Fed chief issues stark warning to Congress on deficits

Federal Reserve Chairman Jerome Powell called on Congress to reduce the U.S. federal budget deficit to ensure the central bank could adequately respond to a financial crisis or recession.

Powell told a House committee Tuesday that lawmakers should curb federal spending while the economy is running strong before a downturn forces Congress or the Fed to pump stimulus spending into the U.S.

“Putting the federal budget on a sustainable path when the economy is strong would help ensure that policymakers have the space to use fiscal policy to assist in stabilizing the economy during a downturn,” Powell said Tuesday before the House Financial Services Committee.

“A more sustainable federal budget could also support the economy’s growth over the long term.”

Powell’s comments come one day after President Trump proposed a budget for fiscal 2021 with a $1 trillion deficit that puts the U.S. on track to balance its spending in 15 years. Those projections assume the economy growing at a far faster rate than predicted by most economists.

Powell, a Republican widely seen as moderate, has frequently called on Congress to reduce the deficit throughout his tenure as Fed chairman. The Fed chief is among several policymakers and economists concerned about how a combination of low interest rates and high debt could hamstring policymakers if the economy slows down.

The Fed has historically responded to economic downturns with drastic interest rates cuts, reducing the cost of borrowing to stimulate the economy. The bank reduced interest rates to zero percent after the 2007 financial crisis and gradually raised them to a baseline range of 2.25 percent to 2.5 percent by December 2018.

A global economic slump forced the Fed to reverse course last year, cutting rates to the 1.5 percent to 1.75 percent range. With rates well below the historic average of 5 percent, some economists fear that interest rates are currently too low for a swift rate cut to stave off a recession. That would likely boost pressure on Congress to pass a massive stimulus bill akin to the 2009 measure enacted by former President Obama.

“The current low interest rate environment means that it would be important for fiscal policy to help support the economy if it weakens,” Powell said Tuesday.

Fiscal advice is one of the few areas directly beyond the Fed’s mandate where Powell is willing to offer policy prescriptions. Before joining the Fed in 2012, the chairman was a crucial Republican advocate for raising the federal debt limit during the Obama administration as a visiting scholar at the Bipartisan Policy Center.

But beyond budgeting, Powell has largely rejected lawmakers’ requests to opine on issues relegated to Congress while guarding the central bank’s independence amid Trump’s constant criticism.

Trump bashed Powell on Twitter in the middle of his testimony, blaming the Fed chief for a slight dip in the Dow Jones Industrial Average that began during his House appearance. 

“When Jerome Powell started his testimony today, the Dow was up 125, & heading higher. As he spoke it drifted steadily downward, as usual, and is now at -15. Germany & other countries get paid to borrow money. We are more prime, but Fed Rate is too high, Dollar tough on exports,” Trump tweeted.

While stocks are historically sensitive to commentary from Fed chiefs, it’s unclear what role Powell’s testimony actually played in the Dow’s minuscule loss.

Powell at the hearing painted an optimistic picture of a sturdy economy that is likely to hold steady amid a series of global threats but could be hampered by fallout from the lethal coronavirus.

Per custom, Powell brushed off Trump’s attack when asked to respond.

“I’m not following the market as I sit here answering your questions,” Powell said.

Lawmakers squabbled over Trump’s constant pressure even before the president weighed in on the hearing. Rep. Maxine Waters (D-Calif.), who chairs the Financial Services panel, condemned Trump for impeding on the Fed’s independence, prompting rebukes from committee Republicans.

“Every president in the last 100 years has had some private criticism [of the Fed] and we’ve found out at some point about that criticism,” said Rep. Patrick McHenry (R-N.C.), the panel’s ranking member.

“But here on the hill, we can make negative comments about the Fed and attack the president for having negative comments about the Fed.”

Rep. Bill Posey (R-Fla.) suggested later that the Fed should face an audit of its monetary policymaking process, even though the Fed releases minutes and full transcripts of its rate-setting meetings, which are public.

But the hearing highlighted the challenge Powell faces in trying to sidestep a partisan and sharply divided Washington.

Powell even faced criticism of his own personal conduct despite a reservoir of goodwill among lawmakers in both parties.

Rep. Katie Porter (D-Calif.) questioned Powell on why he attended a party at the Washington, D.C., home of Amazon CEO Jeff Bezos that was attended by several top White House officials, including Jared Kushner and Ivanka Trump and JPMorgan Chase CEO Jamie Dimon.

“I would just suggest that this attendance at this kind of event with these kinds of people is inconsistent with what I would otherwise commend you on for doing a very good job,” Porter said. 

Powell responded that he did not talk to any of the people Porter named and merely introduced his son and daughter-in-law to former Defense Secretary James Mattis, who resigned in protest from the Trump administration in December 2018.