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Fed Chair Powell To Congress: US Economic Downturn 'Without Modern Precedent'

Federal Reserve Chairman Jerome Powell and Treasury Secretary Steven Mnuchin testified in front of the Senate Banking, Housing and Urban Affairs Committee on Tuesday as part of what will be quarterly hearings on the CARES Act. The CARES Act has provided trilli

Benzinga · 05/19/2020 17:35

Federal Reserve Chairman Jerome Powell and Treasury Secretary Steven Mnuchin testified in front of the Senate Banking, Housing and Urban Affairs Committee on Tuesday as part of what will be quarterly hearings on the CARES Act.

The CARES Act has provided trillions of dollars in liquidity to financial markets, loans to businesses and direct payments to individual Americans.

On Tuesday, Powell said the situation fueled by the coronavirus pandemic is unprecedented in American history.

“Available economic data for the current quarter show a sharp drop in output and an equally sharp rise in unemployment. By these measures and many others, the scope and speed of this downturn are without modern precedent and are significantly worse than any recession since World War II,” Powell said.

Powell On Risks Of Extended Shutdown

Powell said there are risks associated with extending the U.S. economic shutdown.

“Long periods of unemployment can really affect people’s abilities to go back to work,” he told the Senate committee.  

The Fed has injected trillions of dollars of liquidity into financial markets in recent months, and Powell said conditions in markets for Treasury securities and mortgage-backed securities have “improved substantially” since the Fed took action.

One silver lining for Americans in comparing this crisis to 2008 is that Powell said banks are much better equipped to handle liquidity crunches today than they were 12 years ago.

“As a result, they have been well-positioned to cushion the financial shocks we are seeing. In contrast to the 2008 crisis when banks pulled back from lending and amplified the economic shock, in this instance they have greatly expanded loans to customers,” he said. 

Powell also said the Fed’s lending programs for medium-sized businesses and state and local governments should be up and running by the end of May.

Reasons For Optimism

On Friday, the Atlanta Federal Reserve estimated the economic shutdown could trigger an unprecedented 42.8% drop in U.S. GDP in the second quarter.

However, Treasury Secretary Mnuchin said Tuesday that the latest developments in COVID-19 testing, treatments and vaccines are encouraging.

“Working closely with governors, we are beginning to open the economy in a way that minimizes risks to workers and customers. We expect economic conditions to improve in the third and fourth quarters,” he said.

Treasury is fully prepared to distribute all of the $500 billion authorized to help businesses struggling during the downturn and is even “fully prepared to take losses in certain scenarios,” the Trump cabinet member said. 

Benzinga’s Take

It seems like Powell and Mnuchin didn’t surprise the markets with any of their testimony on Tuesday. The SPDR S&P 500 ETF Trust (NYSE: SPY) traded mostly flat throughout the hearing and was up less than 0.2% overall on Tuesday morning.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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Federal Reserve photo via Wikimedia