Washington — Federal Reserve Chair Jerome Powell told lawmakers on Tuesday that the-battered economy remains hobbled, suggesting that the central bank will keep interest rates low.
"The economic recovery remains uneven and far from complete, and the path ahead is highly uncertain," Powell said in written 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 about a potential surge in inflation and fueled a sharp increase in longer-term interest rates this year.
Many 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.
"Mr. Powell presumably wants to try to persuade markets that a strengthening economy does not necessarily mean that rates have to rise," Ian Shepherdson, chief economist with Pantheon Macroeconomics, told investors in a note. "Good luck with that when the post-Covid surge in activity become clear."
Financial markets fell modestly in morning trade, with the S&P 500 and Dow stock indexes both down less than 1% and the tech-heavy Nasdaq down 242 points, or 1.8%.
Powell acknowledged the potential for a healthier economy. But he stressed the challenges caused by the pandemic, especially for unemployed Americans.
"The resurgence in COVID-19 cases, hospitalizations and deaths in recent months is causing great hardship for millions of Americans and is weighing on economic activity and job creation," he said. "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 is testifying before the Senate Banking Committee in 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.
Rising interest rates typically reflect optimism that the economy is poised to expand more quickly, which can accelerate inflation. But they can also weaken growth, especially if the Fed were to respond to rising inflation by raising its benchmark rate more quickly than markets expect.
"The upshot is that the Fed won't blink an eye until the unemployment rate is back down to 4%, which is in line with its current estimate of the long-run equilibrium rate," Paul Ashworth of Capital Economics said in a report.
Powell did not mention the sharp increase in longer-term rates this year or the stock market's run-up to frothy levels in his written testimony.