Federal Reserve Chairman Jerome Powell reported on the state of the economy at a Senate hearing June 16.
During the initial report on the state of the economy and the actions taken by the Fed in response to the Coronavirus crisis, the president listed all the extraordinary measures taken by the bank since March.
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Part of this included an unprecedented expansion of the Federal Reserve’s balance sheet, which purchased securities in the market with freshly printed money as part of the practice of quantitative easing.
But the president was totally optimistic about the inflation outlook. He noted that, in the short term, weak demand caused prices to fall for clothing, gasoline, airplane tickets and other industries affected by the quarantine. Because of this, „consumer price inflation has dropped significantly in recent months,“ he said.
„Long-term inflation expectations have remained fairly stable. As output stabilizes and the recovery progresses, inflation is expected to balance out and gradually return over time. … inflation is likely to remain below our target for some time.
Equilibrium is not a threat
Responding to Senator Richard Shelby’s (R-AL) concerns about the size of the balance sheet, Powell ruled out any resulting problems. „I don’t think the current balance sheet represents a real threat to inflation or financial stability,“ he said.
He stressed that the balance sheet expands only when necessary, without making it „larger than necessary.
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But he revealed that the Fed’s balance sheet is unlikely to be eliminated after the crisis:
„When the time comes, as we did from 2014 to 2017, we simply freeze the size of the balance sheet and, as the economy grows, the balance sheet will shrink.“
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He explained that, in the past, active reduction in the balance sheet has had an effect on the economy, while a „passive“ approach has not.
Powell’s optimistic view contrasts with the opinion of many market experts, who believe the dollar may lose a significant portion of its value due to inflation.
The rest of the session focused largely on the post-crisis labor market outlook, as well as the recent decision to buy corporate bonds, which some senators criticized as unnecessary.