Federal Reserve Chair Jerome Powell warns of a possible sustained recession from coronavirus pandemic
WASHINGTON — Federal Reserve Chair Jerome Powell warned Wednesday of the threat of a prolonged recession resulting from the viral outbreak and urged Congress and the White House to act further to prevent long-lasting economic damage.
The Fed and Congress have taken far-reaching steps to try to counter what is likely to be a severe downturn resulting from the widespread shutdown of the U.S. economy. But Powell cautioned that numerous bankruptcies among small businesses and extended unemployment for many people remain a serious risk.
“We ought to do what we can to avoid these outcomes,” Powell said.
Additional rescue aid from government spending or tax policies, though costly, would be “worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery,” he said.
Powell spoke a day after House Speaker Nancy Pelosi, a California Democrat, proposed a $3 trillion aid package that would direct money to state and local governments, households, and health-care workers. This money would come on top of roughly $3 trillion in earlier financial assistance that the government has provided. The Fed itself has also intervened by slashing interest rates to near zero and creating numerous emergency lending programs.
Yet Trump administration officials have said they want to first see how previous aid packages affect the economy. And Republican leaders in Congress have expressed skepticism about allowing significant more spending right now. Senate Majority Leader Mitch McConnell, a Kentucky Republican, said there is no “urgency” to act.
Powell, though, made clear his concern that a recession may last long enough to cause extensive damage to the economy and make a recovery weaker and slower. In such a scenario, unemployed workers would lose skills and their connections in the job market, making it harder for them to find new employment. And with many small businesses bankrupt, fewer companies would be available to hire the jobless.
“Deeper and longer recessions can leave behind lasting damage to the productive capacity of the economy,” the chairman warned in his prepared remarks before holding an online discussion with the Peterson Institute for International Economics. “Avoidable household and business insolvencies can weigh on growth for years to come.”
Powell's sobering warning about the risks facing the economy weighed down Wall Street on Wednesday.
“It was a soothing tone from Powell saying the Fed will do what they need to do, but it was also somber in that basically the Fed can’t do everything,” said Willie Delwiche, investment strategist at Baird.
The Standard & Poor's 500 stock index was down a sharp 2.4% as of 3 p.m. Eastern time, with the deepest losses hitting stocks that most need a healthy economy for their profits to grow.
Powell said the Fed would “continue to use our tools to their fullest” until the viral outbreak subsides. He gave no hint of what the Fed's next steps might be.
But Powell shot down the idea of cutting the Fed's short-term interest rate, which is now near zero, into negative territory, as central banks in Europe and Japan have done. Such a move would require banks to pay interest on cash reserves that they hold at the Fed. That would be intended to encourage them to lend the money instead. Yet negative rates appear to have done little to stimulate the economies of the countries that have adopted them.