Fed Chair Powell Tells Washington: Avoid “Tragic Effects” And Spend As Recession Persists

In an extraordinary speech this morning, Federal Reserve Chair Jerome Powell warned that failure to control the coronavirus will “significantly limit economic activity” and lead to “tragic effects on lives and well-being.”  But Congress—more specifically, the Senate Republican caucus—still refuses to enact additional emergency spending, while President Trump (after his hospitalization and emergency treatment for Covid-19) told Americans “don’t be afraid of Covid” and appeared in public without wearing a mask.

In today’s overloaded policy and media environment, it’s hard to keep focused.  But Powell’s speech underscores our economic risks, and the data show why the Fed is worried.  Although jobs have recovered somewhat, well over 50 million people have filed for unemployment insurance since the pandemic began, with hundreds of thousands of new claims filed every week.

Increasingly, unemployed people are facing long-term joblessness, while their regular unemployment insurance is running out.  (Most state allow 26 weeks of regular coverage, and earlier pandemic relief legislation extended that to 39 weeks through the end of this year.)  Erica Groshen, the former head of the U.S. Bureau of Labor Statistics, says “the temporary layoffs in the beginning (of the recession) are turning more and more into permanent layoffs.”  

Company news reinforces these aggregate data.  In September, Forbes contributor Jack Kelly detailed how companies that “range the spectrum, including Ford, MGM Resorts, Coca-Cola, Salesforce

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, and Boeing

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” and others, like Disney, Wells Fargo

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and other banks, and airlines, are restructuring businesses and making layoffs and downsizing permanent.  And Forbes’ Christian Krenzar shows the same thing is happening to small businesses, where more and more are closing.

The expiration of the $600 weekly unemployment insurance supplement also has caused lower incomes for millions of workers.  Falling incomes in turn means less spending, less economic growth, and fewer jobs.  When the $600 supplement was added, some feared it would discourage people from taking new jobs and seeking work.  But that didn’t happen.  Researchers at the Federal Reserve Bank of San Francisco confirm that the “supplemental payments had little or no adverse effect on jobs search” as people want a permanent job rather than temporary unemployment.

But the extra $600 did help the economy by putting more spending in people’s pockets, especially low and moderate-income households.  The Economic Policy Institute has estimated that taking the $600 supplement out of people’s personal income could result in a loss of over 5.1 million jobs in the next year, as less money to spend means a slower economy with less job growth. 

The Fed knows all of this.  They see the numbers daily, if not hourly.  And they are worried that no new fiscal stimulus means, in Powell’s words this morning, “there is still a long way to go in recovery,” and that “the outlook remains highly uncertain.”

Powell got about as directive as the Fed ever gets towards Congress when he said “too-little policy support would lead to a weak recovery” and that the “risks of overdoing policy support seem smaller.”  He concluded that the “recovery will be stronger, faster if fiscal, monetary policy work side by side until the economy is clearly out of the woods.

There’s little the Fed can do to directly induce spending and incomes and job creation.  That means it’s up to Congress—more specifically to Senate Republicans.  It is a major mystery why they seem willing to fight the upcoming election without providing more spending to offset the recession, which is hitting red and blue states alike. On October 1, the House passed a scaled-down $2.2 billion version of their original $3.4 trillion HEROES Act.  But at this writing, the Senate is still refusing to act. We will see if Fed Chair Powell’s plea today makes any difference.