Powell warns of a possible sustained recession from pandemic

UNITED STATES Federal Reserve Chair Jerome Powell warned Wednesday of the threat of a prolonged recession resulting from the viral outbreak and urged Congress and the White House to act further to prevent long-lasting economic damage.

The Fed and Congress have taken far-reaching steps to try to counter what is likely to be a severe downturn resulting from the widespread shutdown of the US economy. But Powell cautioned that widespread bankruptcies among small businesses and extended unemployment for many people remain a serious risk.

“We ought to do what we can to avoid these outcomes,” Powell said.

Additional rescue aid from government spending or tax policies, though costly, would be “worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery,” he said.

Powell spoke a day after House Speaker Nancy Pelosi, a California Democrat, proposed a US$3-trillion aid package that would direct money to small businesses, state and local governments, and other beleaguered institutions. This money would come on top of roughly US$3 trillion in earlier financial assistance that the government has provided. The Fed itself has also intervened by slashing interest rates to near zero and creating numerous emergency lending programmes.

Yet Trump administration officials have said they want to see how previous aid packages affect the economy. And Republican leaders in Congress have expressed scepticism about allowing significantly more spending right now.

“Deeper and longer recessions can leave behind lasting damage to the productive capacity of the economy,” the chairman warned in his prepared remarks, before holding an online discussion with the Peterson Institute for International Economics. “Avoidable household and business insolvencies can weigh on growth for years to come.”

He said the Fed would “continue to use our tools to their fullest” until the viral outbreak subsides, but he gave no hint of what the Fed’s next steps might be.

Powell repeated his previous warnings that the Fed can lend money to solvent companies to help carry them through the crisis. But a longer downturn could threaten to bankrupt previously healthy companies without more help from the government.

Powell’s downbeat view contrasted with a speech on Monday by Charles Evans, president of the Federal Reserve Bank of Chicago. Evans sketched a more upbeat outlook and suggested that “it’s reasonable to assume a legitimate return to growth in the second half” of this year and into 2021.

In his remarks Wednesday, the Fed chairman underscored some of the harsh impacts of the recession. Among those working in February, nearly 40 per cent of households earning less than US$40,000 a year lost a job in March, Powell said.

On the day that Powell spoke, new data released by the US Labor Department raised more concerns around deflation.

Wholesale prices slid a record 1.3 per cent in April led by a 19 per cent plunge in the cost of energy, further signalling the potential threat of deflation in the United States.

The Labor Department said Wednesday that its Producer Price Index, which measures inflation before it reaches the consumer, fell by the largest level on records dating to 2009 as the disruptions from the coronavirus pandemic rattled the US and the global economy.

On Tuesday, the US reported that consumer prices declined 0.8 per cent in April, the steepest month-to-month fall since the 2008 financial crisis.

The decline of prices at both the retail and wholesale levels raise concerns that the seismic evaporation of demand brought on by a pandemic could ignite a destabilising bout of deflation, something not seen in the United States since the economic collapse of the 1930s.

“The economy is on deflation watch for producers and consumers now that economic demand is falling away more quickly than anytime … since the Great Depression,” said Chris Rupkey, chief financial economist at MUFG Bank in New York. “Inflation isn’t coming back in this economy for a long, long time.”

While falling energy prices have accelerated, it was the third consecutive month of declines, illustrating how the global economy was already slowing before the arrival of the coronavirus. The outbreak has exacerbated the trend.

Food prices at the wholesale level also fell in April, dropping 0.5 per cent.

AP