Fed's Powell warns of a 'weak' US economic recovery if more stimulus isn't enacted

Reuters
  • Failure to pass adequate and timely stimulus endangers the US economic recovery, Federal Reserve Chairman Jerome Powell said Tuesday.
  • In one of his most pointed calls for new aid, Powell noted that the risks of passing new relief measures “are still asymmetric.”
  • While overspending risks are small, passing too little stimulus could drive a “weak recovery,” Powell said in remarks to the National Association of Business Economics’ annual meeting.
  • The nation’s rebound “will be stronger and move faster if monetary policy and fiscal policy continue to work side by side,” he added.
  • The remarks arrive as Congress remains stuck in deliberations on a new fiscal relief bill. While House Democrats passed a $US2.2 trillion measure on Thursday, Senate Republicans have balked at the bill’s price tag.

Federal Reserve Chairman Jerome Powell inched closer to explicitly calling for additional fiscal stimulus on Tuesday, warning that an insufficient spending bill could cripple the US economic recovery.

The risks of employing new relief measures “are still asymmetric,” the central bank chair said in an address to the National Association for Business Economics’ annual conference. Employing too little support will give way to a “weak recovery” as household spending crumbles and business closures mount. On the other hand, the risks of overspending seem to be smaller, and any extraneous spending “will not go to waste,” Powell said.

“The expansion is still far from complete,” he added. “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.”


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To be sure, the Fed has shouldered much of the policy burden throughout the coronavirus pandemic. The central bank slashed its benchmark interest rate to near zero in March, kicked off an unprecedented asset-purchase program, and established nine emergency lending facilities.

Congress stepped in with the $US2.2 trillion CARES Act in March, but many of the bill’s relief measures have since expired. Economists have called for a follow-up bill to keep the nation’s rebound on track, but legislators remain in a stalemate over new stimulus. While House Democrats passed a $US2.2 trillion proposal on Thursday, Senate Republicans have indicated they won’t back the measure.

House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin resumed negotiations last week, hoping to reach a compromise before the November elections. Though an hour-long conversation on Monday failed to bring a deal, the two are scheduled to speak again Tuesday.


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Still, Powell’s commentary highlighted some bright spots. The recovery is moving “more quickly than generally expected,” and could see the unemployment rate fall back to pre-pandemic levels by the end of 2023, he said. The initial fiscal response was “truly extraordinary” and fuelled much of the rebound’s early gains. When taken in combination with the Fed’s monetary easing, the policy actions “have so far supported a strong but incomplete recovery,” Powell said.

The outlook remains “highly uncertain” and hinges on containing the virus, the Fed chair reiterated. Powell identified two risks facing the bounce-back. First, rising COVID-19 infection rates across the US could lead to reinstated lockdowns and another halt to economic activity. Failure to curb the virus’ spread during reopenings could endanger the economic expansion, he said.

A prolonged weakening of the economic recovery could also plunge the country into a deeper downturn, he added. Some indicators suggest such a slackening has already begun, with the labour market’s rebound slowing and consumer spending growth hitting a plateau. A period of “unnecessarily slow progress” could intensify existing economic disparities and reverse significant improvements, Powell said.

“That would be tragic, especially in light of our country’s progress on these issues in the years leading up to the pandemic,” the Fed chair said.


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