The battle of recovery narratives – swift and sharp versus shallow and long – Wednesday saw one of the main players, the Federal Reserve chief, come down on the side of a protracted challenge to survive.
Fed Chair Jay Powell chose a think-tank venue, the Peterson Institute for International Economics, to extend his view to the unsettling long-range possibilities, in itself seemingly a signal not to expect any V-shaped rebound as soon as this summer.
“The loss of thousands of small- and medium-sized businesses across the country would destroy the life’s work and family legacy of many businesses and community leaders and limit the strength of the recovery when it comes,” Powell said as the latter half of his prepared remarks looked at starkly negative scenarios.
“These businesses are a principal source of job creation, something we will need sorely as people seek to return to work,” he said.
“Seek to return” rather than just “return to work” were the kind of Powell’s phrases that seemed to be precautionary hedges against any overly rosy optimism. The longer Powell spoke, the more dire became the possibilities.
“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,” he cautioned, “could be an extended period of low productivity growth and stagnant incomes.”
Finally, Powell used words that in a slightly different construction would say that to hold off permanent damage, more needs to be done. As he put it, “We ought to do what we can to avoid these outcomes, and that may require additional policy measures.”
To the single biggest question, the “how long” question, Powell refrained from being overly encouraging.
“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, but,” Powell added in what may have been his bottom line, “the recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems.”
As Capitol Hill begins what threatens to be a long ideological negotiation between the Republican Senate and a Democratic House over who gets what in the next virus response legislation, Powell said Congress should not become intimidated by big numbers.
“Additional fiscal support could be costly,” he said, “but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery.”
The subsequent Q&A added little to the discussion except to give Powell another opportunity to bat aside any possibility of a purposeful US descent into negative interest rates.
Even so, market forces have been pushing credit in that direction. The 1-month Treasury bill yield was barely positive at 0.097% as he spoke. The 2-year passed its record low within the past few days and has been running around a 0.15% yield.
“The committee’s view on negative rates really has not changed,” Powell said, echoing every statement he has made on the subject since taking the chairmanship. “This is not something that we’re looking at.”
Not only is the Federal Open Market Committee not considering any policy move toward negativity, as it hasn’t ever since European rates started using minus signs, there’s no reason to, he said.
“The evidence on the effectiveness of negative rates is very mixed – it’s very mixed. There’s no research that says that they’ve been effective,” he said. “There are plenty of doubters.”
If there was a hint of optimism in Powell’s remarks it was that unemployment may stop getting worse soon. He did not go so far as to say how long it might remain on a Depression-era plateau.
“Probably over the course of the next month or so, unemployment will peak,” he said, “and then as we return to more normal levels of economic activity, it’s a reasonable expectation that unemployment will start to decline again and it may decline sharply.”
He added the “remain” word, saying “It’s also likely to remain well above the levels that we saw earlier this year.”
Powell waded into broad fiscal policy while emphasising the Fed does not tell Congress how to do it. He did remind, couching his words carefully, that Congress did not take the opportunity of good times to even begin to move in the right direction. Then the virus crisis hit.
“I absolutely believe that we must and indeed we will eventually have to return to a sustainable fiscal path,” he repeated, “and that just means that you’ve got to get the economy growing faster than the debt.”
“Many countries have done it successfully over a period of time,” he continued, “and I do think the time to do that is during good times, you know, when the economy is strong and unemployment is low. That’s the time to be addressing those concerns.”
Powell also confirmed what other officials have said, that its Main Street lending facility for medium-sized and large firms is still several weeks away from operation.