Jerome H Powell: Current economic issues
Speech (via webcast) by Mr Jerome H Powell, Chair of the Board of Governors of the Federal
Reserve System, at theAt the Peterson Institute for International Economics, Washington DC, 13
May 2020.
* * *
The coronavirus has left a devastating human and economic toll in its wake as it has spread
around the globe. This is a worldwide public health crisis, and health-care workers have been the
first responders, showing courage and determination and earning our lasting gratitude. So have
the legions of other essential workers who put themselves at risk every day on our behalf.
As a nation, we have temporarily withdrawn from many kinds of economic and social activity to
help slow the spread of the virus. Some sectors of the economy have been effectively closed
since mid-March. People have put their lives and livelihoods on hold, making enormous
sacrifices to protect not just their own health and that of their loved ones, but also their neighbors
and the broader community. While we are all affected, the burden has fallen most heavily on
those least able to bear it.
The scope and speed of this downturn are without modern precedent, significantly worse than
any recession since World War II. We are seeing a severe decline in economic activity and in
employment, and already the job gains of the past decade have been erased. Since the
pandemic arrived in force just two months ago, more than 20 million people have lost their jobs.
A Fed survey being released tomorrow reflects findings similar to many others: Among people
who were working in February, almost 40 percent of those in households making less than
1
$40,000 a year had lost a job in March. This reversal of 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.
This downturn is different from those that came before it. Earlier in the post- World War II period,
2
recessions were sometimes linked to a cycle of high inflation followed by Fed tightening. The
lower inflation levels of recent decades have brought a series of long expansions, often
accompanied by the buildup of imbalances over time-asset prices that reached unsupportable
levels, for instance, or important sectors of the economy, such as housing, that boomed
unsustainably. The current downturn is unique in that it is attributable to the virus and the steps
taken to limit its fallout. This time, high inflation was not a problem. There was no
economythreatening bubble to pop and no unsustainable boom to bust. The virus is the cause, not the
usual suspects-something worth keeping in mind as we respond.
Today I will briefly discuss the measures taken so far to offset the economic effects of the virus,
and the path ahead. Governments around the world have responded quickly with measures to
support workers who have lost income and businesses that have either closed or seen a sharp
drop in activity. The response here in the United States has been particularly swift and forceful.
To date, Congress has provided roughly $2.9 trillion in fiscal support for households, businesses,
health-care providers, and state and local governments-about 14 percent of gross domestic
product. While the coronavirus economic shock appears to be the largest on record, the fiscal
response has also been the fastest and largest response for any postwar downturn.
At the Fed, we have also acted with unprecedented speed and force. After rapidly cutting the
federal funds rate to close to zero, we took a wide array of additional measures to facilitate the
flow of credit in the economy, which can be grouped into four areas. First, outright purchases of
Treasuries and agency mortgage-backed securities to restore functionality in these critical
markets. Second, liquidity and funding measures, including discount window measures,
expanded swap lines with foreign central banks, and several facilities with Treasury backing to
support smooth functioning in money markets. Third, with additional backing from the Treasury,
facilities to more directly support the flow of credit to households, businesses, and state and
local governments. And fourth, temporary regulatory adjustments to encourage and allow banks
to expand their balance sheets to support their household and business customers.
The Fed takes actions such as these only in extraordinary circumstances, like those we face
today. For example, our authority to extend credit directly to private nonfinancial businesses and
state and local governments exists only in "unusual and exigent circumstances" and with the
consent of the Secretary of the Treasury. When this crisis is behind us, we will put these
emergency tools away.
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. Economic forecasts are uncertain in the best of times, and today the virus raises
a new set of questions: How quickly and sustainably will it be brought under control? Can new
outbreaks be avoided as social-distancing measures lapse? How long will it take for confidence
to return and normal spending to resume? And what will be the scope and timing of new
therapies, testing, or a vaccine? The answers to these questions will go a long way toward
setting the timing and pace of the economic recovery. Since the answers are currently
unknowable, policies will need to be ready to address a range of possible outcomes.
The overall policy response to date has provided a measure of relief and stability, and will provide
some support to the recovery when it comes. But the coronavirus crisis raises longer-term
concerns as well. The record shows that deeper and longer recessions can leave behind lasting
3
damage to the productive capacity of the economy. Avoidable household and business
insolvencies can weigh on growth for years to come. Long stretches of unemployment can
damage or end workers' careers as their skills lose value and professional networks dry up, and
4
leave families in greater debt. The loss of thousands of small- and medium-sized businesses
across the country would destroy the life's work and family legacy of many business and
community leaders and limit the strength of the recovery when it comes. These businesses are
a principal source of job creation-something we will sorely need as people seek to return to
work. A prolonged recession and weak recovery could also discourage business investment and
expansion, further limiting the resurgence of jobs as well as the growth of capital stock and the
pace of technological advancement. The result could be 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. Recall that the Fed has lending powers, not
spending powers. A loan from a Fed facility can provide a bridge across temporary interruptions
to liquidity, and those loans will help many borrowers get through the current crisis. But the
recovery may take some time to gather momentum, and the passage of time can turn liquidity
problems into solvency problems. 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 tradeoff is one
for our elected representatives, who wield powers of taxation and spending.
Thank you. I look forward to our discussion.
References
Blanchard, Olivier J., and Lawrence H. Summers (1987). "Hysteresis in Unemployment,"
European Economic Review, vol. 31 (February-March), pp. 288-95.
Board of Governors of the Federal Reserve System (2019),
Washington: Board of
Report on the Economic Well-Being of U.S. Households in 2018 (PDF).
Governors, May.
Davis, Steven J., and Till von Wachter (2011).
"Recessions and the Costs of Job Loss (PDF),"
Brookings Papers on Economic Activity, Fall, pp. 1-72.
Martin, Robert F., Teyanna Munyan, and Beth Anne Wilson (2014). "
IFDP Notes. Washington: Board
Potential Output and Recessions: Are We Fooling Ourselves?"
of Governors of the Federal Reserve System, November 12.
--- (2015).
"Potential Output and Recessions: Are We Fooling Ourselves? (PDF)"
International Finance Discussion Papers 1145. Washington: Board of Governors of the Federal
Reserve System, September.
Reifschneider, Dave, William Wascher, and David Wilcox (2015). "Aggregate Supply in the
United States: Recent Developments and Implications for the Conduct of Monetary Policy," IMF
Economic Review, vol. 63 (May), pp. 71-109.
Romer, Christina D., and David H. Romer (1989). "
in
Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz (PDF),"
Olivier J. Blanchard and Stanley Fischer, eds., NBER Macroeconomics Annual 1989, vol. 4.
Cambridge, Mass.: MIT Press, pp. 121-84.
1
Board of Governors, 2019. Also see the Federal Reserve's Survey of Household Economics and
Decisionmaking (forthcoming) and its Report on the Economic Well-Being of U.S. Households in 2019,
Featuring Supplemental Data from April 2020 (forthcoming).
2
Romer and Romer, 1989.
3
For example, see Reifschneider, Wascher, and Wilcox, 2015; Blanchard and Summers, 1987; and Martin,
Munyan, and Wilson, 2014, 2015.
4
Davis and Von Wachter, 2011.