US Federal Reserve outlook: Fed warns of ‘extraordinarily uncertain’ path to recovery

By Jeanna Smialek

WASHINGTON: The Federal Reserve painted a sober picture of the economy Friday, declaring that the financial system remains under stress because of the coronavirus pandemic and that the path back to steady growth and a strong labor market is unsure.

In a semiannual monetary policy report to Congress, its first since the pandemic took hold, the Fed said the nation’s gross domestic product would probably contract “at a rapid pace” in the second quarter after “tumbling” in the first.

“Global economic activity in the first half of the year has experienced a sharp and synchronized contraction greater than that in the global financial crisis” more than a decade ago, the Fed said. Domestically, it added, “the path ahead is extraordinarily uncertain.”

The worldwide slowdown came after governments locked down their economies to slow the spread of the virus. In the United States, states are slowly lifting stay-at-home orders that have been in place since mid-March, and the economy is beginning to recover after tipping suddenly and sharply into recession.

While the central bank has moved to blunt the fallout in financial markets from that shock — buying unlimited quantities of government-backed bonds and rolling out a series of emergency lending programs that go beyond even the response to the 2008 financial crisis — it noted that borrowing conditions remained tight for households with weaker credit histories. It also flagged lingering risks to banks and other financial entities.

“Financial-sector vulnerabilities are expected to be significant in the near term,” according to the report. “The strains on household and business balance sheets from the economic and financial shocks since March will likely create persistent fragilities.”

President Donald Trump has made it clear that he expects a rapid economic rebound, even criticizing the Fed on Twitter on Thursday for being too glum. But the central bank reiterated its recent caution in the report, highlighting that challenges to the economy remain even as states reopen.

“Importantly, some small businesses and highly leveraged firms might have to shut down permanently or declare bankruptcy, which could have longer-lasting repercussions on productive capacity,” the report said. “In addition, there is uncertainty about future labor demand and productivity as firms shift their production processes to increase worker safety, realign their supply chains or move services online.”

The Fed noted that employers had cut about 20 million employees from payrolls since February, reversing a decade of job gains. While the unemployment rate eased to 13.3% in May after jumping to 14.7% in April, the Fed called that rate “still very elevated” and said workers in low-wage jobs, who are disproportionately from minority groups, had been hit especially hard.

“In the months ahead, labor market prospects for the unemployed and underemployed — both overall and for particularly hard-hit groups of workers — will largely depend on the course of the COVID-19 outbreak itself and on actions taken to halt its spread,” the report said.

It also suggested that the pandemic was probably costing workers more than their employment: Those still in the labor market are seeing weak pay growth.

“While reliable data are limited, anecdotal evidence suggests that the economic downturn is putting downward pressure on wages,” it said.

Jerome Powell, the Fed chair, will testify remotely before the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday as part of the same legislatively mandated semiannual process that yielded the Friday report.

Powell has emerged as a voice of caution throughout the pandemic, warning repeatedly that the return to prosperity could be a long slog.

“We’re doing a fair job of getting through these first few months, more than a fair job,” he said at a news conference after the Fed’s regular policy meeting this week. “The question, though, is that group of people who won’t be able to go back to work quickly — what about them?”

Powell said that beyond the Fed’s monetary policy, support for the recovery might require further action by Congress and the White House, with their taxing and spending powers. “It’s possible that we will need to do more,” he said, “and it’s possible that Congress will need to do more.”

[Source – Economic Times]


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