Federal Reserve Chairman Jerome Powell gave a bleak assessment of the U.S. economy as he testified remotely to the Senate Banking Committee on Tuesday. The only bright spot he mentioned was the mortgage market.
Powell reiterated the central bank’s plan to slow its purchases of agency mortgage-backed securities because of an easing of credit conditions. The Fed has bought more than half a trillion dollars of MBS since mid-March, helping to drive interest rates for home loans to the lowest ever recorded in April’s final week.
“As tensions and uncertainty rose in mid-March, investors moved rapidly toward cash and shorter-term government securities, and the markets for Treasury securities and agency mortgage-backed securities, or MBS, started to experience strains,” Powell told lawmakers. “These markets are critical to the overall functioning of the financial system and to the transmission of monetary policy to the broader economy.”
The central bank’s decision to purchase Treasuries and MBS greased the credit wheels by creating demand for bonds, he said.
“With these purchases, market conditions improved substantially, and thus we have slowed our pace of purchases,” Powell said. “While the primary purpose of these open market operations is to preserve smooth market functioning and effective policy transmission, the purchases will also foster more accommodative financial conditions.”
Powell referred to Section 13 of the Federal Reserve Act of 1913 that delineates the powers of the central bank.
“The tools that the Federal Reserve is using under its 13(3) authority are for times of emergency, such as the ones we have been living through.,” he told Congress. “When economic and financial conditions improve, we will put these tools back in the toolbox.”
In a rare sit-down interview with CBS’ “60 Minutes” on Sunday night, Powell said the percentage of the contraction of GDP in the current quarter could be as steep as “the twenties or thirties,” which would be a record.
The second half of the year could be better, he said.
“I think it’s a reasonable expectation that there’ll be growth in the second half of the year,” Powell told reporter Scott Pelley. “I would say though we’re not going to get back to where we were quickly. We won’t get back to where we were by the end of the year.”