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Fed warns economic damage from coronavirus pandemic could be 'quite persistent'

Megan Henney

The Federal Reserve in a new report released Friday warned the U.S. economy faces "persistent" damage as a result of the coronavirus outbreak and related lockdown, even as every state begins to gradually reopen its economy.

"The path ahead is extraordinarily uncertain," the U.S. central bank said in its twice-annual Monetary Policy Report to lawmakers. "First and foremost, the pace of recovery will ultimately depend on the evolution of the COVID-19 outbreak in the United States and abroad and the measures undertaken to contain it."

In the report, the Fed reiterated the gloomy economic forecast that it released on Wednesday, following the Federal Open Market Committee's two-day meeting. Those projections forecast that GDP will plunge by 6.5 percent this year and suggested unemployment will remain elevated for years to come, sitting at 5.5 percent in 2022 -- well above the 3.5 percent before the virus hit.

"The economic damage of the recession may be quite persistent," the report said.

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The collapse in consumer demand, which came as residents were directed to stay at home and unemployment soared to the highest level in 90 years, could lead to a surge in bankruptcies, the central bankers wrote.

Additionally, the continued practice of social distancing will continue to weigh on the economy, continuing to curtail growth in certain sectors like travel, tourism, restaurants and recreation.

Disruptions to global trade may also result in a "costly reconfiguration" of global supply changes, the central bankers warned.

"Finally, additional expansionary fiscal policies— possibly in response to future large-scale outbreaks of COVID-19—could significantly increase government debt and add to sovereign risk, especially for countries with already limited fiscal space," they wrote.

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Chairman Jerome Powell has previously suggested the economic recovery from the virus outbreak could stretch through 2021. Whether the U.S. returns to its pre-crisis levels may hinge on the completion of a successful vaccine or treatment for COVID-19, Powell has said.

The Fed's dour forecast, and fears over a resurgence in infections, sent stocks plunging on Thursday. The Dow Jones Industrial Average tanked 1,861 points, or 6.9 percent, the fourth-worst one-day point drop on record. The S&P 500 plummeted by 5.89 percent and the Nasdaq Composite dropped 5.27 percent.

Powell and his colleagues have repeatedly pledged to use the Fed's full arsenal to fight the recession and have suggested that Congress may need to pass additional stimulus measures, as well.

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"We're doing a fair job of getting through these first few months," Powell said at a press conference this week. "The question is, however, what about people who can't go back to work? And that could be many millions of people. They're going to need possibly, probably, further support. It's possible that we will need to do more and it's possible that Congress will need to do more."

White House officials have suggested there could be a disparity in recovery between Republican and Democratic states.

"The thing that as an economist gives me pause as I look forward is that there's a radical difference right now in the data between red states and blue states,'' senior White House adviser Kevin Hassett told "Fox & Friends" on Friday.

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