Federal Reserve Chairman Jerome Powell warned on Tuesday the United States has a "long way" to go to return to full employment, even as he expressed cautious optimism that the economy will recover from the pandemic this year.
At the same time, Powell avoided commenting on the level of federal support needed for the economy as Congress prepares to vote on President Biden's $1.9 trillion dollar rescue package for families and businesses battered by the coronavirus downturn.
In testimony before the Senate Banking Committee, Powell also pushed back against concerns that inflation will become a threat, as Republicans – and even some Democrats - warn that Biden's plan is excessive and could overheat the U.S. economy.
"While we should not underestimate the challenges we currently face, developments point to an improved outlook for later this year," Powell said.
"Once we get this pandemic under control, we could be getting through this much more quickly than we had feared, and that would be terrific," he added, referring to a sharp decline in new infections in recent weeks and the rollout of vaccinations.
Powell cautioned, however, that millions of people are still out of work, especially in hard-hit service industries like restaurants and hotels.
"The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved," Powell said.
During Powell's appearance, committee Republicans questioned how much additional government help the economy needs.
"We are well past the point where our economy is collapsing," said Sen. Pat Toomey, R-Pa. "The last thing we need is a massive, multi-trillion dollar universal spending bill."
Powell reiterated his belief that price hikes are unlikely to be a significant threat, without wading into Biden's plan.
"Inflation dynamics do change over time but they don't change on a dime," Powell said.
Inflation has consistently fallen short of the central bank's 2% annual target, and prices fell sharply in the early months of the pandemic.
"You could see spending pick up pretty substantially in the second half of the year and that would be a good thing of course, but it could also put upward pressure on prices," Powell said. "It doesn't seem likely that that would result in very large increases or that they would be persistent."
While the Fed does not anticipate a lasting spike in inflation, Powell stressed that he and his colleagues have the tools to address any surprises.
"Forecasters need to be humble and have a great deal to be humble about, frankly," he said. "If it does turn out that unwanted inflation pressures arise and they're persistent, then we have the tools to address that, and we will."
Biden's rescue package includes direct payments of $1,400 to most Americans, expanded unemployment benefits and federal aid to cities and states. It would also gradually raise the federal minimum wage to $15 an hour.
Sen. Tim Scott, R-S.C., questioned Powell about a report from the Congressional Budget Office which forecast the minimum wage provision would boost pay for an estimated 27 million Americans, but would also cost 1.4 million jobs.
Powell said while economists typically assume that minimum wage policy involves some trade-off between pay increases and job losses, the relationship is nuanced, and he declined to be dragged into the policy debate.
"This is a classic issue that the Fed never takes a position on," Powell said.