WASHINGTON – Chairman Jerome Powell on Wednesday defended the Federal Reserve's efforts to support the economy during the pandemic-induced recession from assertions that its programs bungled aspects of its response.
A House subcommittee released a staff analysis that found that a program in which the Fed bought corporate bonds to try to support companies struggling in the pandemic included buying bonds of companies that laid off more than 1 million workers since March.
The report from the Select Subcommittee on the Coronavirus Crisis concluded that 383 companies whose bonds were bought by the Fed had continued to pay dividends to shareholders, with 95 of those companies also laying off workers. The report said fossil fuel companies accounted for 10% of the Fed's bond purchases even though they employ just 2% of the workers at larger companies.
"Many large layoffs have occurred among the companies whose bonds were purchased by the Fed, suggesting that the primary beneficiaries of the program have been corporate executives and investors not workers,” the report said.
Testifying on the second of three days to Congress about the government's rescue assistance, Powell took issue with the report's findings. The chairman said the Fed had structured its corporate bond purchases, spread in relatively small sums and covering more than 800 companies, to ensure that it wasn't favoring any particular companies. He noted that the corporate bond purchases were made in the secondary market and not directly from the companies.
“We didn't want to be deciding which companies to help,” Powell said.
The chairman said the primary aim of this program was to provide a backstop at a time of turbulence in bond markets, and he suggested that this and other Fed programs had succeeded in stabilizing the markets.
Powell also faced sharp questioning Wednesday about the lackluster success so far of another Fed emergency program, the Main Street Lending Program, which has supplied few loans to medium-size businesses, its intended beneficiaries.
He said Fed officials needed to address numerous complications in setting up this program. He suggested that the small demand for these loans showed that the private markets were now doing an effective job in supplying loans to credit-worthy companies.
Powell's testimony this week comes as lawmakers are conducting oversight of the government's response to the pandemic. On Thursday, the Fed chairman and Treasury Secretary Steven Mnuchin will testify to the Senate Banking Committee.
At its policy meeting last week, the Fed left its benchmark interest rate at a record low near zero and signaled that it planned to keep it that low through 2023. The central bank's policy statement also reflected its new policy goal of allowing its preferred inflation gauge to run above its 2% inflation target for a time to make up for the Fed's failure to achieve that goal over the past decade.
In a separate appearance Thursday, Fed Vice Chairman Richard Clarida said in an interview with Bloomberg television that "we’re not going to even begin to think about lifting off, we expect, until we actually get observed inflation — and we measure it on a year-over year basis, equal to 2%." He said that “we could actually keep rates at this level even beyond that.”
Clarida said, “The economy is recovering robustly, but we are still in a deep hole."
Powell was pressed Wednesday by both Democrats and Republicans to support proposals being floated to break a logjam that has kept Congress from passing a new relief bill, including federal benefits for the unemployed, after the expiration of an earlier rescue package.
The Fed chairman demurred, saying it was up to Congress to decide what should be included in any new measure. But he reiterated his belief that the economy would need more help to emerge from a recession that has left millions of people still unemployed and battered major portions of the economy.
Pressed by some lawmakers to offer ways to expand the Main Street lending program, Powell said that if the economy fares worse than the Fed expects in coming months, the Main Street program would be available to provide help to mid-size businesses.
But he said that for smaller businesses, the more effective means of support would be to make more loans available through the separate Paycheck Protection Program. Under this program, loans can be forgiven if businesses use the money to avoid laying off workers.