Fed Chair Warns the Economy May Need More as Congress Hesitates
https://www.nytimes.com/2020/05/13/business/economy/fed-chair-powell-economy-virus-support.html
text only:
The Federal Reserve chair, Jerome H. Powell, delivered a stark warning on Wednesday that the United States was experiencing an economic hit "without modern precedent," one that could permanently damage the economy if Congress and the White House did not provide sufficient financial support to prevent a wave of bankruptcies and prolonged joblessness.
Mr. Powell's blunt diagnosis was the latest indication that the trillions of dollars that policymakers have already funneled into the economy may not be enough to forestall lasting damage from a virus that has already shuttered businesses and thrown more than 20 million people out of work.
Yet the warning comes as discussions of additional rescue measures have run aground, with Democrats proposing sweeping new programs and Republicans voicing concerns over the swelling federal budget deficit, which is projected to hit $3.7 trillion this year. President Trump and his economic advisers have pressed the pause button on negotiations for additional spending, waiting to see how much the economy rebounds as states begin lifting restrictions on business activity.
Mr. Powell lauded Congress for the more than $2 trillion relief effort it had already funded, but he made clear that a rebound could take months to materialize, requiring more support.
"The recovery may take some time to gather momentum," Mr. Powell said at a Peterson Institute for International Economics virtual event. "Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery."
Stock markets swooned after Mr. Powell's comments, as investors digested the likelihood of a sluggish recovery. The S&P 500 index closed down 1.75 percent.
As the virus persists and the number of unemployed grows, Mr. Powell and his central bank colleagues have begun trying to prod Congress and the White House into action by reminding them that the Fed alone cannot carry the burden of digging the economy out of its deep hole.
Fed officials have slashed interest rates to zero, purchased bonds at a record pace to restore order to roiled government bond markets and unveiled nine emergency lending programs in partnership with the Treasury Department. But Mr. Powell reiterated on Wednesday that the Fed's programs, which will buy bonds from companies and local governments and make loans to midsize businesses, can only temporarily supply credit. The Fed lacks spending powers, which are reserved to Congress.
Mr. Powell characterized the Fed's ability to help as a "bridge across temporary interruptions," while suggesting that more may be needed as huge uncertainties confront the economy, from the speed of reopening to the scope of testing and the timing of a vaccine.
"There is a sense, a growing sense I think, that the recovery will come more slowly than we would like," he said, after highlighting that "the scope and speed of this downturn are without modern precedent, significantly worse than any recession since World War II."
Fed officials have increasingly cautioned that the recovery remains highly uncertain and that if the policy response proves inadequate, the consequences could be long-lasting and painful, particularly for the most disadvantaged.
Loretta Mester, the president of the Federal Reserve Bank of Cleveland, has urged more fiscal help to fend off "dire" economic scenarios. Robert S. Kaplan, the Dallas Fed president, said on Tuesday that the economy "may well" need more government help if the unemployment rate continues to rise, and Neel Kashkari, the president of the Minneapolis Fed, has said the fallout could last for years and displaced workers will probably need more aid to make it through.
Coronavirus lockdowns have left tens of millions unemployed, disproportionately hitting service sector workers, many of them low income and without savings. Mr. Powell said a Fed survey set for release on Thursday would show that almost 40 percent of people who were working in February and were members of households making less than $40,000 a year had lost their jobs in March.
"While the economic response has been both timely and appropriately large, it may not be the final chapter, given that the path ahead is both highly uncertain and subject to significant downside risks," Mr. Powell said.
"Since the answers are currently unknowable, policies will need to be ready to address a range of possible outcomes."
Whether Mr. Powell can push lawmakers into action remains to be seen. The Fed chair has cultivated solid relationships with key congressional Republicans and has a history of influencing economic thinking on Capitol Hill. Yet many Republicans, urged on by Mr. Trump, have begun trying to shift the conversation from federal spending support toward efforts to help the economy rebound as quickly as possible. They have largely stopped conveying the sense of urgency that Mr. Powell voiced on Wednesday.
"I'm not sure I agree with that," Senator Patrick J. Toomey, Republican of Pennsylvania, said when asked about Mr. Powell's remarks. "Not sure that pumping more money out of Washington is going to do more good than harm at this point. I think we have to think that through very carefully."
