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Fed Worries US Is Headed for a Much Worse Recession If Virus Isn't Contained

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Fed Worries US Is Headed for a Much Worse Recession If Virus Isn't Contained

2020-07-02 15:20:12

By Laura Tucker, Staff writer; Image: Jerome Powell (Image source: Public domain)

Contrary to what Donald Trump wants everyone to think, the economy isn't going to get immediately better. And just like a child, he continues not to see the connection between actions and consequences. Sure, it sounded great to reopen the country quickly to help the economy, but that has led to record numbers of new infections, meaning quick closures after just reopening, hurting the economy even more.

The president may not see that, but Federal Reserve officials do, according to minutes of the central bank's meeting on June 9 and 10. Last month they raised concerns that a second wave of the coronavirus — or third, fourth, and other — would disrupt an economic recovery and bring yet more unemployment and a worse economic downturn than the country was already in.

Fed Chair Jerome Powell has said throughout that the path out of the recession will depend on containing the virus and giving Americans the confidence to return to work and their spending habits. The notes from the meeting show what officials predict will be the outcome of a prolonged recession and continued spread of the virus. It also shows why Powell often says lawmakers need to do more in this situation.

"In light of the significant uncertainty and downside risks associated with the pandemic, including how much the economy would weaken and how long it would take to recover, the staff judged that a more pessimistic projection was no less plausible than the baseline forecast," read the minutes of last month's meeting.

"In this scenario, a second wave of the coronavirus outbreak, with another round of strict limitations on social interactions and business operations, was assumed to begin later this year, leading to a decrease in real GDP, a jump in the unemployment rate, and renewed downward pressure on inflation next year."

On that second date of the meeting, there were 20,456 new coronavirus cases in the nation. It's now more than doubled in less than a month. Wednesday saw 52,789 new cases of COVID-19. Dr. Anthony Fauci, the government's top infectious-disease specialist, warned the Senate this week that the country could face 100,000 new cases a day "if this does not turn around."

This is calling into question what has been referred to as the "fiscal cliff." This would hit later this month when the increased unemployment benefits are due to expire. Congress is trying to decide whether it should extend aid, and Powell has repeatedly said more congressional actions would likely be needed to give families and businesses some relief.

Yet, Powell and other Fed officials aren't dictating what they believe lawmakers should do with regard to legislation. But what they discussed in the meeting backs up what they have said in public: that more is needed other than the Fed's tools.

The Fed has already helped with emergency programs to support the markets and extend loans to small and mid-size businesses and local governments. But it can only lend — it can't force people to go out there and spend. Powell said on Tuesday when testifying before the House Financial Services Committee, that for the companies and industries begging for help, "more debt may not be the answer here."

The Fed officials said at the meeting last month that "fiscal support for households, businesses, and state and local governments might prove to be insufficient."

Trump, though, is predicting a sharp increase for economic growth — at a time when people are struggling just to survive. Senior White House economist Larry Kudlow said there is "overwhelming" evidence pointing to a V-shaped recovery.

Powell won't say whether the recovery will be V, U, or W-shaped, but he continues to hammer home that the outcome is still very uncertain.

In putting together its emergency response, however, the Fed takes all possibilities, both encouraging and disappointing outcomes, into consideration. Last week the central bank released new data on how the largest banks would fare under all the scenarios. It concluded that if there is a slower U-shaped or W-shaped scenario, many financial firms "would approach minimum capital levels." 

Others have been more pointed in their response. Mary C. Daly, the president of the San Francisco Federal Reserve Bank, said in an interview with The Post that she "would hesitate to call this a recovery" and noted specifically that it is not V-shaped.

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