Fed's Powell hopeful US economy can return to 'more normal conditions' later in 2021

• Vaccinations and falling case counts "offer hope for a return to more normal conditions later this year," Jerome Powell said.
• The statement is among the most bullish to come from the Fed chair since the pandemic began.
• Still, Powell warned the path forward is "highly uncertain" and the recovery "remains uneven."

Encouraging trends are lifting hopes that the US can make strides toward pre-pandemic normalcy later this year, Federal Reserve Chair Jerome Powell said Tuesday.

Data suggests the US is clearing the deadliest wave of the pandemic yet. Daily case counts are the lowest since October and hospitalizations have more than halved from their early January highs. The country's rate of vaccination, while down from its peak, remains well above the Biden administration's 1-million-doses-per-day target. The falling cases and vaccine distribution "offer hope for a return to more normal conditions later this year," Powell said while testifying to the Senate Banking Committee on Tuesday. The bullish statement is among the Fed chair's most positive since the pandemic rocked the economy in spring 2020. Separately, central bank officials said during a January meeting that their medium-term outlook toward economic recovery had improved due to the $900 billion stimulus package passed by Donald Trump in December, the potential for additional aid, and the "prospect of an effective vaccine program," according to meeting minutes published February 17.

Powell passively urged more stimulus throughout 2020 but pulled back on such comments after Trump's $900 billion plan passed. Democrats are now set to approve another plan currently worth $1.9 trillion as early as mid-March. While the Fed chief has avoided directly commenting on Biden's aid proposal, he noted during the Tuesday hearing that additional aid isn't likely to spur an immediate concerning jump in inflation.

Powell wards off taper, inflation talk with 'highly uncertain' path ahead

The recent uptick in bond yields suggests investors are also betting on a "robust and ultimately complete recovery," Powell told senators. Treasury yields gained over the past few sessions as investors positioned for economic growth and the stronger inflation set to come with it. The move signals investors are pulling forward their expectations of when the Fed will lift interest rates for the first time since March 2020.

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The change in market expectations has prompted some discussion around when the central bank will taper its asset purchases. The Fed continues to buy $120 billion of assets each month, split between $80 billion in Treasurys and $40 billion in mortgage-backed securities.

Pulling back from the purchase schedule risks jolting financial markets with a so-called taper tantrum, named for when the Fed "tapers" its bond purchases. A surprise reversal of the Fed's support could spark a sell-off in Treasurys and hinder bond-market functioning. Powell reiterated Tuesday that the Fed will clearly communicate the assessment of progress toward its inflation and employment goals before taking such action. For now, "substantial further progress" toward above-2% inflation and maximum employment is necessary to warrant a policy shift, he said.

The path forward is "highly uncertain," and the recovery "remains uneven and far from complete," Powell added. While the manufacturing and housing sectors fared well in recent months, spending in some service industries remains low and the labor market's recovery has stagnated.

Fiscal stimulus has helped pad against some of the pandemic's fallout, but the path of the virus is the single biggest factor in bringing about a swift recovery, Powell said.

"While we should not underestimate the challenges we currently face, developments point to an improved outlook for later this year," the Fed chair said. "In the meantime, we should continue to follow the advice of health experts to observe social-distancing measures and wear masks."