Powell says recovery may take time and more Fed action
Uncertainty remains the key word in the battle against the coronavirus, and it could be a long recovery, with solvency issues, Federal Reserve Chair Jerome Powell said Wednesday.
“The recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems,” Powell said. “Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery. This tradeoff is one for our elected representatives, who wield powers of taxation and spending.”
Governments around the world have responded quickly with measures to support workers who have lost income and businesses that have either closed or seen a sharp drop in activity and that the response here in the United States has been particularly swift and forceful, Powell said.
“The overall policy response to date has provided a measure of relief and stability, and will provide some support to the recovery when it comes,” he said, adding the coronavirus crisis raises longer-term concerns as well.
“The record shows that deeper and longer recessions can leave behind lasting damage to the productive capacity of the economy, as avoidable household and business insolvencies can weigh on growth for years to come,” Powell said. “Long stretches of unemployment can damage or end workers' careers as their skills lose value and professional networks dry up, and leave families in greater debt and the loss of thousands of small- and medium-sized businesses across the country would destroy the life's work and family legacy of many business and community leaders and limit the strength of the recovery when it comes.”
These businesses are a principal source of job creation — something that will sorely be needed as people seek to return to work, he said.
“A prolonged recession and weak recovery could also discourage business investment and expansion, further limiting the resurgence of jobs as well as the growth of capital stock and the pace of technological advancement,” he said. “The result could be an extended period of low productivity growth and stagnant incomes.”
The Fed, he noted, has“acted with unprecedented speed and force.” After “rapidly cutting the federal funds rate to close to zero,” it took a wide array of additional measures to facilitate the flow of credit in the economy.
“We will continue to use our tools to their fullest until the crisis has passed and the economic recovery is well under way,” Powell said. “Recall that the Fed has lending powers, not spending powers. A loan from a Fed facility can provide a bridge across temporary interruptions to liquidity, and those loans will help many borrowers get through the current crisis.”
One of the tools that will most likely not be used, is negative interest rates.
“Our view has not changed [on implementing negative rates] and it is not something we are looking at,” he said, adding that during the financial crisis they used forward guidance and asset purchases. "Negative rates is not an attractive tool for the U.S. right now, as we have a good tool kit that works, based on evidence so that is what we will be doing.”
Also, negative rates are unproven, with mixed evidence about their effectiveness.
He also applauded Congress' response. “While the coronavirus economic shock appears to be the largest on record, the fiscal response has also been the fastest and largest response for any postwar downturn,” he said.
As for employment, Powell noted, the job gains of the past decade have been erased and this reversal of economic fortune has “caused a level of pain that is hard to capture in words, as lives are upended amid great uncertainty about the future.”
Over the next month, unemployment will likely peak, he said.
“We will recover once we are over the virus but I know we can get back there at some point,” he said. “Where we were before virus, is a place we can and will get back to. It will take some time but we need to get to get on the road to recovery and stay on that road.”
The producer price index fell a seasonally adjusted 1.3% in April after dropping 0.2% in March, the Labor Department reported on Wednesday. It was the biggest decline ever.
Economists surveyed by IFR Markets had expected PPI to fall 0.5% .
On an unadjusted basis, PPI was down 1.2% in the 12 months ended in April, the largest decline since November 2015, when it fell 1.3%. Economists surveyed by IFR Markets had expected PPI year-over-year to drop 0.4%.
Prices for final demand less food and energy fell 0.4% in April, after rising 0.2% in March. Economists expected core to fall 0.2%.