THURSDAY, March 28, 2024
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Fed chair warns of long, painful downturn if Congress does not provide more economic relief

Fed chair warns of long, painful downturn if Congress does not provide more economic relief

WASHINGTON - Federal Reserve Chairman Jerome Powell gave a dire warning Wednesday that the U.S. economy could become stuck in a painful multi-year recession if Congress and the White House do not approve more aid to address the coronavirus pandemic's economic fallout.

"Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery," Powell said in a videoconference with the Peterson Institute for International Economics.

Powell said that the United States is in the midst of the "biggest shock our economy has felt in modern times" and probably will face an "extended period" of weakness. Stocks slid as he spoke, with the Dow Jones industrial average dropping more than 300 points on the gloomy outlook from one of the world's top economic policymakers.

The Fed chair urged Congress to remember that the longer people remain out of work and the more businesses that close, the deeper the scarring becomes on the U.S. economy. There is a domino effect where consumers lose jobs and sharply cut spending, and companies that go out of business stop paying their suppliers, which can drag down other firms.

"The record shows that deeper and longer recessions can leave behind lasting damage to the productive capacity of the economy," Powell said. "Avoidable household and business insolvencies can weigh on growth for years to come."

The unemployment rate has surged to nearly 15%, the highest since the Great Depression, and more than 27 million Americans are out of work. Companies are going bankrupt or closing permanently.

Fed chairs typically refrain from telling Congress what to do, but Powell has broken from that tradition.

"Fed Chair has ever been more forthright in their warning to the country that the risks the economy faces are almost overwhelming," wrote Chris Rupkey, chief financial economist at MUFG Bank, in an email.

Talks have currently stalled between Congress and the Trump administration on more economic relief. Democrats proposed a $3 trillion package this week that would provide another round of stimulus checks and massive aid to states and municipalities, but many Republicans said they would not support the bill.

Congress and the White House have already approved nearly $3 trillion in new programs since March to try and address the economic fallout from the coronavirus. This has included extraordinary assistance to businesses, expanded unemployment benefits, and individual checks to millions of Americans. That spending - and a precipitous drop in tax revenue - has led budget experts to project that the U.S. could run a nearly $4 trillion deficit this year, roughly four times what was projected just a a few months ago.

But Powell said more was needed because the economic impact has been so severe.

He said low-income Americans are facing the brunt of this economic crisis and they have the least ability to handle it. Almost 40% of U.S. households making less than $40,000 a year lost a job in March, he said, citing results from a Fed survey coming out later this week.

The Fed has taken dramatic steps to aid the economy. Under Powell's direction, the Fed has slashes interest rates to zero and pumped over $2.5 trillion into markets and the financial system in an effort to make it as easy as possible for companies and households to borrow money cheaply to make it through this time.

"The Powell Fed did in a few weeks what the Bernanke fed did over the course of several years," said Nathan Sheets, a former Fed staffer who is now chief economist at PGIMF Fixed Income. "Powell's Fed has grown the balance sheet by $2.5 trillion. It's been powerful."

Some, including President Donald Trump, have urged the Fed to make interest rates negative, which has never happened before in the United States. It would basically penalize anyone saving and make it almost free to borrow money. Powell said again Wednesday the Fed does not want to do that.

"The committee's view on negative rates has not changed. This is not something we are looking at," he said.

Powell has emphasized the Fed cannot do direct aid to the many Americans and small business owners who are struggling. That is the role of Congress.

The Fed is about to provide low-cost loans to small and mid-size businesses, but many struggling business owners say they need grants to survive because they will not be able to repay so much debt. Retail and food services are particularly susceptible to shutting down permanently, said Alex Bartik, an economics professor at the University of Illinois who is part of a team of researchers tracking small business closures from the pandemic. They found that more than 2% of U.S. small businesses have closed permanently. "A lot firms had half a month to two months' worth of cash on hand. They can stretch it by cutting costs or taking a government loan, but we are now getting several months into the crisis and we're getting to the point where firms are going beyond the cash on hand to weather the crisis," Bartik said.

Several Fed officials, including Powell, said this week that they think the U.S. economy will soon hit its low point, then start to rebound, but they have warned that a recovery probably will be slow. "There is a sense, a growing sense, the recovery may come more slowly than we would like," Powell said.

 

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