Virus poses lasting harm to U.S. economy, Powell says
The U.S. economy faces unprecedented risks from the coronavirus if fiscal and monetary policy makers don’t rise to the challenge, U.S. Federal Reserve Chair Jerome Powell said while pushing back against the notion of deploying negative interest rates.
“The recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems,” Powell said Wednesday in remarks to a virtual event hosted by the Peterson Institute for International Economics. “Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery.”
Powell and his colleagues on the policy-setting Federal Open Market Committee have taken dramatic measures to shelter the U.S. economy during the coronavirus pandemic. They have cut their benchmark interest rate to nearly zero, engaged in open-ended bond buying and begun rolling out emergency lending programs as U.S. unemployment has soared to levels not seen since the 1930s Great Depression.
Fed balance sheet has ballooned as Powell & Co. act quickly to bolster economy
Amid such a dark outlook, some investors have bet the Fed might follow other central banks in taking rates into negative territory to spur spending, nudging futures markets to price in a slight chance it could happen. Powell acknowledged the speculation but said such a move was not being considered, though he stopped short of completely ruling the tool out as an option in the future.
”The committee’s view on negative rates really has not changed. This is not something that we’re looking at,” he said. “I know that there are fans of the policy, but for now, it’s not something that we’re considering. We think we have a good toolkit, and that’s the one we’ll be using.”
Traders of fed funds futures pushed bets on a negative policy rate into next year after Powell’s comments.
“He was asked about negative rates and he categorically rejected them yet again,” Stephen Stanley, chief economist at Amherst Pierpont Securities, wrote in an email to clients following the event. “I don’t think he could have been clearer, but market participants have not been willing to take ‘no’ for an answer yet, so I am not optimistic that the message will be absorbed this time either.”
The Fed chair in his speech outlined the worrying scenario posed by mass bankruptcies and unemployment while asserting that policy makers may have to do more to prevent these from coming to pass. He said the Fed would publish a survey Thursday showing almost 40 per cent of Americans in households making less than US$40,000 a year had lost a job in March.
“Long stretches of unemployment can damage or end workers’ careers as their skills lose value and professional networks dry up, and leave families in greater debt,” Powell said. “The loss of thousands of small- and medium-sized businesses across the country would destroy the life’s work and family legacy of many business and community leaders and limit the strength of the recovery when it comes.”
Congressional lawmakers and President Donald Trump’s administration have passed almost US$3 trillion in economic relief measures, including US$454 billion to serve as a backstop for the central bank’s emergency programs.
Democrats and Republicans are currently talking about another round of aid, including measures to shore up state and local governments whose tax revenues have been decimated by stay-at-home orders that have shuttered entire sectors of the economy.
What Our Economists Say
“Powell’s comments show a willingness from the Fed to do more to support the economy, but negative rates will not be in contention.”
-- Carl Riccadonna and Andrew Husby
“While the economic response has been both timely and appropriately large, it may not be the final chapter, given that the path ahead is both highly uncertain and subject to significant downside risks,” Powell said.
In an unprecedented step, the Fed this week also began buying exchange-traded funds invested in corporate debt to support liquidity in the market where large companies borrow.
Powell added that the central bank would “continue to use our tools to their fullest until the crisis has passed and the economic recovery is well under way,” but cautioned that it could only make loans and not spend money.
“When this crisis is behind us, we will put these emergency tools away,” he said.
--With assistance from Catarina Saraiva, Christopher Condon, Rich Miller, Vince Golle, Alexandra Harris and Ana Monteiro.