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Powell Warns of ‘Tragic’ Economic Risks if Recovery Isn’t Supported

Speaking virtually at the National Association for Business Economics annual meeting, Fed Chairman Jerome Powell warned of potentially “tragic” risks if Congress and the White House do too little to support the recovery. Photo: Toni L. Sandys/Reuters

Video Transcript

JEROME POWELL: The recovery has progressed more quickly than generally expected. And the most recent projections by FOMC participants at our September meeting show the recovery continuing at a solid pace. The median participants saw unemployment declining to 4% and inflation reaching 2% by the end of 2023. Of course, the economy may perform better or worse than expected. The outlook remains highly uncertain in part because it depends on controlling the spread and effects of the virus.

There is a risk that the rapid initial gains from reopening may transition to a longer-than-expected slog back to full recovery as some segments struggle with the pandemic's continued fallout. The pace of economic improvement has moderated since the outside gains of May and June as is evident in employment, income, and spending data. The increase in permanent job loss as well as recent layoffs are also notable.

We should continue to do what we can to manage downside risks to the outlook. One such risk is that COVID-19 cases might again rise to levels that more significantly limit economic activity, not to mention the tragic effects on lives and well-being. Managing this risk as the expansion continues will require following medical experts' guidance, including using masks and social distancing measures.

A second risk is that a prolonged slowing in the pace of improvement over time could trigger typical recessionary dynamics as weakness feeds on weakness. A long period of unnecessarily slow progress could continue to exacerbate existing disparities in our economy. That would be tragic, especially in light of our country's progress on these issues in the years leading up to the pandemic.

The expansion is still far from complete. At this early stage, I would argue that the risks of policy intervention are still asymmetric. Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses. Over time, household insolvencies and business bankruptcies would rise, harming the productive capacity of the economy and holding back wage growth.

By contrast, the risks of overdoing it seem for now to be smaller. Even if policy actions ultimately prove to be greater than needed, they will not go to waste. The recovery will be stronger and move faster if monetary policy and fiscal policy continue to work side by side to provide support to the economy until it is clearly out of the woods.