Fed Chair Powell: COVID-19 Is Driving The U.S. Economy
Federal Reserve Board Chair Jerome Powell, speaking in January 2020. (Photo by Samuel Corum)
Federal Reserve chair Jerome Powell warns that the road back from the economic impacts of the coronavirus pandemic will be a long one.
In Wednesday’s Federal Open Market Committee (FOMC) press conference, Powell acknowledged the contributions of healthcare and essential workers, and credited the federal stimulus payments and expanded unemployment benefits that have “provided substantial and timely support to household incomes.”
In May and June, increased economic activity was accompanied by job gains that have reversed one-third of the jobs lost since April, according to Powell. Consumer spending began to rebound, but then so did the transmission of the virus.
While there are areas of strength within the economy—including housing and motor vehicle sales—as coronavirus cases began spiking in June, other areas’ recovery has slowed. And certain sectors will not revive until the public health crisis is under better control: restaurants, bars and live performances immediately come to mind.
FOMC Leaves Rates Alone
As expected, the FOMC left its target range for the federal funds rate at 0% to 0.25%.
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The Fed reduced the rate to near zero in mid-March and has stated that it will be kept there, “until we are confident that the economy has weathered recent events and is on track to achieve our maximum employment and price stability goals,” according to Powell’s prepared remarks.
On Tuesday, the Federal Reserve announced that it will be extending—through December 31—its lending facilities that were set to expire on or around September 30. The Fed’s emergency lending powers are used only in very unusual circumstances.
The Fed will continue to increase its holdings of Treasury and agency mortgage-backed securities “to support orderly conditions in the markets, which are vital to the flow of credit in the economy.”
Powell says it’s too early to say how serious or sustained the slowing pace of the economic recovery will be. He stresses that the path to recovery for the economy is going to depend, to a great extent, on the course the virus takes.
Powell Praises Strong Fiscal Action, Calls for More
Powell believes the actions taken to date to help stabilize the U.S. economy have been effective. In the face of “the biggest shock to this economy in recent memory,” the response by fiscal authorities, he says, “was strong. It was fast, it was broad and appropriately so.”
According to Powell, overall, it’s been money well spent, as it’s kept people in their homes and kept businesses in business. And yet there still will be a need for more support both from the Federal Reserve and via fiscal policy from Congress.
As Congress’s summer recess deadline approaches, negotiations continue specific to the Senate Republicans’ $1 trillion Health, Economic Assistance, Liability Protection, and Schools Act (HEALS Act).
Even as businesses continue to come online, there still won’t be work for those in industries where people operate in close proximity, such as restaurants, bars, hotels, public entertainment and transportation. There likely won’t be enough available alternative jobs for them and they’ll need support.
In part because the number of COVID-19 cases increased sharply in many areas of the country in June and July, “the path forward for the economy is extraordinarily uncertain,” Powell says, “and will depend in large part on our success in keeping the virus in check.”
Because the current economic disruption was triggered by a worldwide public health crisis, the solutions need to be similarly far-reaching: “Policy actions need to be taken at all levels,” according to Powell.
The measures required to manage the virus are starting to weigh on consumer spending, and small businesses are seeing slower job growth. Even as cities across the country proceed through various stages of reopening, entire areas of the economy remain shut down: specifically, those that feature or rely on proximity, duration or both.
New York City, while priding itself on its virus response to date, is a prime example. The very things for which NYC is known are the things that appear most dangerous in a world with COVID-19: large numbers of people traveling or spending time in very close proximity.
Unequal Employment Effects
Powell referenced Federal Reserve research that suggests that if you make $40,000 or less, you had a 40% chance of losing your job in April and May. “The burdens of the pandemic have fallen very heavily on people who work in the service industries in relatively low-paying jobs,” Powell said. The job losses also skew heavily to racial minorities and to women.
This inequality did not spring from the global pandemic but rather is systemic. Powell cites several economic problems that are not specific to the pandemic, including the flattening of lower and middle incomes, and lower mobility as opportunities have declined. The goal is to create an environment where an individual can either return to their old job or find a new one. “Everything we do is directed at that,” Powell said.
He also points out that even positive forces such as advancing technology can cause stagnant income levels if a person is “on the wrong side of those forces.” The right fiscal policies must be implemented. In the wake of COVID-19, there’s a need to return the nation to full employment, while helping keep prices stable.
Addressing Coin Shortages
There were concerns earlier this year that COVID-19 could spread via paper currency. Recently, grocers and gas station owners across the U.S. have reported a shortage of coins.
This coin shortage is not an issue of quantity, according to Powell. Rather, as consumers have sheltered in place and many relied increasingly on contactless payments, “the circulation kind of stopped.” With fewer customers, fewer coins were entering the system.
The Fed has been working to reverse this disruption of the supply chain, establishing a coin task force that includes the numerous stakeholders involved: the U.S. Mint, banks and credit unions, armored carriers and others. The inventories are building back up, and the Mint continues to make new coins.
As Powell noted, we know what lockdown looks like: very low GDP.
Reopening means that many people go back to work, which in turn means masks and social distancing measures. “Social distancing and a fast reopening of the economy go together,” says Powell. “They’re not in competition with each other.”
With the federal funds rate already so close to zero, there’s only so much the Fed can do in terms of adjusting interest rates. But Powell reiterated his stance that the Fed can always do more, via credit facilities, adjusting the forward guidance or asset purchases.
Powell also sees fiscal policy as essential here, to address things the Federal Reserve can’t. Congress’s historically large action “is really helping now. It’s going to stand up very well to scrutiny down the years,“ he says.
Regarding the possibility of raising rates, the Fed’s “not even thinking about raising rates,” says Powell. Rather, they’re focused on supporting the economy for as long as is needed.
To Revisit in the Fall
Perhaps by the September FOMC meeting, more will be known about the course of the coronavirus pandemic, and thus about the shape of the U.S. economy’s recovery. In Powell’s words, “Full recovery is unlikely until people feel safe.”
Even after the lockdowns and reopenings, Powell imagines a long tail to the curve where the most heavily affected areas of the economy continue to struggle. The speed with which the virus affected the U.S. economy—putting 14 million people out of work between February and May—is not something from which recovery will be swift.
As Powell points out, the Fed’s job is not to plan for the upside case: “We’ve got that covered.” They will continue to assume that policies are needed to help the public, unless they’re shown otherwise.
Then, “when the time comes, after the crisis has passed,” says Powell, “we will put these emergency tools back in the toolbox.”
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