Fed’s Powell Says Economic Outlook ‘Highly Uncertain,’ Pins Hopes on Vaccine

February 23, 2021 Updated: February 23, 2021

WASHINGTON—Federal Reserve Chair Jerome Powell said on Feb. 23 that the ongoing COVID-19 vaccinations could help speed a return to normal activities later this year, but also warned that the U.S. economic recovery from the pandemic still “remains unequal and far from complete.”

Speaking to the Senate Banking Committee, Powell offered a more optimistic view about the economy than he has in recent statements and signaled that growth in 2021 could be much higher than projected.

While the U.S. economy could be getting through the pandemic much more quickly than feared, he said, the Fed’s job to support economic activity isn’t over yet.

“Following a sharp rebound in economic activity last summer, momentum slowed substantially, with the weakness concentrated in the sectors most adversely affected by the resurgence of the virus,” Powell said in his testimony about the state of the economy and the monetary policy outlook.

He said that “ongoing vaccinations offer hope for a return to more normal conditions later this year. However, the economic recovery remains uneven and far from complete, and the path ahead is highly uncertain.”

The pace of improvement in the labor market has also slowed in recent months as the resurgence in the virus and some lockdown measures slowed activity mainly in the leisure and hospitality sectors.

“While we should not underestimate the challenges we currently face, developments point to an improved outlook for later this year,” Powell said, hoping that the virus will be brought under control with vaccination efforts.

Household spending on goods picked up “encouragingly” last month after slowing late last year, he noted. The housing sector has been a bright spot in the economy during the pandemic. And business investment and manufacturing production have also improved.

The central bank’s economic projections in December showed that the economy would expand by 4.2 percent in 2021. However, many economists have recently upgraded their growth projections to reflect the next fiscal stimulus package. During the hearing, Powell agreed with these new estimates, stating that the U.S. economy may grow in the range of 6 percent.

Matthew Luzzetti, chief U.S. economist at Deutsche Bank, raised his forecast for growth this year to 7.5 percent. The move was driven primarily by the Biden administration’s desire to “go big” for fiscal stimulus, which will likely boost consumer spending in coming months, he said in a report.

Powell said that the Fed’s bond purchases, or quantitative easing, will continue at least at their current pace until it sees substantial further progress in its labor market and inflation goals.

“The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved,” Powell said.

To reduce economic damage amid the pandemic, the Fed has been buying at least $80 billion per month in Treasuries and $40 billion in mortgage-backed securities since June last year.

According to Deutsche Bank, the central bank likely will announce tapering at its December meeting and reduce the asset purchases to net-zero gradually over the course of next year.

When asked about inflation fears, Powell again downplayed the risk, saying that the central bank has the tools to deal with unwanted inflation.

Powell said it seems unlikely that an “increase in spending would lead to large or persistent inflation.”

The prospects for another large stimulus package have reignited fears about inflation, causing a deep division among economists recently. While some forecasters such as Democratic economist Larry Summers believe that the stimulus plan pushed by Democrats threatens future inflation, Powell and Treasury Secretary Janet Yellen have softened the concerns, saying inflation worries are overstated.

Powell said the Fed wouldn’t repeat the inflation mistakes of the 1970s.

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