While the Federal Reserve has already taken “timely and appropriately large” responses to the economy’s free fall in the wake the coronavirus crisis, there may be more to come, the chair of the Federal Reserve Board said Wednesday – especially since an economic recovery “may take some time to gather momentum.”
Fed Chair Jerome H. (“Jay”) Powell, in remarks given remotely to the Peterson Institute for International Economics in Washington, D.C., indicated that the path ahead for the central bank and the economy is both “highly uncertain and subject to significant downside risks.” He said policies will need to be ready to address a range of possible outcomes, given that answers to questions such as readiness of vaccines, therapies and testing are currently “unknowable.”
“The overall policy response to date has provided a measure of relief and stability, and will provide some support to the recovery when it comes,” Powell said. “But the coronavirus crisis raises longer-term concerns as well. The record shows that deeper and longer recessions can leave behind lasting damage to the productive capacity of the economy. Avoidable household and business insolvencies can weigh on growth for years to come. Long stretches of unemployment can damage or end workers’ careers as their skills lose value and professional networks dry up, and leave families in greater debt.”
The Fed chair said the loss of thousands of small- and medium-sized businesses nationwide would limit the strength of the recovery by destroying the life’s work and family legacy of many business and community leaders. He called those businesses a principal source of job creation, necessary for people as they seek to return to work. “A prolonged recession and weak recovery could also discourage business investment and expansion, further limiting the resurgence of jobs as well as the growth of capital stock and the pace of technological advancement. The result could be an extended period of low productivity growth and stagnant incomes,” he said.
Powell said the Fed will continue to use its tools “to their fullest until the crisis has passed and the economic recovery is well under way.” He reminded the audience that the agency has lending powers, not spending powers, and that a loan from one of the many lending facilities the Fed has established in the wake of the onset of the economic crisis “can provide a bridge across temporary interruptions to liquidity, and those loans will help many borrowers get through the current crisis.”
“But the recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems,” he said. “Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery. This tradeoff is one for our elected representatives, who wield powers of taxation and spending.”
In other remarks, Powell said a Fed survey being released Thursday reflects findings similar to many others: Among people who were working in February, almost 40 percent of those in households making less than $40,000 a year had lost a job in March. “This reversal of economic fortune has caused a level of pain that is hard to capture in words, as lives are upended amid great uncertainty about the future,” he said.