and the Senate Banking Committee at 10 a.m. Wednesday. The appearances are required by the March 2020 Cares Act, which gave the Treasury and Fed hundreds of billions of dollars of firepower to fight the crisis.
Treasuries advanced on Tuesday ahead of the hearing, with 10-year yields at 1.63% as of 7:23 a.m. in New York, compared with the 14-month high of 1.75% hit last week.
Questions from lawmakers could range widely. The following are some of the items to expect.
Economy Bouncing Back
Yellen and Powell will repeat their assessments that the U.S. is bouncing back nicely from a devastating shock, thanks to fiscal and monetary policy support, but also flag that it has not fully recovered.
“While we’re seeing signs of recovery, we should be clear-eyed about the hole we’re digging out of: The country is still down nearly 10 million jobs from its pre-pandemic peak,” Yellen said in her opening remarks, which were released Monday evening.
New Fed projections point to 6.5% GDP growth this year, with unemployment seen falling to 4.5% by year’s end. Still, more than 9 million Americans remain out of work and the Covid-19 virus has not yet been contained.
Yellen also gave credit to lawmakers for passing the third massive stimulus bill in a year. “I am confident that people will reach the other side of this pandemic with the foundations of their lives intact,” she said in the prepared remarks.
Aid Disbursement Update
Yellen may be asked for fresh numbers on how much money has been delivered so far under Biden’s $1.9 trillion American Rescue Plan. Last week, the Treasury reported it had disbursed $242 billion of the $442 billion it expects to send to individuals under the law. Lawmakers will also be keen to hear when aid for state, local, territorial and tribal governments will be released.
State Tax Cuts
Yellen may also get pressed by Republicans over whether new relief will limit the ability of state governments to cut taxes. The law doesn’t explicitly bar states from cutting taxes but does prohibit them from using federal aid to offset tax cuts.
Asked during a phone briefing Thursday how the Treasury will enforce the law if states shift money within their budgets, department officials said the agency is in the process of crafting rules that will explain how the restrictions work.
Inflation Fear and Markets
Both Yellen and Powell may be asked about inflation fears, with critics saying that ultra stimulative fiscal and monetary policy settings run the risk of a surge in consumer prices. The sharp selloff in longer-dated Treasuries this quarter has only amplified those concerns.
Each key policy maker has predicted that a jump in prices, especially compared with depressed levels a year ago, will prove temporary. Last week, Powell said he expected a “pop” in inflation measures beginning this month, but said it would be a “one-time sort of bulge in prices.”
Democrats will also be happy to hear Powell repeat the Fed’s commitment to ultra-easy monetary policy. Watch for the Fed chief to repeat that the central bank won’t act on forecasts of inflation, but only on hard data points showing that the economy is back to full employment and there’s sustained achievement of the 2% target for price gains.
“The recovery is far from complete, so, at the Fed, we will continue to provide the economy the support that it needs for as long as it takes,” Powell said in testimony prepared for delivery Tuesday.
Build Back Better
The Biden administration and Democratic lawmakers are moving forward on a long-term economic package that could total up to $3 trillion, people familiar with the matter said on Monday, though they cautioned that no decision had been made. The program will feature a range of initiatives from infrastructure and combating climate change to increasing subsidies for child and elder care, strengthening workers’ rights and expanding Obamacare.
Democratic lawmakers may ask for each policy makers’ thoughts on their favored measures for inclusion. Powell almost certainly will seek to avoid comment, as he did in hearings last month -- a contrast to his repeated calls last year for more fiscal support to fight the impact of the pandemic.
“You’ve seen him pivot already,” said Julia Coronado, a former Fed economist and president of MacroPolicy Perspectives. “Last year he was pleading with them” for more spending. “This year he’s saying, ‘I can’t say anything.’”
The Biden administration has signaled interest in tightening scrutiny of big banks. Separate discussions are already underway at the Treasury about reforming the structure of the market for U.S. Treasuries in order to make it more resilient -- after the episode in March 2020 when trading nearly seized up amid an investor flight to cash, forcing the Fed to inject massive liquidity.
“There’ll be a huge conversation about banks and bank regulation,” predicted Carpenter at UBS. “And lawmakers will ask, ‘Is there something broken in markets and why do you have to keep swooping in to save them?’
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