It’s impossible to guess what the trajectory for the economy will look like, a series of central bankers warned. That makes nimbleness key
Jerome Powell, the Chairman of the Federal Reserve, and other top central bank officials warned on May 21 that the United States was experiencing an exceptional shock in the coronavirus pandemic, and that it was wildly unclear when and how low unemployment and widespread prosperity would return.
The US economy is in a “downturn without modern precedent,” Powell said.
“In the best of times, predicting the path of the economy with any certainty is difficult,” he added. “We are now experiencing a whole new level of uncertainty, as questions only the virus can answer complicate the outlook.”
The Fed chief’s comments underscored a point his colleagues made repeatedly across a series of speaking engagements on May 21: The path to recovery is not obvious as the economy and job market absorb the biggest shock in generations. Against that backdrop, several said, both Fed policymakers and those in Congress and the White House should be prepared to do more if needed.
“Depending on the course the virus takes and the depth and duration of the downturn it causes, additional support from both monetary and fiscal policies may be called for,” Richard Clarida, the Fed’s Vice Chairman, said during an event earlier in the day.
But key government officials, particularly Republican members of Congress and some leaders in the Trump administration, have signalled varying appetite for providing further help.
Larry Kudlow, the Director of the National Economic Council, speaking on May 21 at a Washington Post event, expressed opposition to extending enhanced unemployment benefits, which provide an extra $600 a week. Tax cuts and other incentives to encourage hiring would be preferable at this point, he said.
“I do not believe that more government spending is going to give us a strong and durable recovery,” Kudlow said.
It remains unclear whether lawmakers will agree to extend the more generous unemployment benefits, which expire at the end of July, or if they will provide any additional aid beyond the $2 trillion stimulus package that passed in March.
House Democrats included a provision in the $3 trillion stimulus bill passed on May 15, which includes extending that benefit through January 2021. Republicans have rejected the House bill, which they do not plan to vote on in the Senate, and several have shared Kudlow’s concern that the higher unemployment insurance in particular could create a work disincentive.
If a new support package does come, it is unclear when that will happen. Treasury Secretary Steven Mnuchin said on May 21 that while additional government support was likely to be necessary, he was waiting to see how recent relief bills — which total nearly $3 trillion — play out.
“I think there is a strong likelihood we will need another bill,” he said, speaking at an event hosted by The Hill. “We’re going to step back for a few weeks and think very clearly how we need to spend more money and if we need to do that.”
Lael Brainard, a Fed Governor speaking at the same webcast event as Powell, called the current moment an “emergency unprecedented in modern times.” She noted that the strong labour market the United States enjoyed last year had quickly given way to the highest unemployment rate since the Great Depression — 14.7 percent in April.
Unemployment is likely to shoot higher before coming back down, several Fed officials warned, and while economic healing should start in earnest later the year, the speed and extent of that process are difficult to guess.
John C Williams, the President of the Federal Reserve Bank of New York, said on May 21 that the pandemic put ‘a large question mark’ over how industries would fare going forward. “It’s impossible to know exactly how and when workers and businesses will be fully back to work and when consumers will return to the businesses that are open,” Williams said at an event held by several business groups based in upstate New York.
Against that backdrop, the economy may need more help to make it through the downturn without permanent scarring.
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