Jay Powell, the chair of the Federal Reserve, has said “additional policy measures” may be needed from the US central bank and fiscal authorities to prevent greater long-term damage to the economy from the coronavirus pandemic.
“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 in remarks to the Peterson Institute for International Economics in Washington on Wednesday.
Mr Powell warned “deeper and longer recessions” tended to leave “lasting damage to the productive capacity of the economy”, and the US risked an “extended period of low productivity growth and stagnant incomes”.
“We ought to do what we can to avoid these outcomes, and that may require additional policy measures. At the Fed, we will continue to use our tools to their fullest until the crisis has passed and the economic recovery is well under way,” he said in prepared remarks.
Mr Powell ruled out a move to negative interest rates, which Donald Trump, the US president, had again urged the Fed to consider in a Twitter post this week.
The Fed chair had already dismissed negative rates as “not an appropriate policy response” for the US in March, and reiterated his scepticism on Wednesday — just days after markets had priced in the prospect — arguing that the Fed’s existing tools were working and the evidence on the effectiveness of negative rates was “very mixed”.
“It’s an unsettled area, I would call it. I know that there are fans of the policy, but for now it’s not something that we are considering,” Mr Powell said. “We think we have a good toolkit and that’s the one we’ll be using.”
The Fed chair did signal that the White House and Congress should be considering additional fiscal stimulus, on top of the $3tn already passed since the start of the crisis. Democratic lawmakers in the House of Representatives this week unveiled legislation for a further $3tn in stimulus, though Republicans panned the proposal, heralding tricky negotiations.
“Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery. This trade-off is one for our elected representatives, who wield powers of taxation and spending,” Mr Powell said.
The Fed has already delivered in quick succession a series of emergency measures to shore up financial markets and the economy. In addition to slashing interest rates to zero and uncapping the quantity of US Treasuries and agency mortgage-backed securities it has committed to buying, the Fed has rolled out a number of new facilities to lend unprecedented support to critical debt markets, including those for corporate debt and municipal bonds.
Many of these programmes have yet to become fully operational, and the Fed has pledged to continue to adjust the terms if warranted by underlying market conditions. Mr Powell said the Fed’s so-called “Main Street” lending programme, designed for medium-sized businesses with less than $5bn in revenues and less than 15,000 employees, would “go live in a few weeks”.
“I am hopeful that we can meet the demand that is out there, we are committed to continuing to innovate and adapt,” Mr Powell said.
Trading conditions in many of the markets targeted by the Fed have improved in recent weeks, but investors remain concerned that volatility could resurface should the economic outlook fail to improve even as cities and states ease the policies they put in place to curtail the spread of coronavirus.
“[Mr Powell] wanted to temper any assumption that people or the markets are making that the recovery is going to be swift,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “The Fed can do a lot to alleviate liquidity problems, but they are going to be limited if and when this becomes a solvency crisis.”
In his remarks, Mr Powell did not offer any clues about specific actions the Fed might take in the future on monetary policy, especially since negative interest rates are off the table. Some economists have been calling for the US central bank to firm up its forward guidance, pledging to maintain interest rates close to zero until the economy reaches certain milestones in its recovery, with unemployment, at 14.7 per cent in April, dropping to a certain level.
The Fed chair noted that the economic toll had already been severe, particularly in low-income communities — “least able to bear it”. He pointed to a Fed survey due to be released on Thursday that illustrated the burden on struggling households.
“Among people who were working in February, almost 40 per cent of those in households making less than $40,000 a year had lost a job in March,” Mr Powell said. “This reversal in economic fortune has caused a level of pain that is hard to capture in words, as lives are upended amid great uncertainty about the future.”