London (CNN Business)Jerome Powell needs help.
The chairman of the US Federal Reserve warned Wednesday that the economic shock from the coronavirus is “without modern precedent” and “significantly worse” than any recession since World War II.
Investors didn’t like what they heard. The Dow shed more than 2% after the warning from the central banker, and the S&P 500 closed down 1.75%
Powell said while economic forecasts are uncertain even in the best times, the speed of the recovery depends on a series of essentially unanswerable questions: How quickly can the coronavirus be brought under control? Will new testing, treatments and vaccines be effective? When will consumer confidence return?
“There is a sense, growing sense I think, that the recovery may come more slowly than we would like,” the central banker said during a virtual event at the Peterson Institute of International Economics.
The Federal Reserve has responded to the coronavirus pandemic by cutting the federal funds rate close to zero, and ramping up purchases of US Treasuries and mortgage-backed securities. It’s taken steps to keep financial markets running smoothly, while helping to deliver credit to households, businesses and local governments.
What needs to happen now: Powell wants US lawmakers, who have already approved roughly $3 trillion in stimulus spending, to do even more.
“Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery,” said the central banker. “This tradeoff is one for our elected representatives, who wield powers of taxation and spending.”
Easier said than done: House Democrats want to send Americans a second round of stimulus checks worth up to $6,000 per family as part of another $3 trillion coronavirus relief package they rolled out Tuesday.
Yet Republicans are cool to the idea. White House economic adviser Kevin Hassett and other Trump administration officials have said they do not believe another stimulus package is needed right now.
Powell laid out the potential consequences of a weak recovery on Wednesday, warning that deeper and longer recessions leave economic scars that do not fade with time. The risks:
- Household and business insolvencies weigh on growth
- Long stretches of unemployment end careers
- Unemployed workers aren’t able to upgrade their skills
- Families fall deeper into debt
- The loss of small businesses weakens communities
- Business investment and expansion is discouraged
- The pace of technological advancement slows
“We ought to do what we can to avoid these outcomes,” Powell said, before calling on lawmakers to provide additional fiscal stimulus.
The central banker said the Fed stands ready to do more as needed. But he drew the line at pushing interest rates into negative territory, as central banks in Europe and Japan have already done.
“The [Federal Open Market] Committee’s view on negative rates has not changed,” he said. “That’s not something we’re looking at.”
The faintest of silver linings
The International Energy Agency says that the collapse in demand for oil won’t be quite as bad as feared.
The agency said in a report Thursday that “better than expected” mobility in developed economies and a gradual easing of lockdown measures has prompted a revision in its demand forecast.
“We estimate that from a recent peak of 4 billion, the number of people living under some form of confinement at the end of May will drop to about 2.8 billion worldwide,” the agency said.
As a result of the increased mobility, the group no longer expects demand to fall by 9.3 million barrels per day in 2020. Instead, it’s forecasting a reduction of 8.6 million barrels per day — still a record drop.
Of course, significant uncertainties remain. “The biggest is whether
governments can ease the lockdown measures without sparking a resurgence of Covid-19 outbreaks,” the IEA said.
Who is Elon Musk?
Tesla CEO Elon Musk has changed. How and why that happened is the subject of a great new story from my CNN Business colleagues Michael Ballaban and Peter Valdes-Dapena.
They write: Musk truly entered the public consciousness just over a decade ago, when Tesla was a quirky upstart putting batteries in the chassis of a little Lotus sports car. He grew it into an electric powerhouse, building cars that he promised would one day drive themselves, with doors that swung upward much like the time machine from Back to the Future.
Musk deftly played the part of a new kind of CEO, one who made jokes on Twitter, engaged with fans, and even sought to re-define the very idea of what “fun” could be in a car. Then things began to change. Increasingly, the risks Musk has been taking are not with his own money, or even his own life, but with the money, careers, reputations and lives of others. And the boundaries that once held him back are caving under the pressure.
Are the changes for the better? That depends a lot on your perspective.