“Resilient” US economy tested by coronavirus

“Resilient” US economy tested by coronavirus

Fed Chair upbeat in the first of his twice-a-year updates to congress. 

Federal Reserve Chair Jerome Powell told the US House of Representatives Financial Services Committee that over the second half of 2019 “the economy appeared resilient to the global headwinds that had intensified last summer,” despite challenges from coronavirus and productivity. 

Powell highlighted increased economic activity and a strengthening labor market as the US enjoyed its 11th year of economic growth.  

Powell reiterated the forecast from a formal report submitted to congress by the central bank Friday that its current target range for short-term borrowing costs, between 1.50% and 1.75%, is “appropriate” to keep the expansion on track. 

Powell added that “We are closely monitoring the emergence of the coronavirus, which could lead to disruptions in China that spill over to the rest of the global economy.”

With risks to trade policy receding and global growth stabilizing, Powell said he sees no reason to adjust interest rates unless new developments cause a “material reassessment” to the current perspective.

Nevertheless, the response from Wall Street was muted. US equity index futures pointed to a record-high open for the Standard & Poor’s 500 index while yields on US Treasury securities changed little. The dollar rose to a four-month high against the euro.

Job growth has remained sufficient to provide new jobs for workers entering the labor force, Powell said, highlighting that employers are increasingly willing to hire people with fewer skills and train them. 

Of concern are disparities across racial and ethnic groups, and a lower rate of labor force participation by Americans in their prime working years than citizens of most other advanced economies.

Meanwhile, Powell said that productivity gains had been subpar during the current period of growth, squeezing US corporate profits and making some businesses, which have already cut back on capital expenditures, cautious about hiring.

Finding ways to boost labor participation and productivity “should remain a national priority,” Powell claimed.

Business investment and exports were weak in the second half of 2019 after disputes with major trading partners. Manufacturing output also declined for the same reason.

Overall inflation based on the price index for personal consumption expenditures was 1.6% in 2019, below the Fed’s 2% target. 

Powell offered a quiet warning about the growing federal deficit, which is predicted to reach more than $1 trillion in 2020 after a Republican-led overhaul of the tax system.

“Putting the federal budget on a sustainable path when the economy is strong would help ensure that policymakers have the space to use fiscal policy to assist in stabilizing the economy over a downturn,” he said.


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Paul Imison
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