In a rare televised appearance, Federal Reserve Chairman Jerome Powell said the economy is set to turn around as more Americans get vaccinated and flock back to long-neglected industries, but he warned that the pandemic remains the “principal” risk to the economy if cases spike as a result of reopenings happening too quickly and signaled that cyber attacks on financial institutions are the Fed’s biggest concern at the moment.
Speaking to CBS News’ 60 Minutes, Powell said widespread vaccination and the federal government’s massive stimulus spending has helped the U.S. economy reach an inflection point “right now” and that it should start to grow “much more quickly” as a result.
Despite saying he’s “highly confident” that the economy will emerge from the pandemic “better and more inclusive” than it was before, Powell urged Americans to “continue to socially distance and wear masks” for the foreseeable future and noted that nearly half of the 22 million jobs lost during the pandemic have yet to be recovered.
The long-bearish central banker cautioned against businesses reopening too soon and fueling a resurgence in the virus, saying that “the principal risk to our economy right now really is that the disease would spread more quickly.”
Though he acknowledged that asset prices do seem elevated by “some historical metrics,” Powell kept to recent messaging and insisted that the Fed will not ease up on its unprecedented economic support until the economy reaches maximum employment—something he said last month is “not at all likely” to happen this year.
Likely to usher in bullishness among investors, Powell said “it’s unlikely” the Fed will raise interest rates this year and said chances are “very, very low” that the financial system is at risk of a collapse similar to the one in 2008 during the Great Recession.
In terms of what could trigger a market collapse of similar magnitude, Powell said the Fed is most concerned about cyber attacks on financial institutions that halt their ability to track payments, a risk that the International Monetary Fund has estimated may cost banks around the world about $100 billion annually.
“The world evolves, and the risks change as well and I would say that the risk that we keep our eyes on the most now is cyber risk,” Powell said Sunday. “There are scenarios in which a large financial institution would lose the ability to track the payments that it’s making, where you would have a part of the financial system come to a halt, and so we spend so much time, energy and money guarding against these things.”
Since Powell pledged in March 2020 to use the Fed’s “full range of tools to support the U.S. economy,” the S&P 500 has skyrocketed nearly 80% from a mid-pandemic low to a new all-time high on Friday, and the Dow Jones Industrial Average and tech-heavy Nasdaq have posted similarly stunning gains of 76% and 102%, respectively. The labor market, on the other hand, has remained stubbornly below pre-pandemic levels, though it’s made promising progress in recent weeks. Powell insists the Fed will continue to bolster the economic recovery with historically low interest rates and $120 billion in monthly asset purchases until “substantial further progress” is made toward full employment—something still far on the horizon given the unemployment rate of 6%.
What We Don’t Know
How soon the Fed may be pressured to raise interest rates if prices start to rise too quickly and it needs to help normalize them. “If the jobs recovery gains steam or inflation pressures continue to rise, we believe the risk is that Powell could start hiking rates sooner than currently expected,” Lindsey Bell, the chief investment strategist at Ally Invest, said in an email Friday. “As we saw in 2018, that could be a risk to stocks, especially high-growth technology names,” she added, referencing an end-of-year stock-market crash after the Fed said it would raise interest rates in December 2018.
What To Watch For
Powell’s next speech is scheduled for Wednesday at the Economic Club of Washington. Vital Knowledge Media Founder Adam Crisafulli said in a Sunday note that he expects Powell will emphasize yet again that Fed policy should remain “unchanged for some time.”