Jay Powell, the chairman of the Federal Reserve, dismissed fears that the recent rise in long-term borrowing costs could be unhealthy for the US recovery, saying markets had adjusted in an “orderly” manner to declines. better economic prospects.
In testimony before the Senate Banking Committee on Wednesday, Powell sought to allay concerns, raised primarily by Republican lawmakers, that the economy could overheat due to Joe Biden’s $ 1.9 billion fiscal stimulus package.
Long-term U.S. government debt yields have risen since the start of the year, with the benchmark 10-year note trading at 1.63%, well above the observed 0.9% level in January. However, after hitting a 14-month high of 1.75% last week, the market has stabilized in recent days.
While Fed officials have said they are monitoring market developments, they have fought back against warnings that the rise in yields has been so steep as to warrant an alarm or central bank intervention.
“There has been an underlying sense of improving economic outlook, and that must partly explain why rates would revert from the extremely low levels we are at – to levels that we are more likely to see, and it has been. an orderly process, ”Powell said in response to a question from Richard Shelby, a Republican senator from Alabama.
“I would be worried if this was not an orderly process or if conditions had tightened to the point of threatening our recovery,” he added.
A recent round of decent Treasury auctions has also helped stabilize the market. On Wednesday, the Treasury Department was able to unload $ 61 billion in five-year notes at a yield of 0.85%. Although slightly higher than the initial yield of 0.847% set before the auction, it marked a significant improvement over wrong auction of 7-year notes last month that triggered frantic trading.
The Treasury is looking to offload an additional $ 62 billion in 7-year notes on Thursday – an auction investors will be watching closely.
Republicans on the Senate committee seemed skeptical of the The will of the Fed to keep monetary policy extremely loose – with its main interest rate close to zero and $ 120 billion in monthly debt purchases – until ambitious economic recovery targets are met.
“I’m afraid the Fed will be behind the curve when inflation inevitably picks up,” said Pat Toomey, Republican Senator from Pennsylvania.
Powell responded to these concerns by saying that the Fed did not expect a boom in economic activity this year “to produce significantly higher prices or the effects to be lingering.” On the contrary, the central bank believed that higher inflation would be “transient or temporary”.
Powell was joined at the virtual audience by Janet Yellen, his predecessor as Chairman of the Fed who is now Secretary of the Treasury.
During the hearing, Yellen said the recently approved fiscal stimulus package could potentially return the U.S. economy to full employment by next year.
But it has faced repeated criticism from Republican lawmakers for giving the IMF the green light to issue $ 650 billion in new special drawing rights to bolster the balance sheets of low-income countries with a hefty dose of reserve currency to help them get through the pandemic.
In a heated exchange, Yellen was repeatedly interrupted by John Kennedy, Republican Senator from Louisiana, as she sought to rebut her accusations that a new SDR issue would cost U.S. taxpayers $ 180 billion and channel money to strategic US adversaries like China and Venezuela.
“I don’t know where you got a figure like that from,” Yellen said, arguing that the budgetary cost to the United States would be “a wash.”
She also defended the need for the SDR allocation as a matter of policy.
“I would say the current crisis has increased the need for global reserves, and that’s the IMF assessment. The world economy suffered a very severe and severe collapse in 2020, ”Yellen said. “This allocation will help countries meet this need for reserves.”