A day after congressional Democrats revealed an additional $3 trillion economic relief plan for an ailing economy, Federal Reserve Chairman Jerome Powell crystallized the choice before legislators: more, expensive fiscal support or prolonged economic damage.
In a speech to the Peterson Economic institute, Powell noted that the current downturn is “unprecedented” in its “scope and speed” and “worse than any recession since World War II.”
It “has caused a level of pain that is hard to capture in words, as lives are upended amid greater uncertainty about the future,” said Powell, noting that almost 40% of Americans working in February and earning less than $40,000 a year lost their jobs in March. At last count, 33 million Americans have filed for unemployment benefits since late March, wiping out more than a decade of job gains, and the U.S. unemployment rate for April soared to 14.7%.
The fiscal response to these losses, providing roughly $2.9 trillion to households, businesses, health care providers and state and local governments is equivalent to about 14% of GDP. It has been “the fastest and largest response for any post-War downturn,” said Powell. But it may not be enough.
“Deeper and longer recessions can leave behind lasting damage to the productive capacity of the economy,” Powell said. Long stretches of unemployment can damage or end careers, leaving families in deep debt; the loss of thousands of small and medium-size businesses can destroy a life’s work and family legacy and, along with reduced business investment and expansion, limit the scope of the economic recovery, explained Powell.
“We ought to do what we can to avoid these outcomes, and that may require additional policy measures,” said Powell.
He noted that the Fed will continue to use its tools “to their fullest” until the economic recovery is well under way, but that will take time.
“Additional fiscal support could be costly but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery,” said Powell. “This tradeoff is one for our elected representatives, who wield powers of taxation and spending.”
In the Q&A with the institute’s president Adam Posen following his speech, Powell noted that the Fed doesn’t play a formal role in fiscal policy and won’t take a position about particular bills. “It’s not our role to supervise Congress. It’s the other way around. They have oversight over us.”
He said the Fed — which has undertaken multiple programs to support the economy including a revived quantitative easing program, expanded swap lines and lending programs for businesses, consumers, and state and local governments — remains committed to innovating in response to the economic crisis, but he noted its limitations.
“We can make loans to solvent borrowers who don’t have access to other private sources of capital. … The passage of time is really all it takes to turn a liquidity problem into a solvency problem. We’ll be a big help to companies for a while, but over a longer period of time it may be that more fiscal help is needed.”
Powell said the Fed’s Main Street lending program for small and medium-size businesses that lack access to capital markets will be live in a few weeks.
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