Business & Economy

Fed warns of slow US recovery, rules out negative interest rates

By Alfonso Fernandez

Washington, May 13 (efe-epa).- The chairman of the United States Federal Reserve on Wednesday warned that the recovery from the Covid-19 crisis is likely to be slow and said new extraordinary measures may be needed to reactivate the world’s largest economy.

Even so, Jerome Powell ruled out the use of negative interest rates as a stimulus measure, despite growing calls for such a move by US President Donald Trump and others.

“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,” Powell said via webcast at the Peterson Institute for International Economics in Washington. “But the coronavirus crisis raises longer-term concerns as well. The record shows that deeper and longer recessions can leave behind lasting damage to the productive capacity of the economy.”

Amid the economic carnage, Powell acknowledged there is some support for the idea of the Fed lowering its benchmark interest rate to negative territory, which in practice would mean that banks would have to pay to park their excess cash at the central bank and therefore be encouraged to lend those funds out instead.

But the Fed has long maintained that monetary tool would not be effective for the US, and on Wednesday Powell said such a move is not under consideration.

Trump, whose calls for further monetary easing long predate the coronavirus crisis, has been an outspoken voice in favor of negative rates.

“As long as other countries are receiving the benefits of Negative Rates, the USA should also accept the ‘GIFT.’ Big numbers!” Trump tweeted on Tuesday, referring to the adoption of that measure by Japan and the European Central Bank.

Since the coronavirus crisis struck the US, the Fed has dug deep into its arsenal in a bid to ease some of the economic devastation, including injecting massive liquidity into financial markets, making large-scale purchases of Treasuries and agency mortgage-backed securities and lowering its benchmark interest rate to practically zero.

The US Congress, for its part, has approved several fiscal stimulus packages valued at nearly $3 trillion.

But Powell said even more stimulus may be needed in light of the dire economic situation.

“There is a growing consensus that recovery may come slower than we would like … and that recovery may take a while before gaining momentum,” the Fed chairman said.

“Although the economic response has been both timely and adequately large, it may not have been the final chapter, given that the road ahead is both highly uncertain and subject to significant downside risks,” he added.

The impact of the lockdowns on the economy has been devastating.

Referring to a Fed survey that will be released on Thursday, Powell said that among people who were working in February, almost 40 percent of those in households making less than $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,” he added.

Separately Wednesday, two governors released a statement calling for more congressionally approved funding for states hard-hit by the lockdowns, saying there is “widespread bipartisan agreement on the need for this assistance.”

“As Congress reconvenes, delivering urgent state fiscal relief must be a top priority. Each day that Congress fails to act, states are being forced to make cuts that will devastate the essential services the American people rely on and destroy the economic recovery before it even gets off the ground,” said Maryland Gov. Larry Hogan, a Republican who is the chair of the National Governors Association; and New York Gov. Andrew Cuomo, a Democrat who is the NGA vice chair.

The advance estimate of US first-quarter gross domestic product (GDP), released by the Commerce Department’s Bureau of Economic Analysis on April 29, indicated a contraction of 4.8 percent relative to the same three-month period of 2019.

But the contraction in the second quarter is expected to be far greater.

Related Articles

Back to top button