Fed Chair warns on output and jobs despite rebound

Powell said gaps in economic well-being could widen, while former central bank chiefs Bernanke and Yellen urge more economic stimulus

Fed Chair warns on output and jobs despite rebound
Federal Reserve Board Chairman Jerome Powell speaks during a news conference in January 2020. He warned that the pandemic had hit the poor hardest, with millions still out of work despite a 17% jump in retail sales in May. Photo: AFP 

(ATF) The US economy has shown early signs of stability but output and employment numbers are far below the pre-pandemic levels, Federal Reserve Chair Jerome Powell said on Tuesday, when he sent out a message of cautious optimism for the world’s largest economy.

“Recently, some indicators have pointed to a stabilization, and in some areas a modest rebound, in economic activity,” Powell said in his semi-annual monetary policy report to the Congress.   

“With an easing of restrictions on mobility and commerce and the extension of federal loans and grants, some businesses are opening up, while stimulus checks and unemployment benefits are supporting household incomes and spending.”

But he also warned there was still more work to be done.

“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… Until the public is confident that the disease is contained, a full recovery is unlikely,” he said.

The pandemic has inflicted its worst consequences on low-income and minority groups, and the contraction of GDP in the April-June quarter "is likely to be the most severe on record," said the central bank chief, who was testifying via video link.

Recent economic data have offered some promising signs that a recovery is underway, cheering Wall Street investors. US markets closed higher again on Tuesday, and major indices have recouped much of the losses suffered since the pandemic struck in March.

Retail sales up 17.7%

Earlier in the day, the Commerce Department said retail sales posted a surprise spike of 17.7% in May, coming in nearly double the gain economists had expected.

And the Fed reported that industrial production rebounded by 1.4%, after two months of steep declines.

That adds to the data released earlier this month showing the economy adding 2.5 million positions in May as the unemployment rate ticked down to a still-high 13.3%, as well as various surveys showing consumers and businesses becoming more optimistic about their prospects.

President Donald Trump, who has downplayed risks of the virus and instead focused on reviving the economy as he faces a tough re-election battle in November, cheered the good news.

"You'll see the third quarter numbers will be very good. You'll see fourth quarter will be really good and you'll see next year will be one of the best economic years this country has ever had," Trump said at a White House event.

But Powell cautioned that despite the positive data, the economy has shed 20 million jobs and "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 noted that the 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, Powell said.

"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," he said.

More spending needed

However the Fed can only lend, not spend, and Powell again told lawmakers that more support may be needed, noting there will be "an awful lot of unemployed people for some time."

In a separate address, Fed Vice Chair Richard Clarida was more direct, saying aid is "essential to sustain economic activity and complement what monetary policy cannot accomplish on its own."

And Dallas Fed President Kaplan said the Fed has “got plenty of dry powder” and whether the data actually is better or worse than his forecast, will depend people's use of masks, testing, and contact tracing.

“The takeaway is that Fed policy is aiming at a full recovery – and that the expected string of good economic data in H2 will not lead to tightening discussions if the recovery is incomplete,” Steve Englander, head of Standard Chartered Bank’s Global G10 FX Research and North America Macro Strategy, said.

“More fiscal and monetary stimulus likely to be needed to restore activity. Credit programmes may not be needed now, but will be if financial conditions reverse.”

Bernanke, Yellen urge more support

Congress continues to debate whether to extend the extraordinary unemployment benefits put in place in the CARES Act passed to counter the pandemic, with many Republicans advocating scaling back the aid.

Former Fed chair Ben Bernanke on Tuesday co-authored a letter to congressional leaders urging additional support to address the economic suffering and saying it "must be large."

"Congress must pass another economic recovery package before most of the support in the CARES Act expires this summer," he said in the letter co-signed by Powell's predecessor Janet Yellen and two Nobel laureates as well as numerous economists.

with additional reporting by AFP