‘W-shaped’ re­cov­ery for U.S. may be too op­ti­mistic, Fed chair­man sug­gests

Calgary Herald - - FINANCIAL POST - LINDSAY DUNSMUIR

WASH­ING­TON Fed­eral Re­serve chair­man Jerome Pow­ell has sketched out an al­to­gether bumpier ride for the U.S. econ­omy than many are pre­dict­ing — one that sees busi­ness ac­tiv­ity stop and start for months to come, un­til an ef­fec­tive treat­ment or vac­cine for the novel coro­n­avirus can be found.

Since the novel coro­n­avirus out­break in the United States, eco­nomic growth stalled al­most overnight as “stay at home” or­ders shut down large parts of the econ­omy. Econ­o­mists and Trump ad­min­is­tra­tion of­fi­cials have been di­vided about how deep and long-last­ing the eco­nomic im­pact will be.

Some still fore­see a “V shaped” re­cov­ery, in which the econ­omy re­bounds quickly from a tem­po­rary shock. Life in the United States could re­turn to “nor­mal” by June, White House se­nior ad­viser Jared Kush­ner said on Wed­nes­day, adding that “the hope is that by July the coun­try’s re­ally rock­ing again.”

Oth­ers pre­dict a “U shape,” where it takes longer to bounce back. The idea of a “W-shaped” re­cov­ery has also steadily gained trac­tion as health ex­perts in­creas­ingly warn about a resur­gence in virus cases come the fall, and with it, a new down­turn in eco­nomic growth.

Just un­der half of 45 econ­o­mists re­spond­ing to a Reuters poll ear­lier this month said the U.S. eco­nomic re­cov­ery would be “U” shaped. Ten of those polled said it would be “V” shaped, and five said it would be “W” shaped. The poll was con­ducted be­fore the price of a bar­rel of U.S. crude oil fell be­low zero.

In com­ments on Wed­nes­day, Pow­ell in­di­cated he sees even more dis­rup­tion than the “W” camp. He spoke at a press con­fer­ence fol­low­ing the U.S. cen­tral bank’s lat­est pol­icy meet­ing, at which the Fed re­it­er­ated it will use all its tools to sup­port the econ­omy.

Call­ing all cur­rent eco­nomic fore­casts “highly un­cer­tain,” Pow­ell mapped out why he be­lieves the econ­omy may go through a se­ries of peaks and troughs for at least a year or more as the world bat­tles to keep the virus un­der con­trol.

The United States has more than one mil­lion con­firmed cases of COVID-19, the res­pi­ra­tory dis­ease caused by the virus, and more than 58,000 peo­ple have died, the high­est num­ber in the world.

“We’re go­ing to see eco­nomic data for the sec­ond quar­ter that’s worse than any data we’ve ever seen,” Pow­ell said.

Af­ter that, if more U.S. states be­gin to re­open and so­cial dis­tanc­ing is grad­u­ally rolled back, the econ­omy could be­gin to re­cover in, say, the third quar­ter, he said.

But that re­cov­ery could be fleet­ing, Pow­ell cau­tioned.

“This is the pe­riod as well that car­ries the risk of new out­breaks of the virus,” he said.

“Af­ter that pe­riod, the for­mal so­cial dis­tanc­ing mea­sures will be gone but you’ll still be left with prob­a­bly a level of cau­tion on the part of peo­ple who will worry and prob­a­bly keep wor­ry­ing for some time,” he went on, de­tail­ing why con­sumers, who drive two-thirds of U.S. eco­nomic growth, are un­likely to be out in force any­time soon.

“The main thing is to get into the stage where the econ­omy is heal­ing, where we have the dis­ease un­der con­trol, where we don’t take too much risk of sec­ond and third waves,” he said.

More than 26 mil­lion peo­ple have filed new claims for un­em­ploy­ment ben­e­fits since March 21, as the econ­omy con­tracted at its sharpest pace since the Great Re­ces­sion.

Fi­nally, Pow­ell noted that eco­nomic data around the world is “very, very neg­a­tive and that too can weigh on U.S. per­for­mance over time.”

For all those rea­sons, Pow­ell said, the cen­tral bank will do lit­tle more at this stage than wait and see what un­folds, while fully ex­pect­ing that the eco­nomic im­pact of mea­sures taken to con­tain the virus will be felt, in at least some ways, for years to come.

“This is such an ex­tra­or­di­nary, ex­tra­or­di­nary shock, un­like any­thing cer­tainly that’s hap­pened in my life­time ... we’re still putting out the fire, we’re still try­ing to win, and I think we’ll be at that for a while,” he said.

Jerome Pow­ell

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