On Tuesday, House Democrats released a multitrillion-dollar, 1,800-page proposal that includes hundreds of billions of dollars for state and local governments to shore up holes in their budgets and additional direct payments and tax credits for low- and middle-income Americans. But the proposal also contains a wide range of provisions that Republicans dismissed immediately as not directly linked to those struggling amid the pandemic, including bailouts for troubled pension plans and lifting a cap on state and local tax deductions.
Republicans are working on their own proposals that Democrats have similarly said should be off the table, including shielding businesses from virus-related legal liabilities. Lawmakers and the White House have also begun pushing for additional individual and business tax cuts.
Senator Kevin Cramer, Republican of North Dakota, did not seem spurred to action by Mr. Powell's warnings, noting that "it's one person's voice — a smart person, that I tend to agree with a lot — but it is just one person."
"I think we have to be very targeted about the next few weeks," he said.
Senator Marco Rubio, Republican of Florida, expressed some openness to more financial relief, provided that the spending was temporary and dealt with the pandemic as opposed to creating new permanent programs that would balloon the deficit.
"I'm not insensitive to the debt issue nor do I believe we can government-spend our way out of this forever. Government cannot replace the private economy," he said, adding that "at some point, we need economic activity to come back."
Early indications suggest that activity is only returning slowly to states that have moved to reopen businesses, as many would-be consumers and workers continue to stay home out of fear of contracting the virus. Total hours worked by employees of small businesses that use the human resource firm Homebase remain down by a third from pre-crisis levels in South Carolina and by two-fifths in Texas and Georgia, even after governors eased many restrictions in those states.
With little evidence that Republicans and Democrats are willing to work together to continue helping businesses through a protracted slump, there is growing concern that the trillions already spent may have been too limited.
The economic stimulus payments that many Americans received remain, at least for now, a one-time payout. Expanded aid to the unemployed is set to expire at the end of July.
The government's main vehicle for helping small businesses — the Paycheck Protection Program — has nearly exhausted its $660 billion in funds, and many companies are beginning to worry that the loans, which cover just eight weeks of payroll, will not be enough as the virus persists.
Economists and business advocates say now is not the time to abandon efforts that could determine whether a company comes through the crisis bruised but alive or is forced into bankruptcy.
"They have yet to solve for the fundamental problem," said John Lettieri, the president of the Economic Innovation Group, a Washington think tank that has pushed Congress and the Trump administration to spend more on the payroll program and loosen restrictions. "The program as implemented simply doesn't do enough to help deeply affected businesses survive the crisis."
If the current recession is drawn out, Mr. Powell said, it could inflict "lasting damage" on the economy's productive capacity, with "avoidable" business insolvencies weighing on growth for years to come. He also cautioned that long stretches of unemployment could erode worker skills and leave families struggling with huge debt loads.
"We ought to do what we can to avoid these outcomes, and that may require additional policy measures," Mr. Powell said.
While congressional Republicans are worried that the packages will significantly add to the federal deficit, Mr. Powell said this was not the moment to fret over government spending.
"Now, when we are facing the biggest shock that the economy has had in modern times, is, for me, not the time to prioritize considerations like that," he said. That time will come "a few years down the road, when the economy is well and truly recovered, or at least mostly recovering."
Mr. Trump, who has been consistently critical of Mr. Powell and accused him of putting the United States at a disadvantage by keeping interest rates too high, said on Wednesday night that the Fed chair was the government's "most improved player."
While noting that he still wanted the central bank to try out negative interest rates, Mr. Trump said Mr. Powell had been doing a "great job." Mr. Powell on Wednesday ruled out lowering rates below zero, saying evidence about the effectiveness of negative interest rates had been "mixed."
Jeanna Smialek writes about the Federal Reserve and the economy for The New York Times. She previously covered economics at Bloomberg News, where she also wrote feature stories for Businessweek magazine. @jeannasmialek
Jim Tankersley covers economic and tax policy. Over more than a decade covering politics and economics in Washington, he has written extensively about the stagnation of the American middle class and the decline of economic opportunity. @jimtankersley
Emily Cochrane is a reporter in the Washington bureau, covering Congress. She was raised in Miami and graduated from the University of Florida. @ESCochran
-- via my feedly newsfeed
https://www.nytimes.com/2020/05/13/business/economy/fed-chair-powell-economy-virus-support.html
text only:
The Federal Reserve chair, Jerome H. Powell, delivered a stark warning on Wednesday that the United States was experiencing an economic hit "without modern precedent," one that could permanently damage the economy if Congress and the White House did not provide sufficient financial support to prevent a wave of bankruptcies and prolonged joblessness.
