Powell’s comments suggest the Fed is preparing contingency plans for a wide range of outcomes as the U.S. pushes to ramp back up the economy in coming weeks. Like everyone else, the Fed currently seems to be confined to watching and waiting for the next round of virus-related data and U.S. economic numbers.
Markets drifted lower on Wednesday after Federal Reserve Chair Jerome Powell said the Fed may need to take more measures to pull the U.S. economy out of its downturn.
In a speech at the Peterson Institute for International Economics on Wednesday, Powell said the U.S. economic recovery may require more fiscal stimulus to prevent liquidity issues from turning into solvency issues.
“The loss of thousands of small- and medium-sized businesses across the country would destroy the life's work and family legacy of many business and community leaders and limit the strength of the recovery when it comes,” Powell said.
“The recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems.”
Why It’s Important
The S&P 500 is up more than 27% from its March 23 lows, and much of that gain is based on the massive stimulus measures the Fed has already taken and the belief in a relatively quick economic recovery. Powell’s comments suggest the recovery may not be as fast as many investors might have hoped, but the Fed appears to be willing to step in with more supportive actions.
Powell said the shutdown has triggered an unprecedented economic fallout, and the medium-term outlook for the economy is unclear at the moment given the recovery is dependent on a number of factors, including timelines for a vaccine or coronavirus treatment, the possibility of a second wave of outbreaks and how much of an impact the virus has had on consumer confidence.
“Since the answers are currently unknowable, policies will need to be ready to address a range of possible outcomes,” Powell said.
Powell also reiterated that the Fed is focused on asset purchases and lending rather than further interest rate cuts.
“The committee’s view on negative rates really has not changed. This is not something that we’re looking at,” he said.
The Kenan Institute recently said investors should brace themselves for unpredictable and unprecedented second-quarter economic numbers.
“There is little doubt that the second quarter will be the worst quarter in recorded economic history for the U.S.,” the institute said in a new report.
“Many of the models used by forecasters are just not able to handle the peculiarities of the current situation.”
Do you agree with this take? Email email@example.com with your thoughts.