Federal Reserve Chairman Jerome Powell said Wednesday that positive vaccine developments should make the second half of 2021 a strong period of growth for the U.S. economy.
But until then, Powell warned that surging COVID-19 cases will have an “effect on suppressing activity” particularly in the first quarter of next year.
“The case numbers are so high and so widespread across the country that that seems like it must happen,” Powell said in a press conference.
The Fed chair added that high-contact industries like restaurants and bars will face significant impacts that could make for an economically challenging four to six months.
But with the vaccine rollout as a “light at the end of the tunnel,” Powell said Congress should act to help the businesses and households most likely to be impacted by closures or layoffs during that period.
“For many Americans, that bridge is there and they’re across it. But there’s a group for which they don’t have a bridge yet,” Powell said, pointing to small businesses struggling to stay open and low-income families turning to food banks.
If help is provided through a stimulus deal, Powell said the U.S. can cross the “economic chasm” and experience second half growth “at a fairly healthy clip.”
On Wednesday morning, Congressional leaders announced progress on a roughly $900 billion coronavirus relief bill. Details of the bill have not yet been released but the deal could include a fresh round of aid to small businesses and stimulus payments and additional unemployment insurance for households.
“The case for fiscal policy right now is very, very strong,” Powell said Wednesday.
For the Fed’s part, Powell says the central bank can still do plenty more to bridge the economy through the tunnel.
Powell’s press conference came alongside a new Federal Open Market Committee policy statement that committed the central bank to maintaining an aggressive pace of asset purchases until “substantial further progress” has been made in the economic recovery.
In the statement, which also held interest rates near-zero, the Fed said it could adjust its quantitative easing program but would, at a minimum, purchase at least $120 billion per month in U.S. Treasury bonds and mortgage-backed securities.
Powell added in the press conference that the central bank could, for example, target longer-dated U.S. Treasuries as part of its bond buys.
“Any time we feel like the economy could use stronger accommodation, we would be prepared to provide it,” Powell said.
But the Fed chief suggested that there could be a high bar for asset purchases that skew toward longer-dated assets, saying that interest-sensitive sectors like mortgages and auto loans do not appear pressured at the moment.
Powell also reiterated that the Fed still has the authority to open one if the Treasury approved it and if they were “needed.” But he clarified that the central bank currently has no plans to open any emergency loan program. Last month, the Fed and the Treasury quarreled over the fate of nine of 13 liquidity facilities that Treasury Secretary Steven Mnuchin declined to extend past December 31.
Although several Fed officials thought the programs needed to remain open past that point in time, Powell acknowledged Mnuchin’s legal authority to let the facilities wind down and followed the Treasury’s orders.
It remains to be seen whether or not the incoming Biden administration would take up the legal question of re-opening those facilities.
Powell said that he had been in touch with former Fed Chair Janet Yellen, after she was nominated by Biden to head the Treasury, but had not discussed any policy matters with her.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.