Federal Reserve Chairman Jerome Powell spoke to the National Association for Business Economics on Tuesday and said that the U.S. economy is far from out of the woods from its pandemic slowdown.
The SPDR S&P 500 ETF Trust (NYSE:SPY) traded lower in early afternoon trading as investors weigh the potential risks to the economic recovery and the potential benefits of more government stimulus.
‘Long Way To Go’: In his speech, Powell said he sees more risk to underaction by the Fed than overaction.
“The risks of overdoing it seem, for now, to be smaller,” Powell said. “Even if policy actions ultimately prove to be greater than needed, they will not go to waste.”
While economists now believe U.S. GDP grew sharply by a record 30% in the third quarter, Powell said dialing back on stimulus measures now would run the risk of allowing the recovery to run out of steam.
“While the combined effects of fiscal and monetary policy have aided the solid recovery of the labor market so far, there is still a long way to go,” Powell said.
Latest Projections: In August, Powell discussed the Fed’s new “average inflation targeting” policy, under which it may keep interest rates near 0% until inflation levels exceed its 2% inflation target. The latest Fed “dot plot” economic forecasts suggest it’s unlikely the Fed will raise interest rates from their current near-0% level until at least 2023.
The Federal Reserve is projecting a 3.7% decline in U.S. GDP in 2020 but a return to 4% growth in 2021 and 3.0% growth in 2022.
Benzinga’s Take: Powell didn’t tell investors anything they didn’t already know on Tuesday. The Fed has pledged to continue to support the economy via monetary policy measures, but investors are hoping to get another major stimulus package out of Washington in the near future as well.