Mr. Powell's blunt diagnosis was the latest indication that the trillions of dollars that policymakers have already funneled into the economy may not be enough to forestall lasting damage from a virus that has already shuttered businesses and thrown more than 20 million people out of work.
Yet the warning comes as discussions of additional rescue measures have run aground, with Democrats proposing sweeping new programs and Republicans voicing concerns over the swelling federal budget deficit, which is projected to hit $3.7 trillion this year. President Trump and his economic advisers have pressed the pause button on negotiations for additional spending, waiting to see how much the economy rebounds as states begin lifting restrictions on business activity.
Mr. Powell lauded Congress for the more than $2 trillion relief effort it had already funded, but he made clear that a rebound could take months to materialize, requiring more support.
"The recovery may take some time to gather momentum," Mr. Powell said at a Peterson Institute for International Economics virtual event. "Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery."
Stock markets swooned after Mr. Powell's comments, as investors digested the likelihood of a sluggish recovery. The S&P 500 index closed down 1.75 percent.
As the virus persists and the number of unemployed grows, Mr. Powell and his central bank colleagues have begun trying to prod Congress and the White House into action by reminding them that the Fed alone cannot carry the burden of digging the economy out of its deep hole.
Fed officials have slashed interest rates to zero, purchased bonds at a record pace to restore order to roiled government bond markets and unveiled nine emergency lending programs in partnership with the Treasury Department. But Mr. Powell reiterated on Wednesday that the Fed's programs, which will buy bonds from companies and local governments and make loans to midsize businesses, can only temporarily supply credit. The Fed lacks spending powers, which are reserved to Congress.
Mr. Powell characterized the Fed's ability to help as a "bridge across temporary interruptions," while suggesting that more may be needed as huge uncertainties confront the economy, from the speed of reopening to the scope of testing and the timing of a vaccine.
"There is a sense, a growing sense I think, that the recovery will come more slowly than we would like," he said, after highlighting that "the scope and speed of this downturn are without modern precedent, significantly worse than any recession since World War II."
Fed officials have increasingly cautioned that the recovery remains highly uncertain and that if the policy response proves inadequate, the consequences could be long-lasting and painful, particularly for the most disadvantaged.
Loretta Mester, the president of the Federal Reserve Bank of Cleveland, has urged more fiscal help to fend off "dire" economic scenarios. Robert S. Kaplan, the Dallas Fed president, said on Tuesday that the economy "may well" need more government help if the unemployment rate continues to rise, and Neel Kashkari, the president of the Minneapolis Fed, has said the fallout could last for years and displaced workers will probably need more aid to make it through.
Coronavirus lockdowns have left tens of millions unemployed, disproportionately hitting service sector workers, many of them low income and without savings. Mr. Powell said a Fed survey set for release on Thursday would show that almost 40 percent of people who were working in February and were members of households making less than $40,000 a year had lost their jobs in March.
"While the economic response has been both timely and appropriately large, it may not be the final chapter, given that the path ahead is both highly uncertain and subject to significant downside risks," Mr. Powell said.
"Since the answers are currently unknowable, policies will need to be ready to address a range of possible outcomes."
Whether Mr. Powell can push lawmakers into action remains to be seen. The Fed chair has cultivated solid relationships with key congressional Republicans and has a history of influencing economic thinking on Capitol Hill. Yet many Republicans, urged on by Mr. Trump, have begun trying to shift the conversation from federal spending support toward efforts to help the economy rebound as quickly as possible. They have largely stopped conveying the sense of urgency that Mr. Powell voiced on Wednesday.
"I'm not sure I agree with that," Senator Patrick J. Toomey, Republican of Pennsylvania, said when asked about Mr. Powell's remarks. "Not sure that pumping more money out of Washington is going to do more good than harm at this point. I think we have to think that through very carefully."
On Tuesday, House Democrats released a multitrillion-dollar, 1,800-page proposal that includes hundreds of billions of dollars for state and local governments to shore up holes in their budgets and additional direct payments and tax credits for low- and middle-income Americans. But the proposal also contains a wide range of provisions that Republicans dismissed immediately as not directly linked to those struggling amid the pandemic, including bailouts for troubled pension plans and lifting a cap on state and local tax deductions.
