Jay Powell, the chair of the Federal Reserve, says the US central bank is “strongly committed” to deploying measures to help the economy during the coronavirus pandemic, warning that a second wave of infections could lead to a longer and weaker recovery.
Mr Powell’s remarks represented a more emphatic pledge by the Fed to take additional action if needed compared with the US central bank’s last policy statement in April, as the economy struggles to re-emerge from the bruising lockdowns and record-setting unemployment.
The Fed has already brought interest rates close to zero, boosted asset purchases and set up a series of emergency lending facilities to help the economy, but insists it has not yet reached the limits of its capacity to move.
“The Fed is strongly committed to using our tools to do whatever we can for as long as it takes to provide some relief and some stability now, to support the recovery when it comes, and to try to avoid longer-run damage to people’s lives through long spates of unemployment, or to their businesses through unnecessary insolvencies,” Mr Powell said in a webcast with Alan Blinder, the Princeton University economics professor and former senior Fed official.
The Fed chair suggested one of his biggest worries was that the US might experience a new wave of infections that could further damage economic activity.
“There’s clearly a risk of a second outbreak or a second wave and that would be challenging. We of course would continue to react. We’re not close to any limits that we might have,” Mr Powell said. “I think a second wave would really undermine public confidence and might make for a significantly longer and weaker recovery.”
In response to a question from Mr Blinder, the Fed chair said he was sleeping better than he was in late February and early March, when the virus began spreading across America, suggesting that the US central bank was comfortable with its policy response so far.
Financial markets have rallied in recent weeks after the US central bank took steps to shield the economy from the pandemic, in conjunction with nearly $3tn in fiscal stimulus approved by Congress and the White House.
Mr Powell said one key Fed lending facility set up as part of the stimulus package to provide credit to midsized businesses was “days away” from launch, after several weeks of finessing the loan terms.
Fed officials are preparing to enter the traditional blackout period ahead of their next policy meeting in June. Officials are likely to debate ways to firm up their support for the economy at the meeting — including new guidance on interest rate policy and asset purchases — but are not expected to take any big policy measures.
Mr Powell reiterated the Fed’s scepticism towards a move to negative rates, saying the US central bank was content with its existing tools. The evidence of success in using negative rates around the world was mixed, he added, and there could be “negative side effects”.
Mr Powell’s comments came after US data showed a record decline in US household spending in April under coronavirus lockdowns, even as incomes unexpectedly jumped thanks to the payment of jobless benefits.
Consumer spending fell 13.6 per cent from March, the commerce department said on Friday — the steepest decline on records going back to 1959. Spending accounts for a majority of US gross domestic product.
The situation is expected to reverse as states begin to gradually reopen, but economists at JPMorgan estimate that real consumption could be down at a seasonally adjusted annualised rate of 45 per cent in the second quarter.
Friday’s report also showed incomes jumped 10.5 per cent in April from the previous month, compared with expectations for a 6.5 per cent decline.
That rise “primarily reflected an increase in government social benefits to persons as payments were made to individuals from federal economic recovery programmes in response to the Covid-19 pandemic”, the commerce department said.
President Donald Trump in March signed into law a historic $2.2tn stimulus package that included an extra $600 a week in unemployment insurance for those without work and one-time payments of up to $1,200 for individuals.
The unemployment top-up is due to run out at the end of July, however, and efforts to extend it — included in a Democratic plan for $3tn more in stimulus, which passed the House of Representatives earlier this month — are not supported by Republicans, who control the Senate.
The drop in spending and rise in incomes helped push the savings rate to a record 33 per cent, up from 12.7 per cent in March, although this is also expected to reverse as benefits end and spending picks up.
Trade data released on Friday further highlighted signs of stress to the economy. The trade deficit in goods widened to $69.7bn in April from $65bn the previous month, the commerce department said.
Merchandise exports tumbled 25.2 per cent, led by cars and consumer goods, while imports fell 14.3 per cent.
Source: Economy - ft.com
