Powell warns of severe damage from deep downturn
FEDERAL RESERVE Chairman Jerome Powell warned Tuesday that the United States 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 said that until the public is confident the disease has been contained, “a full recovery is unlikely”.
“The longer the downturn lasts, the greater the potential for longer-term damage from permanent job loss and business closures,” Powell said at his semiannual congressional testimony on Tuesday to the Senate Banking Committee. “Long periods of unemployment can erode workers’ skills and hurt their job prospects.”
He noted that the pandemic poses “acute risks” for small businesses.
“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.”
Since March, the Fed has slashed its benchmark short-term rate to near zero, bought US$2.1 trillion in Treasury and mortgage bonds to inject cash into markets, and rolled out numerous lending programmes 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.
On Tuesday, Powell suggested that the drop in economic output during the current April-June quarter, as measured by gross domestic product, GDP, will likely be the most severe on record. Many economists are forecasting that GDP could shrink at a recordsetting 40 per cent annual rate this quarter.
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 per cent for workers who were previously earning wages in the bottom fourth of wage earners, the Fed said. By contrast, employment has declined five per cent for higher-wage earners. Because lower-wage earners are disproportionately African American and Hispanic, unemployment has risen more sharply for those groups.
In its projections, the Fed is predicting the US economy will shrink 6.5 per cent this year before growing five per cent next year, an assessment in line with the forecasts of private economists.