Fed official warns economic outlook wildly uncertain

Federal Reserve officials Friday warned the U.S. economic outlook remains wildly uncertain, as parts of the country see a new surge in coronavirus infections.

“So far, in the United States efforts to contain the virus have not been particularly successful,” Eric Rosengren, president of the Federal Reserve Bank of Boston, said in a speech Friday. With the spread of the disease continuing “and the acceleration of new cases in many states, I expect the economic rebound in the second half of the year to be less than was hoped for at the outset of the pandemic.”

But while the downturn could persist or worsen the central bank’s vice chairman for supervision, Randal K. Quarles, said the Fed would determine capital requirements essentially the financial cushions they must keep to withstand losses based on economic scenarios developed before the pandemic took hold. While the Fed is testing the strength of banks against multiple dire scenarios that reflect how the virus might play out, the central bank will not publish bankspecific results.

“We don’t know about the pace of reopening, how consumers will behave or the prospects for a new round of containment,” Quarles said.

Given the serious risks, the Fed’s annual “stress tests,” the results of which will be released next week, will include three sensitivity analysis scenarios. These would look at how the banking system would fare in the case of a V-shaped recovery, in which output and employment bounce back quickly; a U-shaped rebound, in which jobs and growth take a long time to recover; or a Wshaped trajectory, in which a second wave of the coronavirus forces activity to collapse again, Quarles said.

The Fed has taken a number of actions to ensure lending continues and credit does not become prohibitively expensive, relaxing some regu

lations while rolling out a variety of emergency programs, including several that buy loans to qualifying small- and medium-sized businesses from bank balance sheets.

Even so, central bank officials have repeatedly warned that both they and Congress may need to do more to make sure the economy can recover as massive risks persist.

“Lives and livelihoods have been lost, and uncertainty looms large,” Fed Chairman Jerome Powell said in remarks prepared for delivery Friday afternoon. “We will make our way back from this, but it will take time and work,” he said.