Republicans are working on their own proposals that Democrats have similarly said should be off the table, including shielding businesses from virus-related legal liabilities. Lawmakers and the White House have also begun pushing for additional individual and business tax cuts.
Senator Kevin Cramer, Republican of North Dakota, did not seem spurred to action by Mr. Powell's warnings, noting that "it's one person's voice — a smart person, that I tend to agree with a lot — but it is just one person."
"I think we have to be very targeted about the next few weeks," he said.
Senator Marco Rubio, Republican of Florida, expressed some openness to more financial relief, provided that the spending was temporary and dealt with the pandemic as opposed to creating new permanent programs that would balloon the deficit.
"I'm not insensitive to the debt issue nor do I believe we can government-spend our way out of this forever. Government cannot replace the private economy," he said, adding that "at some point, we need economic activity to come back."
Early indications suggest that activity is only returning slowly to states that have moved to reopen businesses, as many would-be consumers and workers continue to stay home out of fear of contracting the virus. Total hours worked by employees of small businesses that use the human resource firm Homebase remain down by a third from pre-crisis levels in South Carolina and by two-fifths in Texas and Georgia, even after governors eased many restrictions in those states.
With little evidence that Republicans and Democrats are willing to work together to continue helping businesses through a protracted slump, there is growing concern that the trillions already spent may have been too limited.
The economic stimulus payments that many Americans received remain, at least for now, a one-time payout. Expanded aid to the unemployed is set to expire at the end of July.
The government's main vehicle for helping small businesses — the Paycheck Protection Program — has nearly exhausted its $660 billion in funds, and many companies are beginning to worry that the loans, which cover just eight weeks of payroll, will not be enough as the virus persists.
Economists and business advocates say now is not the time to abandon efforts that could determine whether a company comes through the crisis bruised but alive or is forced into bankruptcy.
"They have yet to solve for the fundamental problem," said John Lettieri, the president of the Economic Innovation Group, a Washington think tank that has pushed Congress and the Trump administration to spend more on the payroll program and loosen restrictions. "The program as implemented simply doesn't do enough to help deeply affected businesses survive the crisis."
If the current recession is drawn out, Mr. Powell said, it could inflict "lasting damage" on the economy's productive capacity, with "avoidable" business insolvencies weighing on growth for years to come. He also cautioned that long stretches of unemployment could erode worker skills and leave families struggling with huge debt loads.
"We ought to do what we can to avoid these outcomes, and that may require additional policy measures," Mr. Powell said.
While congressional Republicans are worried that the packages will significantly add to the federal deficit, Mr. Powell said this was not the moment to fret over government spending.
"Now, when we are facing the biggest shock that the economy has had in modern times, is, for me, not the time to prioritize considerations like that," he said. That time will come "a few years down the road, when the economy is well and truly recovered, or at least mostly recovering."
Mr. Trump, who has been consistently critical of Mr. Powell and accused him of putting the United States at a disadvantage by keeping interest rates too high, said on Wednesday night that the Fed chair was the government's "most improved player."
While noting that he still wanted the central bank to try out negative interest rates, Mr. Trump said Mr. Powell had been doing a "great job." Mr. Powell on Wednesday ruled out lowering rates below zero, saying evidence about the effectiveness of negative interest rates had been "mixed."
Jeanna Smialek writes about the Federal Reserve and the economy for The New York Times. She previously covered economics at Bloomberg News, where she also wrote feature stories for Businessweek magazine. @jeannasmialek
Jim Tankersley covers economic and tax policy. Over more than a decade covering politics and economics in Washington, he has written extensively about the stagnation of the American middle class and the decline of economic opportunity. @jimtankersley
Emily Cochrane is a reporter in the Washington bureau, covering Congress. She was raised in Miami and graduated from the University of Florida. @ESCochran
-- via my feedly newsfeed
Chelsea Watson, a worker from the District of Columbia, pins a protest banner on her jacket during a May Day rally in Washington, May 1, 2020. | Manuel Balce Ceneta / AP
The Democrats' proposal includes hazard pay for workers in a range of "essential" jobs. Here, workers line up to enter the Tyson Foods pork processing plant in Logansport, Ind., May 7, 2020. The plant had closed after nearly 900 employees tested positive for the coronavirus; on order of President Trump, it reopened. | Michael Conroy / AP
There is nothing like a pandemic to highlight markets' inadequacy in the face of collective-action problems and the importance of state capacity to respond to crises and protect people. The COVID-19 crisis has raised the volume on calls for universal health insurance, stronger labor-market protections (including of gig workers), and protection of domestic supply chains for critical medical equipment. It has led countries to prioritize resilience and dependability in production over cost savings and efficiency through global outsourcing. And the economic costs of lockdowns will grow over time, as the massive supply shock caused by the disruption of domestic production and global value chains produces a downward shift in aggregate demand as well.
