US Fed chair warns of 'significant uncertainty' over economic recovery

A prolonged downturn could hit lowest-income workers hardest, Jerome Powell tells Congress

US Federal Reserve Chairman Jerome Powell speaking at a press conference before pandemic restrictions in March this year. On Tuesday, Mr Powell told a Senate hearing that the longer the economic downturn in the US lasts, 'the greater the potential for longer-term damage from permanent job loss and business closures'. AFPShow less

US Federal Reserve chairman Jerome Powell warned on Tuesday that the world's biggest economy faces a deep downturn with “significant uncertainty” about the timing and strength of a recovery.

He cautioned that the longer the recession lasts, the worse the damage that would be inflicted on the job market and businesses.

In testimony to Congress, Mr Powell stressed that the Fed is committed to using all of its financial tools to cushion the economic damage from the coronavirus. But he said that until the public is confident the disease has been contained, “a full recovery is unlikely”.

The chairman warned that a prolonged downturn could inflict severe harm, especially to low-income workers who have been hit hardest.

Mr Powell was delivering the first of two days of semi-annual congressional testimony on Tuesday to the Senate Banking Committee before addressing the House Financial Services Committee on Wednesday.

“The longer the downturn lasts, the greater the potential for longer-term damage from permanent job loss and business closures,” Mr Powell said. “Long periods of unemployment can erode workers’ skills and hurt their job prospects.”

He noted that the pandemic poses “acute risks” for small businesses.

“If a small or medium-sized business becomes insolvent because the economy recovers too slow, we lose more than just that business,” he said. “These businesses are the heart of our economy and often embody the work of generations.

The chairman told lawmakers the Fed is "committed to using our full range of tools to support the economy and to help assure that the recovery from this difficult period will be as robust as possible”.

Since March, the Fed has slashed its benchmark short-term rate to near zero, bought $2.1 trillion (Dh7.7tn) in Treasury and mortgage bonds to inject cash into markets and rolled out numerous lending programmes to try to keep credit flowing smoothly. On Monday, the Fed announced that it will begin buying corporate bonds as part of a plan to ensure that companies can borrow during the pandemic. The Fed's policymakers have also forecast that their key rate will remain near zero through to 2022.

Collectively, the central bank's actions are credited with helping fuel an extraordinary rally in the stock market, which has nearly regained its pre-pandemic highs after a dizzying plunge in March.

On Tuesday, Mr Powell suggested that the drop in economic output during the current April-June quarter, as measured by the gross domestic product, is likely to be the most severe on record. Many economists are forecasting that GDP could shrink at a record-setting 40 per cent annual rate this quarter.

While President Donald Trump's administration is forecasting a V-shaped recovery with strong growth in the second half of this year, Mr Powell was more cautious and sought to focus concerns on low-wage workers. In a semi-annual monetary report accompanying the testimony, the Fed noted that workers with lower earnings, including minorities, were being hit hard by the job market disruptions.

Employment has fallen nearly 35 per cent for workers who were previously earning wages in the bottom quarter of wage earners, the Fed said. By contrast, employment has declined 5 per cent for higher-wage earners. Because lower-wage earners are disproportionately African-American and Hispanic, unemployment has risen more sharply for those groups.

Mr Powell had said last week at a news conference that a recovery could be painfully slow, with “well into the millions” of laid-off Americans unable to regain their old jobs. That downbeat assessment had helped trigger a plunge in stock prices and prompted Mr Trump to issue a tweet criticising the Fed’s views.

“The Federal Reserve is wrong so often,” Trump tweeted. “We will have a very good third quarter, a great fourth quarter, and one of our best ever years in 2021.”

In its projections, the Fed is predicting that the economy will shrink 6.5 per cent this year before growing 5 per cent next year, an assessment in line with the forecasts of private economists.