US economic recovery hinges on Covid-19 coming under control: Powell

Washington

A FULL US economic recovery will not occur until the American people are sure that the novel coronavirus epidemic has been brought under control, Federal Reserve chair Jerome Powell said on Tuesday as he began the first of two days of hearings before US lawmakers.

"Until the public is confident that the disease is contained, a full recovery is unlikely," Mr Powell said in prepared testimony to the Senate Banking Committee as he mapped out how the United States faces an uncertain, uneven and prolonged economic recovery from the novel coronavirus crisis.

The Fed last week kept interest rates unchanged near zero and made clear that it plans years of extraordinary stimulus as the nation grapples with steps towards fully reopening its economy amid state and local surges in cases, and with no vaccine in sight.

"The longer the downturn lasts, the greater the potential for longer-term damage from permanent job loss and business closures," Mr Powell said.

Despite a surprising rebound in employment in May, the economy has shed nearly 20 million jobs since February and the contraction of GDP in the April-June quarter "is likely to be the most severe on record", Mr Powell said.

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Even with some promising data, "the levels of output and employment remain far below their pre-pandemic levels, and significant uncertainty remains about the timing and strength of the recovery", he cautioned.

Congress has so far allocated nearly US$3 trillion in financial relief, including direct payments to households and a forgivable loan scheme for small businesses, while the Fed has implemented numerous programmes to pump trillions of dollars of credit into the economy.

On Monday, the Fed launched its long-awaited Main Street lending programme, which will offer up to US$600 billion in loans to US businesses with up to 15,000 employees or with revenues of up to US$5 billion.

But as Mr Powell reiterated on Tuesday, there will be no quick fix to healing the economy and he repeated that the Fed will use its full range of tools to help it recover. "We are committed to using our full range of tools to support the economy and to help assure that the recovery from this difficult period will be as robust as possible," he said.

He also said that direct financial support to families and businesses makes "a critical difference" in limiting long-lasting damage.

Mr Powell and other Fed officials have increasingly said that Congress may need to do more to prevent long-term economic scarring and the Fed warned in its semi-annual report to lawmakers on Friday that it expects households and businesses to suffer "persistent fragilities". This was again reiterated at the testimony when he said that the Fed's actions "are only part of a broader public sector response", and the direct support that only Congress can provide "can make a critical difference not just in helping families and businesses in a time of need, but also in limiting long-lasting damage to our economy".

There are currently roughly 20 million people unemployed as a result of the epidemic, which has killed more than 115,000 people in the United States.

The economic burden from the business shutdowns to contain the spread of the virus "has not fallen equally on all Americans. Instead, those least able to withstand the downturn have been affected most", with the heaviest job losses felt by Hispanics, African Americans and women, Mr Powell pointed out.

"If not contained and reversed, the downturn could further widen gaps in economic well-being that the long expansion had made some progress in closing."

Mr Powell will also appear before the House Financial Services Committee on Wednesday.

Fed officials currently forecast that the economy will shrink at a 6.5 per cent annualised rate in 2020 and see unemployment remaining elevated for several years.

Mr Powell has previously said he sees millions, particularly low-wage workers, remaining out of work for the foreseeable future with no easy re-entry into employment. REUTERS, BLOOMBERG

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