Powell: Without more stimulus, economy risks “downward spiral”

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Strong financial support from the government and the Federal Reserve have helped the economy bounce back from the pandemic recession, but the rebound may falter without further aid, Fed Chair Jerome Powell warned Tuesday.

“Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses,” Powell said in a speech delivered to an economic conference. A too-slow recovery would also exacerbate existing inequalities, Powell said, which would be “tragic.”

The Fed chairman has consistently urged Congress to put more money into the recovery, but the remarks on Tuesday are some of his bluntest to date.

Powell said that government support — including expanded unemployment insurance payments, direct payments to most U.S. households and financial support for small businesses — has so far prevented a recessionary “downward spiral” in which job losses would reduce spending, forcing businesses to cut even more jobs.

But without further support those downward trends could still emerge, the chairman said, noting that “weakness feeds on weakness.”

“By contrast, the risks of overdoing it seem, for now, to be smaller. Even if policy actions ultimately prove to be greater than needed, they will not go to waste,” Powell said in a speech to the National Association for Business Economics, a group of corporate and academic economists. “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.”

Powell noted that the economic recovery has slowed in recent months compared with its rapid improvement in May and June. Incomes fell in August. And job growth weakened in September, slowing to just 661,000, less than half the gains of 1.5 million in August and 1.8 million in September.

The president of the Federal Reserve Bank of Philadelphia echoed Powell’s comments on Tuesday, in a separate speech in which he called the current unemployment rate of 7.9% “disastrously high.”

“Employment, unfortunately, probably won’t be back to pre-pandemic levels until 2023. Last week’s disappointing jobs report underscored how far we have to go,” Philadelphia Fed President Patrick Harker said.  Even that prediction depends on Congress passing another stimulus package “which has yet to materialize,” Harker noted.

Breaking down the latest jobs numbers 08:38

In recent months, in speeches and in testimony to Congress, Powell has repeatedly urged lawmakers to enact additional economic aid. Though negotiations between House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin are ongoing, prospects for a deal remain dim.

The $2 trillion financial rescue package that Congress approved in March, as well as previous aid measures, were “truly extraordinary,” Powell said, enabling U.S. households to pay bills and maintain their spending even as unemployment soared to 14.7% in April.

Spending on autos and other long-lasting goods is actually higher now than before the pandemic, the Fed chair noted.

“Still, since it appears that many will undergo extended periods of unemployment, there is likely to be a need for further support,” Powell said.

Powell also discussed the Fed’s new framework for its interest rate policy but provided no new details about how it will work in practice. Last month, the Fed said it was now seeking to let inflation run above 2% “for some time” before considering higher short-term interest rates. That is a substantial shift from its previous approach, which potentially involved rate hikes once unemployment fell too low or inflation hit 2%.

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