Federal Reserve Chairman Jerome Powell laid out his vision for America’s economic recovery—something he said could stretch through 2021— as the coronavirus continues to force business shutdowns and ravage the labor market.
Powell warned that economic recovery may take more than a year: “we really don’t know,” he said.
Powell also urged lawmakers to do more to “avoid longer run damage to the economy,” and suggested that stimulus measures may be necessary for three to six more months. He conceded that unemployment numbers could peak around 20% or 25%; in April, the unemployment rate was 14.7%.
The chairman said he’s expecting GDP to “easily” shrink by 20% or 30% in the next quarter, but that there’s a “good chance” that there will be positive growth in the third quarter (starting in July).
Powell also said he doesn’t think a “second Great Depression” is a likely outcome “at all,” citing the facts that the current crisis is caused by an external stressor, not a failure within the financial system, and that the United States had a “very healthy” economy just two months ago.
He cautioned, however, that a full recovery might not be possible without an effective vaccine.
Stocks rallied on Monday morning after Boston biopharmaceutical Moderna announced Monday that “positive” data was collected from a trial of a coronavirus vaccine, with all 45 participants producing COVID-19 antibodies; the Dow Jones Industrial gained 3.4%, the S&P 500 rose 3.0%, and the Nasdaq composite climbed 2.4% after the news.
According to Powell, the lowest earners have borne the brunt of the economic downturn. The chairman said that of people working in February making less than $40,000 per year, almost 40% have lost their jobs over the last month.
Powell summed up the potential for long term damage to the economy: "There's a real risk that if people are out of work for long periods of time, that their skills atrophy a little bit and they lose contact with the workforce. This is something that shows up in the data — that longer and deeper recessions tend to leave behind damage to people's careers."
A slew of emergency initiatives enacted by the Federal Reserve during the crisis—including rate cuts, lending programs, and credit facilities—have the potential to inject a collective $6 trillion in cash into the financial system, CNBC estimates.
Over the past three months, the Fed has cut rates twice, down to near-zero levels. It’s slashed the reserve requirement for banks and begun buying up commercial paper (a form of short-term corporate debt). It’s buying municipal bonds for the first time and taking its first steps into certain types of riskier corporate bonds, and it’s promised to buy an unlimited amount of government debt for the duration of the crisis. It launched two credit facilities for big companies and announced a massive lending program for small and medium-sized businesses. It will also backstop loans from bank lenders participating in the Paycheck Protection Program.