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Powell says economy still needs Fed support, markets are not driven by cheap money

FILE PHOTO: Federal Reserve Chairman Jerome Powell during a hearing at the House of Representatives Financial Services Commission in Washington, USA, February 11, 2020. REUTERS / Leah Millis FILE PHOTO: Federal Reserve Chairman Jerome Powell during a hearing at the House of Representatives Financial Services Commission in Washington, USA, February 11, 2020. REUTERS / Leah Millis

By Howard Schneider

WASHINGTON, Feb 23 (.) – Federal Reserve Chairman Jerome Powell on Tuesday rejected suggestions that central bank support for the economy risked inflating a dangerous asset bubble, insisting that support was still necessary and that investors were responding primarily to expectations of a successful recovery.

From the anticipated success of coronavirus vaccines to the large amount of savings available for households to spend in the coming months, “there are many factors that are contributing to what is happening in the markets right now,” Powell said in a hearing before the Senate Banking Committee.

“I certainly agree that monetary policy is one of them,” but it has yet to be deployed to support the economy until it fully recovers.

Interest rates will remain low and the Fed’s bond purchases will continue “at least at the current rate until we make further substantial progress toward our goals … which we have not really achieved,” Powell said at the hearing. , the first since Democrats won the White House and control of both houses of Congress.

The Fed chief was responding to questions from concerned Republican senators that the Fed’s combination of asset purchases, a potential economic boom fueled by the rollout of vaccines, and the passage of another huge stimulus package could lead to losses. Asset prices at unsustainable levels and cause inflation.

“Whether it’s GameStop, Bitcoin, real estate, commodities, we’re seeing pretty high asset prices and signs of inflation,” said Republican Sen. Pat Toomey, who is among those arguing that the $ 1.9 trillion spending plan of dollars proposed by the Joe Biden government should be adjusted.

“There are a lot of warning signs that flash yellow,” Toomey said.

However, Powell said the focus must remain on an economic recovery that remains “uneven and far from complete” and would need central bank help for “some time” to return to full employment.

Cuts in interest rates and monthly purchases of $ 120 billion in government bonds “have materially eased financial conditions and are providing substantial support to the economy,” Powell said in opening remarks to the panel.

“The economy is a long way from our employment and inflation targets, and it will likely take some time to make further substantial progress,” the barrier the Fed has set to discuss when it might be appropriate to cut support.

Even with Americans vaccinated at a rate of more than 1.5 million a day and the drop in coronavirus cases, Powell and his fellow Fed policymakers will focus instead on the nearly 10 million jobs that are lacking in the economy compared to a year ago, and the potent risks still posed by the virus.

Although the health crisis in the country is improving and “vaccines offer hope of a return to more normal conditions later this year,” according to Powell, “the trajectory of the economy continues to depend significantly on the course of the virus and the measures taken to control their spread “.

(Reporting by Howard Schneider, Edited in Spanish by Gabriela Donoso and Manuel Farías)