Fed chair, treasury secretary's message to Congress: Recovery has a long way to go

Testifying before the House Financial Services Committee on Tuesday, Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen told lawmakers that the economy is slated for booming growth this year. But their sunny forecast was paired with reminders that at least 9.5 million jobs are still missing from the labor force and that fully healing the economy depends on getting the pandemic under control.

U.S. jobless rate will fall to 4.5% this year and inflation will rise temporarily, Fed projects

"We welcome this progress but will not lose sight of the millions of Americans who are still hurting, including lower-wage workers in the services sector, African Americans, Hispanics and other minority groups that have been especially hard hit," Powell said Tuesday.

The economic outlook has significantly improved over the past few months and been buoyed by the recent passage of President Joe Biden's $1.9 trillion coronavirus relief package and more-widespread vaccinations. Millions of Americans have started to see $1,400 stimulus payments hit their bank accounts. The Fed projects the U.S. economy will grow at its fastest pace in four decades this year, with the unemployment rate falling to 4.5%.

Still, there are plenty of challenges to getting the elements of the sprawling stimulus law out the door, along with many unresolved questions about how hundreds of billions of dollars allocated by the American Rescue Plan will actually be dispersed. On Tuesday, a number of lawmakers pushed for more regular oversight of the $1.9 trillion bill, noting mechanisms put in place after Congress passed the Cares Act last spring.

"Now that we have an addition $1.9 trillion to track, I would ask for your commitment along those same lines," Rep. Patrick McHenry of North Carolina, the top Republican on the House Financial Services Committee, told Yellen, adding, "That would be encouraging that you'd continue the practice of your predecessor … to ensure appropriate oversight."

Yellen agreed to work with the committee and other oversight groups, and laid out some of the challenges to implementing Biden's bill. Yellen said earlier rounds of the Paycheck Protection Program often didn't reach the country's smallest businesses, especially those in rural and low-income areas. Rental assistance was frequently tied up in red tape. Many Americans still haven't received their stimulus checks.

"And all this is just a fraction of Treasury's work," Yellen told the committee. "There are so many more relief programs, including one that will provide $350 billion in aid to state and local governments. Implementing all of it is more complicated than it sounds."

Meanwhile, many Republican lawmakers, Wall Street investors and prominent economists are worried that the economy won't be able to absorb a massive stimulus package and post-pandemic consumer spending, pushing prices rapidly upward. Their worry is that dangerous cycles of inflation will force the Fed to hike interest rates, triggering a new recession.

"Economic projections are increasingly positive," McHenry said. But "with the addition of $1.9 trillion, there's been a great deal of debate about what will happen with this amount of liquidity in financial markets."

But the Fed and White House argue that inflation is not a pressing concern. Powell says that there would have to be substantial progress in the labor market before the Fed considers raising rates. Any price increases resulting from the economy reopening and people spending big on vacations or concert tickets will be temporary, he has said.

"Our best view is that the effect on inflation will be neither particularly large nor persistent," Powell said Tuesday. "We've been living in a world of strong disinflationary pressures around the world really for a quarter of a century. We don't think a one-time surge in spending leading to temporary price increase would disrupt that."

Lawmakers pressed Powell and Yellen on a range of other issues, from the regulators' research on digital currencies to banking regulations. Of particular focus was climate policy, which the Biden White House has made core to its agenda. The Fed increasingly points to climate risk as a threat to the financial system and financial stability.

As Powell and Yellen testified on Tuesday, Fed Governor Lael Brainard announced that the central bank is launching a Financial Stability Climate Committee, which will work closely with another Fed team focused on banks' resilience to climate change.

Republicans in Congress have warned the Fed against delving too deeply into climate issues. They argue that climate policy is part of progressives political agenda and not the purview of the central bank, which is independent and aims for price stability and maximum employment.

"There's concern in my district that the financial regulators may be moving towards regulation and supervision with environmental policy objectives, potentially discouraging banks from doing business with entire sectors of the economy," Rep. Frank Lucas, R-Ok., said at Tuesday's hearing.

Yellen said that even as climate issues are a top priority for the Biden administration, the Treasury Department doesn't plan to regulate specific investments banks can or can't make. Powell said that it's the Fed's job to better understand the risks climate change poses to the financial system, noting that many large banks are already making similar assessments themselves.

"We don't a have new mandate," Powell said. "This is consistent with our existing mandate of supervision of financial institutions. It's just the same mandate but a different risk."

Yellen and Powell will appear before the Senate Banking Committee on Wednesday.