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Powell testifies before House on Federal Reserve response to COVID crisis

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Yahoo Finance’s Brian Cheung joins Adam Shapiro and Seana Smith to recap everything that happened during Federal Reserve Chairman’s testimony in front of the House subcommittee on Tuesday.

Video Transcript

SEANA SMITH: Well, welcome back to Yahoo Finance. I'm Seana Smith, along with my co-host Adam Shapiro. And we were just listening to Fed Chair Jay Powell wrapping up his testimony in front of some of the House members. He testified in front of the House select subcommittee on the coronavirus crisis. And Adam, he was really talking about the Fed's response to the pandemic so far, what he's expecting in terms of growth going forward. And I think he did strike a very positive tone.

He did, though, address two areas that are relatively uncertain, at least here in the short-term, one of that being job creation, the fact that we haven't added as many workers back into the workforce as we initially expected here just a couple of months ago. And there was a fiery exchange between Fed Chair Jay Powell and also Representative Jordan, the Republican out of Ohio. And then also, of course, questions about inflation, and Fed Chair Jay Powell once again insisting that he still sees those inflationary pressures as transitory. Adam, I think you're muted.

ADAM SHAPIRO: Seana, sorry about that. You know, some of the things that Powell was saying were things you would expect in response to what we keep hearing from not only Republicans. There are Democrats who are worried about the steps that have been taken that aren't necessarily from the Fed, but from the federal government to keep people healthy and surviving through the pandemic, the payments from the federal government.

He did talk about enhanced unemployment benefits may be a factor in the labor shortage we're seeing right now. But he also talked about-- remember when he talked about the quit rate, that a lot of what we're witnessing is people are quitting because they feel secure. And he referenced the strength of the economy on that. He also talked about the concern that he has with inflation.

And they tried to talk about whether the current trajectory is sustainable or not sustainable. And he talked about the need to control spending and that as an economy grows, it does become sustainable. So there was nothing really so extraordinary about the hearing. But it was a chance for politicians to get their commercials for the people back home. And it was a chance for the Fed chair to respond to the critics and to the people who might champion what he's been doing. In fact, I think it was a couple of the Democrats who said they're concerned that the Fed would actually remove its easing far too soon.

SEANA SMITH: Yeah, that's a big concern, although if you take a look at the market's reaction, it looks like investors were relatively happy with what they heard from Fed Chair Jay Powell. We're seeing all three of the major averages in the green right now, with just under 20 minutes to go in the trading day. We want to get over to our Fed reporter Brian Cheung, who's, of course, been watching the testimony here all day with us. And Brian, I guess, what stuck out with you from what we just heard from Fed Chair Jay Powell?

BRIAN CHEUNG: Yeah, to be honest, Seana, nothing crazy. First of all, we need to acknowledge that for any sort of Fed watchers that are wondering, wait, this seems to have wrapped up a bit early, this is because it's not with the House Financial Services Committee or with the Senate Banking Committee. This is with the select subcommittee on the coronavirus crisis, which only has, I believe, 12 or 13 members. So it's much smaller than those other chambers that you tend to see questioning the Fed chairman.

Now, when it comes to the substance of the hearing itself, there were, as Adam pointed out, some political questions. There were some questions directed at the Fed chairman with regards to the origin of the virus itself, which, as we know, the monetary policy officials are not necessarily that in the know on the virology or the nature of this COVID pandemic. So when it came to the monetary policy substance, though, I think there was a lot of expectation headed into this hearing that we might get more clarity from the Fed chairman about what the Federal Reserve is thinking when it comes to tapering.

As we know, the Federal Reserve had retired that term of talking about talking about tapering. Those conversations really began last week, but no questions on that front. And then also no questions about the projections that we got last week, showing that more members of the Federal Reserve see the case for a rate hike earlier than they had projected to the world in March. So a lot of questions kind of broadly about where the labor market is. We heard the Fed chairman say something to the effect of, well, there's still over seven million people on the sidelines.

So there's a long way to go on this economic recovery. And then on inflation, he said he continues to see inflationary pressures as transitory, although we got a little bit of a piece of new information when he said that 5% inflation would not be acceptable. Now, of course, is that 5% on PC, 5% on CPI? That's quite vague. So broadly, these are all things that we had already known from the Fed chairman's press conference last Wednesday.

I think it's just been repackaged for the purposes of this hearing. And any sort of opportunity that we had to hear from the Fed chairman to respond to the likes of St. Louis Fed President James Bullard, Dallas Fed President Robert Kaplan, who have expressed their more hawkish views over the past couple of days was not necessarily there. The questioning was focused more high level.

So I would say that in terms of things that we learned new today, nothing particularly crazy, although the Fed chairman saying that the economy still has a long way to go does suggest that he's one of the more dovish people when it comes to that dot plot projection. Keep in mind, only five of the 18 policy setting members projected no interest rate hikes through 2023. We don't know if the Fed chairman is one of them. But from his broad commentary saying that the labor market still needs more time to heal, it does sound like he might be more dovish than perhaps some of his colleagues. Guys.

ADAM SHAPIRO: Brian, that whole discussion about sustainability when they were talking about the ability of the United States to sustain its spending and its debt, there was nothing new there. I can think of two previous Fed chairs that have said the same thing. Is there any kind of understanding as to when that really does become an issue? Does the Fed ever talk about when that might actually be a problem for us?

BRIAN CHEUNG: Yeah, well, there have been some questions about whether or not there is a bright line test when it comes to debt as a percentage of GDP, whether that's a total or whether or not you're looking at growth figures. But broadly speaking, I think the Fed chairman is trying to shy away from offering any sort of specific line for this is the level where we're really in trouble.

But there was some commentary and an interesting exchange where I forgot with who it was, but he was talking about the idea that the United States is still the most powerful country in the world and has the economy that's still ranked number one. So in terms of being able to pay its debts back, he didn't-- he said there should be no worry for the Federal Reserve to pay any sort of bills that it's due to other countries around the world.

Now that doesn't mean that the federal debt is on a sustainable path. In fact, the Fed chairman has been on record of saying even before the amount of unprecedented fiscal spending during the COVID crisis, that debt was outpacing the level of growth in the United States, which, by nature, is unsustainable. That's a definition that he uses. That's a definition that the Congressional Budget Office also uses.

So he's saying that, yes, we do understand that we are spending more than we're growing at. But we needed to do so during the pandemic in order to make sure that we could support the economy so that there would be businesses to return to, that there would be people to go back to those jobs. And I think that was really what he was trying to underscore there.

But of course, Congress loves to ask the Fed chairman about these types of questions. We've seen it with him. We've seen it with former Fed chairman Janet Yellen and then her predecessor and then their predecessors. So this is just very much part of the rotating cast of, I guess, standing questions when it comes to congressional testimony.