Federal Reserve Chairman Jerome Powell warned Tuesday that the U.S. economy faces a deep downturn with “significant uncertainty” about the timing and strength of a recovery. He cautioned that the longer the recession lasts, the worse the damage that would be inflicted on the job market and businesses.
In testimony to Congress, Powell stressed that the Fed is committed to using all its financial tools to cushion the damage from the coronavirus. But he said that until the public is confident the disease has been contained, “a full recovery is unlikely.” He warned that a prolonged downturn could inflict severe harm — especially to low-income workers who have been hit hardest.
Powell delivered the first of two days of semi-annual congressional testimony to the Senate Banking Committee before he will address the House Financial Services Committee on Wednesday. Several senators highlighted the disproportionate impact of the viral outbreak and the downturn on African-Americans and Latinos. Powell expressed his agreement.
“The way the pandemic has hit our economy... has been a real inequality-increaser,” the chairman said, because low-wage service jobs have been hardest hit and are disproportionately held by minorities. “That’s who’s bearing the brunt of this.”
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He noted that the pandemic also poses “acute risks” for small businesses and their employees.
“If a small or medium-sized business becomes insolvent because the economy recovers too slow, we lose more than just that business,” he said. “These businesses are the heart of our economy and often embody the work of generations.”
Several Democratic senators used their questions to Powell to press for a new congressional rescue bill that would provide increased aid for state and local governments, which face the prospect of mass layoffs because of diminished tax revenue, as well as an extension of enhanced unemployment benefits.
Powell agreed that while both Congress and the Fed have supplied record-high support, the severity of the downturn may require more.
“The shock that the economy received was the largest in memory,” he said, noting that the congressional response and the Fed's response were also the largest on record. “Will it be enough? I would say that there is a reasonable probability that more will be needed both from (Congress) and the Fed.”
Without further help, states and cities could be forced to lay off more employees, Powell said, which also happened after the 2008-2009 recession and which, he added, slowed the recovery after that downturn. Similar layoffs now could “weigh on” the economy, he said.
Powell agreed that Congress should consider extending unemployment benefits beyond their typical six-month period, on the assumption that unemployment would likely still be quite high by the end of the year. He did not weigh in on the debate over whether the extra $600 in weekly federal unemployment benefits should be extended beyond its current July 31 cutoff date, as House Democrats have proposed.
“Some form of support for those people going forward is likely going to be appropriate," he told the committee. “There are going to be an awful lot of unemployed people for some time," he said, suggesting that workers in the travel and hotel industries, among others, will likely have to find work in different industries.
Kathy Bostjancic, a senior economist at Oxford Economics, noted that Powell reiterated the cautious message he had expressed at a news conference last week.
“While the economy seemingly has turned the corner, the road to full recovery is long and contingent on the public gaining confidence that the virus is contained,” Bostjancic said. “The outlook remains cautious despite ... initial signs of rehiring and a bounce-back in consumer spending.”
In his remarks to the lawmakers, Powell said he remains confident about the economy’s future: “Long run, I am confident we will have a full recovery.”
Since March, the Fed has slashed its benchmark short-term rate to near zero, bought $2.1 trillion in Treasury and mortgage bonds to inject cash into markets and rolled out numerous lending programs to try to keep credit flowing smoothly. On Monday, the Fed announced that it will begin buying corporate bonds as part of a plan to ensure that companies can borrow during the pandemic. The Fed's policymakers have also forecast that their key rate will remain near zero through 2022.
Collectively, the central bank's actions are credited with helping fuel an extraordinary rally in the stock market, which has nearly regained its pre-pandemic highs after a dizzying plunge in March.
On Tuesday, Powell suggested that the drop in economic output during the current April-June quarter, as measured by the gross domestic product, will likely be the most severe on record. Many economists are forecasting that GDP could shrink at a record-setting 40% annual rate this quarter.
While the Trump administration is forecasting a V-shaped recovery with strong growth in the second half of this year, Powell was more cautious and sought to focus concerns on low-wage workers. In a semi-annual monetary report accompanying the testimony, the Fed noted that workers with lower earnings, including minorities, were being hit especially hard by the job market disruptions.
Employment has fallen nearly 35% for workers who were previously earning wages in the bottom fourth of wage earners, the Fed said. By contrast, employment has declined 5% for higher-wage earners. Because lower-wage earners are disproportionately African-American and Hispanic, unemployment has risen more sharply for those groups.
Powell had said last week at a news conference that a recovery could be painfully slow, with “well into the millions” of laid-off Americans unable to regain their old jobs. That downbeat assessment had helped trigger a plunge in stock prices and prompted President Donald Trump to issue a tweet criticizing the Fed’s views.
“The Federal Reserve is wrong so often,” Trump tweeted. “We will have a very good Third Quarter, a great Fourth Quarter, and one of our best ever years in 2021.”
In its projections, the Fed is predicting that the economy will shrink 6.5% this year before growing 5% next year, an assessment in line with the forecasts of private economists.
