POWELL: RECOVERY INCOMPLETE, INFLATION UNLIKELY
Fed chief shows economic support, no policy shift
Federal Reserve Chair Jerome Powell underscored the U.S. economy’s ongoing weakness Tuesday in remarks that suggested that the Fed sees no need to alter its ultra-low interest rate policies anytime soon.
“The economic recovery remains uneven and far from complete, and the path ahead is highly uncertain,” Powell said in testimony to the Senate Banking Committee.
Powell’s comments are in contrast to the increasing optimism among many analysts that the economy will grow rapidly later this year. That outlook has also raised concerns, though, about a potential surge in inflation and has fueled a sharp increase in longer-term interest rates this year.
Most economists say they think the Fed’s continued low rates, further government financial aid and progress in combating the viral pandemic could create a mini-economic boom as soon as this summer. Powell acknowledged the potential for a healthier economy. But he stressed the personal hardships caused by the pandemic, especially for unemployed Americans.
“As with overall economic activity, the pace of improvement in the labor market has slowed,” Powell said. “Although there has been much progress in the labor market since the spring, millions of Americans remain out of work.”
Powell’s focus on the economy’s challenges reflects his reluctance to send any signal that the Fed is considering pulling back on its efforts to boost economic growth and hiring. The Fed cut its benchmark shortterm interest rate to nearly zero last March in response to the pandemic recession. It is also purchasing $120 billion a month in bonds in an effort to hold down longerterm rates.
Powell reiterated that those purchases will continue until “substantial progress” has been made toward the Fed’s goals of low unemployment and stable inflation at about 2 percent annually.
The economy may improve rapidly later this year, Powell said, “but the job is not done yet, the job is not done.”
Powell also downplayed concerns about rising longer-term interest rates and potentially higher inflation, which some analysts worry will result from a burst of spending and growth if the pandemic is brought under control later this year.
The Fed chair also refused to endorse or condemn President Joe Biden’s $1.9 trillion economic rescue package, which is beginning to make its way through Congress. When asked by Sen. John Kennedy, R-La., if he would “be cool” with Congress approving or voting down Biden’s proposal, Powell said, “By either being cool or uncool, I would have to be expressing an opinion. which I’m not doing.“
The divide in Congress in regard to the state of the economy was clearly on display, a key part of the debate over the stimulus. Sen. Sherrod Brown, D-Ohio, chairman of the committee, spoke of Americans facing eviction, struggling small businesses, and state and local governments that need financial assistance.
Sen. Pat Toomey, R-Pa., however, noted that 18 states have unemployment rates below 5 percent and argued that incomes have recovered
to pre-pandemic levels.
“We are well past the point where our economy is collapsing,” Toomey said. “In fact our economy is growing rapidly There’s also real danger that we have overheating that can lead to inflation.”
Powell has previously endorsed government spending in general to offset the impact of the recession. Fed chairs typically avoid commenting on specific legislation.
The Fed chair also acknowledged that prices could rise later this year if Americans engage in a burst of spending as the coronavirus comes under control.
But Powell emphasized that he doesn’t expect sustained price increases. Inflation has been held down for decades by greater international competition, growing online commerce, and other trends that take time to change, he said.
In response to a question from Sen. Kyrsten Sinema, D-Ariz., Powell said, “We do expect that inflation will move up. But we don’t expect the effects on inflation will be particularly large or persistent.”
Powell’s remarks to the Banking Committee are coming on the first of two days of semiannual testimony
to Congress that is required by law. On Wednesday, he will testify to the House Financial Services Committee.
His testimony comes as the economy is showing gradual improvement in key areas, with manufacturing and retail sales rebounding despite a stagnant job market. Still, the steady rise in interest rates has unsettled the stock market.
On Tuesday, the major indexes were flat after an early slide. The yield on the 10-year Treasury note rose to 1.36 percent. At the start of the year, the 10-year yield was below 1 percent.
Powell attributed that increase to optimism about a potential acceleration in growth.
“In a way it’s a statement of confidence on the part of markets that we will have a robust recovery,“Powell said.
In response to a question from Toomey, Powell acknowledged that “there is certainly a link” between the Fed’s low-interest rate policies and rapid price increases for stocks, homes, and some commodities. But he also attributed much of the price gains that have occurred to rising optimism.
For now, interest rates remain, by historical standards, exceedingly low. As recently as the fall of 2018, for
example, the 10-year yield brief ly topped 3 percent. But for the past year, the economy and the markets have drawn strength from nearrecord-low borrowing rates.
Many analysts are bullish about the prospects for this year. On Monday, Michelle Meyer, an economist at Bank of America, raised her forecast for growth this year to 6.5 percent. That would be the strongest calendar year economy growth since 1984.
Still, the job market remains essentially stalled, with employers adding an average of just 30,000 jobs a month in the past three months. The economy is about 10 million jobs short of its pre-pandemic level.
Powell was also asked about the prospects of the Fed creating a digital currency, a move that is gaining steam among other central banks. Powell said the Fed is “looking carefully at whether to issue a digital dollar.”
Fed governor Lael Brainard said last year that the central bank has conducted “in-house experiments” on a digital currency, as a complement to cash. Providing a digital dollar would ensure “the public has access to a range of payments options,” she said.
The housing market was among the very few bright spots for the U.S. economy in the year of the lockdown and Home Depot became its supplier, racking up an unprecedented $132 billion in sales for 2020.
Sales grew even stronger in the final quarter of the year, surging 25 percent to $32.26 billion. That is up from $25.78 billion in the same period last year and exceeded even the lofty projections for $30.66 billion on Wall Street, according to a survey of analysts by Zacks Investment Research.
Home improvement stores became a beehive during the pandemic with millions working from home and attending school remotely. Many families concluded that bigger homes, or at least different homes, were the answer in 2020, driving prices sky high.
While Home Depot was not alone in meeting the demand for
hammers, paint or appliances that go along with a housing boom, the sheer volume of goods it sold this year were staggering.
Attempting to put that volume into context, Neil Saunders, the managing director of GlobalData, calculated that in 2020 the equivalent of every person in
the United States spent $402 at Home Depot.
“It is easy to look at Home Depot’s numbers and chalk up its success to the pandemic,” Saunders said Tuesday. “However, sustaining three quarters of growth above 20 percent is extremely difficult in terms of the pressure it puts on the whole operation from supply chains to stores.”
Global sales at stores open at least a year, a key indicator of a retailer’s health, climbed 24.5 percent, and by 25 percent if only U.S. stores are counted.
Home Depot Inc. earned $2.86 billion, or $2.65 per diluted share, for the three months ended Jan. 31 compared with $2.48 billion, or $2.28 per diluted share, a year earlier.
Earnings, adjusted for costs related to mergers and acquisitions, were $2.74 per share. That handily beat the $2.63 per share Wall Street was calling for.
The Atlanta company on Tuesday said that it was not providing annual guidance for the year, citing the uncertainty of the pandemic. Given the huge numbers Home Depot put up in 2020, that dispirited investors, and shares fell more than 3 percent.
However, in a show of confidence, the nation’s biggest home improvement chain boosted its quarterly dividend 10 percent, to $1.65 per share.