Fed’s Powell says state and local governments are rebounding faster right now than during the financial crisis

Jerome Powell testifies before the Senate Banking, Housing and Urban Affairs Committee on his nomination to become chairman of the U.S. Federal Reserve in Washington, U.S., November 28, 2017.   REUTERS/Joshua Roberts
  • State and local government tax revenues have performed “better than expected,” Fed Chair Jerome Powell said.
  • Employment is still down by 1.3 million jobs, but school reopenings should bring back some payrolls, he added.
  • Expenses related to the pandemic are still murky and could present risks, the Fed chief said.
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One of the biggest laggards of the previous economic recovery is recovering better this time around, Federal Reserve Chair Jerome Powell said Wednesday.

The direct payments and expansion to unemployment benefits included in President Joe Biden’s $1.9 trillion relief plan are already among its most popular elements. But the inclusion of state and local government funding also addresses what many deem the biggest mistake of the 2009 stimulus package.

A lack of sufficient funding for governments allowed for budget shortfalls that forced job cuts and gutted social programs for years. Economists at JPMorgan estimated the absence of adequate aid slowed economic growth by an average of 0.26 points in the four years after the financial crisis.

The Fed feared a similar dynamic would emerge at the start of the COVID-19 recession, but data so far has been encouraging, Powell told the House Financial Services Committee on Wednesday.

“What we see is that revenues have performed better than expected. They’re about flat overall. Some states are down a lot, other states they’re actually up,” the central bank chief said.

Employment in state and local government is still down about 1.3 million payrolls. Yet many of those jobs are in education and school reopenings should lift that labor market, Powell said.

To be sure, the Fed chair avoided commenting on Democrats’ stimulus plan, noting central bank officials should stick to deliberating monetary policy and leave fiscal matters to lawmakers.

Certain areas remain murky. Fed policymakers “don’t have a great picture” of state and local governments’ expenses, Powell said, particularly those linked to the COVID-19 crisis like testing and vaccine distribution. Fiscal support passed in 2020 addressed some costs, but discrepancies across states make for a “complicated picture,” he added.

The Fed’s overall outlook, however, is fairly optimistic. Powell on Tuesday told the Senate Banking Committee that falling COVID-19 case counts and vaccine rollouts “offer hope for a return to more normal conditions later this year. He reiterated his positive view during the House hearing, saying the US is well on its way to reversing the pandemic’s impact.

“What I see is an economy where there is still a great deal of slack. I see the prospect of really significant progress as we put the pandemic behind us,” Powell said.

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