But while COVID-19 reinforces and entrenches these trends, it is not the primary force driving them. All three – greater government action, retreat from hyper-globalism, and lower growth rates – predate the pandemic. And while they could be viewed as posing significant dangers to human prosperity, it is also possible that they are harbingers of a more sustainable, more inclusive global economy.
Consider the role of the state. The neoliberal market fundamentalist consensus has been in retreat for some time now. Designing a larger role for government in responding to inequality and economic insecurity has now become a core priority for economists and policymakers alike. While the progressive wing of the Democratic Party in the United States fell short of clinching the party's presidential nomination, it has largely dictated the terms of the debate.
Joe Biden may be a centrist, but on every policy front – health, education, energy, the environment, trade, crime – his ideas are to the left of the party's previous presidential candidate, Hillary Clinton. As one journalist put it, "Biden's current set of policy prescriptions would … be considered radical if they had been proposed in any previous Democratic presidential primary." Biden may not win in November. And even if he wins, he may not be able or willing to implement a more progressive policy agenda. Nevertheless, it is clear that the direction in both the US and Europe is toward greater state intervention.
The only question is what form this more activist state will take. We cannot rule out a return to an old-style dirigisme that achieves few of its intended results. On the other hand, the shift away from market fundamentalism could take a genuinely inclusive form focused on a green economy, good jobs, and rebuilding the middle class. Such a reorientation would need to be adapted to the economic and technological conditions of the present moment, and not simply mimic the policy instincts of the three golden decades after World War II.
The return of the state goes hand in hand with the renewed primacy of nation-states. The talk everywhere is about de-globalization, de-coupling, bringing supply chains home, reducing dependence on foreign supplies, and favoring domestic production and finance.
The US and China are the countries that set the tone here. But Europe, perpetually on the verge of greater fiscal union, provides little counterweight. During this crisis, the European Union has once again backed away from cross-national solidarity and emphasized national sovereignty instead.
The retreat from hyper-globalization could lead the world down a path of escalating trade wars and rising ethno-nationalism, which would damage everyone's economic prospects. But that is not the only conceivable outcome.
It is possible to envisage a more sensible, less intrusive model of economic globalization that focuses on areas where international cooperation truly pays off, including global public health, international environmental agreements, global tax havens, and other areas susceptible to beggar-thy-neighbor policies. Otherwise, nation-states would be unencumbered in how they prioritize their economic and social problems.
Such a global order would not be inimical to the expansion of world trade and investment. It might even facilitate both insofar as it opens space for restoring domestic social bargains in the advanced economies and crafting appropriate growth strategies in the developing world.
Perhaps the most damaging prospect the world faces in the medium term is a significant reduction in economic growth, especially in the developing world. These countries have had a good quarter-century, with notable reductions in poverty and improvements in education, health, and other development indicators. Aside from the massive public-health burden of the pandemic, they now face significant external shocks: a sudden stop in capital flows and steep declines in remittances, tourism, and export receipts.
But once again, COVID-19 only accentuates a pre-existing growth problem. Much of the growth in the developing world outside of East Asia was based on demand-side factors – public-investment and natural-resource booms in particular – that were unsustainable. Export-oriented industrialization, the most reliable vehicle for long-term development, appears to have run its course.
Developing countries will now have to rely on new growth models. The pandemic may be the wake-up call needed to re-calibrate growth prospects and stimulate the broader rethink that is needed.
Insofar as the world economy was already on a fragile, unsustainable path, COVID-19 clarifies the challenges we face and the decisions we must make. In each of these areas, policymakers have choices. Better and worse outcomes are possible. The fate of the world economy hinges not on what the virus does, but on how we choose to respond.