Former Fed Chair Janet Yellen Former Fed Chair Janet Yellen.

Janet Yellen, the former chair of the Federal Reserve, says ‘it’s impossible to know at this point how deep the [current] recession in the U.S. will be.” 

On a webinar sponsored by The Brookings Institution, where Yellen serves as a distinguished fellow in residence for economic studies, Yellen said the depth and duration of the recession depend on “how long the period of social distancing lasts” and “what happens to financial conditions,” which have tightened though they’ve eased somewhat as a result of recent Fed actions.

In the meantime, Yellen expects second-quarter GDP will plunge 20% or more, which is in line with forecasts from JPMorgan (-25%), Morgan Stanley (-30%) and Goldman Sachs (-34%). Her best-case scenario, however, is more bearish than the basic forecasts promulgated by the big Wall Street firms. 

Yellen doesn’t expect positive growth returning until the fourth quarter at the earliest. Major Wall Street firms are forecasting positive growth for the third and fourth quarters though still an annual decline in real GDP of about 5% – 6%.

If the lockdown doesn’t “end reasonably soon,” households and businesses won’t be able to resume activity, which “could lead to a prolonged recession,” Yellen said.

Yellen worries about growing unemployment and business bankruptcies and rising debt along with falling asset valuations among households and businesses, including banks.

She praised the Fed’s “rapid and enormous” monetary policy response to the crisis along with the “very significant” Coronavirus Aid, Relief and Economic Security (CARES) Act as “good news” that will help prevent even more damage to the U.S. economy. “I think people should feel reassured that policymakers are on this,” she said.

Yellen is not worried about the increased debt levels that will result from these fiscal and monetary initiatives.

“We’re still in a world of very low interest rates as far as the eye can see, so I don’t think there’s going to be an unmanageable debt burden and interest rate burden because of the spending that we’re doing now,” Yellen said. “It’s appropriate to borrow a lot of money now to deal with what is an absolutely unprecedented situation … This spending is preventing even more of an economic collapse.”

She noted that the U.S. debt-to-GDP ratio doubled to 80% after the global financial crisis of 2008, and that did not become the huge problem that many had feared.

Yellen is more concerned about the “enormous debt loads” of nonfinancial companies that prevailed before the current crisis, which could lead to “a wave of corporate defaults” and “make the recovery more difficult.”

She’s also worried that once the recovery begins, households and businesses will continue to “tighten their belts.” That will “require continued low interest rates and result in continued low inflation for a long time to come.”

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