Jay Powell, the chairman of the Federal Reserve, will tell Congress that struggling small and medium-sized US businesses hit by the coronavirus pandemic may need “direct fiscal support”, rather than loans from the central bank.
In prepared testimony released ahead of his appearance before the House of Representatives financial services committee on Tuesday, Mr Powell sought to defend the Fed from criticism that its crisis measures have failed to help “Main Street” America as much as financial markets in recent months.
In particular, some lawmakers have pointed to the fact that the Fed’s flagship $600bn fund to lend to medium-sized companies needing assistance has barely been used because many potential borrowers and their banks feel the terms are too strict.
But Mr Powell stressed the limit of the Fed’s powers in lending directly to businesses, and said it was up to Congress to offer aid to stricken sectors of the economy.
The Fed chairman said its crisis lending facilities were only a “backstop” and reflected its “lending powers” rather than “spending powers”, which are the purview of Congress.
“Many borrowers will benefit from these programmes, as will the overall economy, but for others, a loan that could be difficult to repay might not be the answer. In these cases, direct fiscal support may be needed,” Mr Powell said.
The Fed chairman is set to testify as lawmakers remain deadlocked on a new fiscal stimulus package to prop up the US economy, with chances of a compromise before the November general election dimming — particularly as Washington gears up for a bitter fight over the Supreme Court vacancy created by the death of justice Ruth Bader Ginsburg on Friday.
Mr Powell has frequently nudged Congress to take additional action to support the economy in the near-term to prevent long-term damage, and will do so again at Tuesday’s hearing.
“A full recovery is likely to come only when people are confident that it is safe to re-engage in a broad range of activities,” he said. “The path forward will depend on keeping the virus under control, and on policy actions taken at all levels of government.”
Mr Powell said there had been a “marked improvement” in many economic indicators since the worst of the pandemic shock, partly thanks to the heavy dose of fiscal stimulus injected into the economy at the beginning of the downturn.
The Fed chairman mentioned better data on housing, investment, and the labour market, as well as consumer spending. But he also warned, as he frequently has this year, that economic activity remained “well below” pre-pandemic levels “and the path ahead continues to be highly uncertain”.
He added that the crisis has not hit Americans equally. “Those least able to bear the burden have been the most affected,” he said.
Last week the Fed signalled it expected to keep interest rates near zero until at least the end of 2023. It also adopted dovish guidance saying it would not raise interest rates until inflation hit 2 per cent and was “on track” to exceed that target for some time — an milestone that could take years.
In his testimony, Mr Powell reiterated that the Fed would keep acting to support the recovery.
“Our economy will recover fully from this difficult period. We remain committed to using our full range of tools to support the economy for as long as is needed,” he said.