Federal Reserve Chair Jay Powell Tuesday said he is more concerned about preventing worse damage from the pandemic crisis than celebrating any rebound – in fact, saying the economy is slowing and unemployment is worse than indicated.
Powell’s main message was that there is an urgency to provide support now when it counts the most. To have bankruptcies and unemployment “go up to a high sustained level can do damage”.
“A lot of the urgency we’ve been feeling…is to do what we can as quickly as we can so that we can avoid those problems,” he said.
“Temporary layoffs have a way of dissipating either into permanent layoffs or into return to work. And that tends to happen fairly quickly,” he said. “We need to be working on that problem because once you’re permanently laid off, it’s just more difficult…The data are really clear that it’s just more difficult to get back in the workforce. “
In his speech and question-and-answer session conducted online by the National Association for Business Economics, Powell said, “Fiscal and monetary policy actions have so far supported a strong but incomplete recovery in demand and have – for now – substantially muted the normal recessionary dynamics that occur in a downturn.”
The risk remains “that a prolonged slowing in the pace of improvement over time could trigger typical recessionary dynamics, as weakness feeds on weakness,” Powell warned. “A long period of unnecessarily slow progress could continue to exacerbate existing disparities in our economy. That would be tragic.”
More congressional support would be money well spent and would not be wasted even if it were to be more than needed currently, he said.
“Too little support would lead to a weak recovery,” Powell said, “creating unnecessary hardship for households and businesses. Over time, household insolvencies and business bankruptcies would rise, harming the productive capacity of the economy, and holding back wage growth.”
With House Speaker Nancy Pelosi and Treasury Secretary Stephen Mnuchin continuing their negotiations on another round of pandemic relief, and President Trump tweeting that a deal needs to be settled, prospects have improved considerably in the past week and a half. Pelosi and Mnuchin spent another hour on the telephone Monday.
“The risks of overdoing it seem, for now, to be smaller,” Powell said. “Even if policy actions ultimately prove to be greater than needed, they will not go to waste. The recovery will be stronger and move faster if monetary policy and fiscal policy continue to work side-by-side to provide support to the economy until it is clearly out of the woods.”
At one point last week, Pelosi and Mnuchin were reported to have consulted Powell on the subject of the needs of state and local governments. The level of such support has been a persistent roadblock to a final agreement with Mnuchin saying the White House is only willing to cover pandemic losses, not pension shortfalls or other chronic budget problems.
Besides, Senate Republicans have been adamant in their opposition to anything that approaches a bailout of states led by Democratic governors. The House and Senate are subject to a 24-hour callback notice should a relief package come together for votes.
The extraordinary first rounds of congressional support along with the panoply of Fed programs “substantially muted the normal recession dynamics that occur in a downturn,” Powell said.
While the consumption of goods “is now above its pre-pandemic level”, Powell said, the larger services sector of the economy sees continuing low activity, apparently the result of social distancing precautions, not the byproduct of lower income.
“The outlook remains highly uncertain, in part because it depends on controlling the spread and effects of the virus,” Powell said. “There is a risk that the rapid initial gains from reopening may transition to a longer-than-expected slog back to full recovery as some segments struggle with the pandemic’s continued fallout.”
Economic activity “has moderated since the outsize gains of May and June,” Powell said, “as is evident in employment, income and spending data. The increase in permanent job loss, as well as recent layoffs, are also notable.”
The primary risk, he said, “is that COVID-19 cases might again rise to levels that more significantly limit economic activity, not to mention the tragic effects on lives and well-being”. He repeated that managing that risk simply means “using masks and social distancing measures”.
The “better measure” of unemployment is the broad U-6 that is running at 11% rather than 7.9%, he said. The labour participation rate is again being depressed and with no online pre-school and increased household burdens, the workforce participation of women is suffering. “A long period of unnecessarily slow progress could continue to exacerbate existing disparities in our economy,” he said.
Answering questions, Powell said, for the Fed, “I think the right thing to do and the smart thing to do for the long run is to continue to support those people as they return to their old jobs or find new jobs in different sectors of the economy.”
He also downplayed any concern about accelerating inflation for the foreseeable future. “If you look around the world what you see are disinflationary pressures from demographics, from technology,” he said. While that could change and in fact someday “will change”, for now “we are still seeing downward pressure on inflation”.
The minutes of the most recent Federal Open Market Committee will be published Wednesday afternoon and are not expected to add any substantial amount to what was disclosed in the policy statement and Powell’s news conference at the time.