WASHINGTON - Federal Reserve Chairman Jerome Powell gave a dire warning Wednesday that the U.S. economy could become stuck in a painful multiyear recession if Congress and the White House do not authorize more aid to address the coronavirus pandemic's economic fallout.
"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 said in a videoconference with the Peterson Institute for International Economics.
Powell's statement was a sharp departure from the economic optimism that President Donald Trump and some senior administration officials have touted in recent days, as they have suggested a dramatic economic rebound will occur later this year and pick up even more momentum in 2021. Powell's outlook was far more grim, and it helped send the Dow Jones industrial average down 517 points, or 2.2 percent.
Powell said the United States is in the midst of the "biggest shock our economy has felt in modern times" and is likely to face an "extended period" of weakness.
"The record shows that deeper and longer recessions can leave behind lasting damage to the productive capacity of the economy," Powell said. "Avoidable household and business insolvencies can weigh on growth for years to come."
Powell said he is concerned about a domino effect, where consumers lose jobs and sharply cut spending. That, in turn, can cause more restaurants, gyms and other businesses to close, hurting more jobs. Companies that go out of business also stop paying their suppliers, which can drag down other firms.
The unemployment rate surged to nearly 14.7 percent in April, up from 3.5 percent in February, the highest level since the Great Depression. More than 27 million Americans are now out of work. A growing number of companies are going bankrupt or closing permanently, a trend that economists warn will only intensify as the slowdown drags on. The economy contracted by 4.8 percent in the first three months of this year, and the economy is expected to perform even worse in the three-month span between April and June.
Congress and the White House already approved nearly $3 trillion in new spending and other initiatives since March to address the economic fallout from shutting down so much of the economy to slow the spread of the deadly coronavirus.
The aid has included extraordinary assistance to businesses, expanded unemployment benefits, and individual checks to millions of Americans. That spending - and a precipitous drop in tax revenue - has led budget experts to project the United States could run a nearly $4 trillion deficit this year, roughly four times what was projected just a few months ago. And the White House's efforts to jump-start parts of the economy have run into the harsh reality that many governors, local leaders, and business owners are cautious about taking steps until they have a better sense about vaccines, treatment, and testing protocols.
Lawmakers and the White House are now in a standoff about next steps, and bipartisan negotiations have not begun. Both Democrats and Republicans have expressed agreement that more should be done, but there is little overlap about how to proceed.
House Democrats proposed a $3 trillion package this week that would provide another round of stimulus checks and massive aid to states and municipalities, but Senate Majority Leader Mitch McConnell, R-Ky., immediately declared it dead on arrival.
McConnell and many Republicans, along with some Trump administration officials, say that after spending so much money they should pause and assess how it's working before adding more money to the deficit.
"Right now we're watching the economies that open up, watching how quickly economic activity picks up and watching the response of the disease and as we get more information on that, then we can make a judgment about what the next phase might look like," White House economic adviser Kevin Hassett said in a webinar hosted by the Brookings Institution on Tuesday.
Senate Republicans generally agree that another relief bill will be necessary at some point. McConnell says the most urgent need is for liability protections for businesses to guard against a "second pandemic" of lawsuits, and he's working on such liability protections to include in Congress' next bill - an idea Democrats have already rejected.
At the same time, some Republicans support some additional spending, with lawmakers under pressure from governors, mayors and other officials in their states to sign onto more aid to states or at least loosen the rules for how existing state aid could be spent. While many Republicans say the best thing that could happen to help the economy is for businesses to reopen, some GOP lawmakers are more open to Powell's views.
"I'm not insensitive to the debt issue nor do I believe we can government-spend our way out of this forever. Government cannot replace the private economy. So at some point we need economic activity to come back," Sen. Marco Rubio, R-Fla., said Wednesday. "But I'm concerned you're not going to have an economic recovery if there's no economy."
Still, Republicans have largely dismissed the $3 trillion bill that House Speaker Nancy Pelosi, D-Calif., intends to bring to a vote on Friday. House Republicans have dubbed it "Pelosi's Socialist Wish List Act" and intend to vote against it en masse, but Pelosi on Wednesday said Powell's warnings validate her call to push for more spending immediately.
"The American people and experts agree that we must 'Think Big' to protect lives and livelihoods during the coronavirus crisis," she said. "Not acting is the most expensive course."
She faces divisions within her own ranks, though, with members of the Congressional Progressive Caucus pushing for more time to review the 1,800-page legislation.
Rep. Pramila Jayapal, D-Wash., a co-chair of the group, said in an interview Wednesday that she's leaning against a "no" vote on the bill, saying it doesn't do enough to address unemployment and other issues. The legislation omits a "Paycheck Guarantee" proposal Jayapal had advocated. Democratic leaders chose to include a new and bigger round of direct payments to individuals instead, arguing it's a more efficient and cost-effective approach.
Though he didn't endorse any specific congressional bill, Powell's signal to Congress that more action is warranted could ultimately jumpstart talks at a time when some lawmakers have become wary of authorizing more spending. His comments also reveal the limits to what the central bank can do during a crisis.
"The Fed cannot cure the virus. The Fed can't repair broken supply chains," said Randall Kroszner, a former Fed governor during the 2008-09 financial crisis. "The Fed will do what it can, but it is not all powerful."
Even with all the spending to date, Powell said more was needed because the economic impact has been so severe and hit some households particularly hard.
He said low-income Americans are facing the brunt of this economic crisis, and they have the least ability to handle it. Almost 40 percent of U.S. households making less than $40,000 a year lost a job in March, citing results from a Fed survey coming out later this week.
The Fed has taken dramatic steps to try to aid the economy so far. Under Powell's direction, the Fed has slashed interest rates to zero and pumped more than $2.5 trillion into markets and the financial system in an effort to make it as easy as possible for companies and households to borrow money cheaply to make it through this time.
"The Powell Fed did in a few weeks what the [former Chairman Ben] Bernanke fed did over the course of several years," said Nathan Sheets, a former Fed staffer who is now chief economist at PGIMF Fixed Income. "Powell's Fed has grown the balance sheet by $2.5 trillion. It's been powerful."
Bernanke led the Fed during the 2008 financial crisis.
Some, including Trump, have urged the Fed to make interest rates negative, which has never happened before in the United States. It would basically penalize anyone saving and make it almost free to borrow money. Powell said again Wednesday the Fed does not want to do that.
"The committee's view on negative rates has not changed. This is not something we are looking at," he said.
Powell has emphasized the Fed cannot do direct aid to the many Americans and small business owners who are struggling. That is the role of Congress.
The Fed is about to begin providing low-cost loans to small and midsized businesses, but many struggling business owners say they need grants to survive because they won't be able to repay so much debt.
Retail and food services are particularly susceptible to shutting down permanently, said Alex Bartik, an economics professor at the University of Illinois who is part of a team of researchers tracking small business closures from the pandemic. They found more than 2 percent of U.S. small businesses have closed permanently already.
Several Fed officials, including Powell, said this week they think the U.S. economy will soon hit its low point and then start to rebound, but they have warned a recovery is likely to be slow.
"There is a sense, a growing sense, the recovery may come more slowly than we would like," Powell said.