Washington: Federal Reserve Chairman Jerome H. Powell said an even stronger fiscal policy response might be needed to restore economic prosperity as a downturn “without modern precedent” strikes the United States - one that brings the threat of long-lasting damage.
“The recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems,” Powell said, according to prepared remarks set for delivery at a Peterson Institute for International Economics virtual event. “Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery.”
The Fed has rushed to support the U.S. economy as coronavirus fears sent markets sharply lower in late February and lockdowns took hold in March, leaving workers jobless and businesses without income. Powell and his colleagues slashed interest rates to zero, rolled out unlimited bond buying meant to restore order in government bond markets and unveiled nine emergency lending programs in partnership with the Treasury Department.
But Powell reiterated Wednesday that the Fed’s programs, which will buy bonds from companies and local governments and make loans to midsize businesses, can only temporarily supply credit to ruptured markets. The Fed does not have the ability to make grants, which may be what companies and households need to make it through.
More help needed
He characterized the Fed’s ability to help as a “bridge across temporary interruptions to liquidity.” But he suggested that more than a bridge may be needed as huge uncertainties continue to confront the economy.
“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,” he said. “Since the answers are currently unknowable, policies will need to be ready to address a range of possible outcomes.”
Coronavirus lockdowns have left more than 20 million people out of work.
Powell warned of significant drawbacks that could come if the current recession is drawn out, from “lasting damage” to the economy’s productive capacity to “avoidable” household and business insolvencies that weigh on growth for years to come.
House Democrats on Tuesday unveiled a $3 trillion relief measure, which included aid for struggling states and another round of direct payments to Americans. Republicans dismissed the package as exorbitantly priced and overreaching.