Fed's Powell remains upbeat about US economy

February 13, 2020 08:30
Federal Reserve Chairman Jerome Powell prepares to leave after testifying at a hearing of the Senate Banking Committee on Capitol Hill in Washington on Tuesday. Photo: Reuters

Federal Reserve Chairman Jerome Powell reiterated his confidence in the US economic outlook, even as he said he expected some drag “soon” from China’s new coronavirus epidemic, Reuters reports.

“There’s no reason why the current situation of low unemployment, rising wages, high job creation - there’s no reason why it can’t go on,” Powell told the Senate Banking Committee on Wednesday, the second day of congressional testimony.

The record-long US economic expansion is now in its 11th year. US wages are now growing at about a 3 percent annual pace, the unemployment rate is 3.6 percent, and job growth has more than kept up with an increase in the workforce.

“There is nothing about this economy that is out of kilter or imbalanced,” Powell said.

His remarks underscored the central bank’s view that its current target range for short-term borrowing costs, between 1.5 percent and 1.75 percent, is the right setting to keep the expansion on track.

But he also said the Fed is keeping close tabs on the coronavirus epidemic that has killed hundreds and sickened tens of thousands of people since January, nearly all in China.

“We do expect that there will be some effects” on the US economy, Powell said, adding that he expects to begin seeing these reflected in economic data “relatively soon”.

Factory shutdowns and travel restrictions aimed at containing the virus’ spread within China and to the rest of the world are expected to disrupt supply chains.

US exports to China will also be suppressed, he said, as will Chinese tourism to the United States. Financial markets offer another pathway for impact on US growth.

Longer-term issues

Powell also noted a number of areas where the economy’s performance is falling short, including wealth and income inequality, and labor force participation that, while rising, is lower than in many other advanced economies.

Asked why, Powell pinned much of the blame on low educational attainment.

And he called out for the second day his concerns about the rise in US debt. “I would say, be concerned now,” he said.

The federal budget’s biggest problem, Powell said, is healthcare spending, which accounts for about 17 percent of GDP, more than the norm of about 11 percent in most advanced economies.

That’s so even though the benefits themselves are no more generous, and the health outcomes are “perfectly average”, he said.

This year’s federal deficit will hover at around US$1 trillion. Though the just-released presidential budget projects a reduction over the next 10 years, it assumes 3 percent economic growth for years to come.

If the ratio of debt to GDP continues to grow quickly, Powell said, “what it means is, 20 years from now ... our children will be spending those tax dollars on servicing the debt, rather than on the things they really need.”

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CG