‘Downturn would mean severe damage’

WASHINGTON, D. C.: Federal Reserve Chairman Jerome Powell warned Tuesday (Wednesday in Manila) that the US 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 Covid-19.

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 lowincome 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.”

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.”