Despite some positive signs, “significant uncertainty” remains about the recovery of the US economy from the COVID-19 pandemic, US Federal Reserve Chairman Jerome Powell said on Tuesday.
And unless consumers feel confident COVID-19 has been defeated, “a full recovery is unlikely,” Powell said in his semiannual testimony before the US Senate Banking Committee.
The pandemic has inflicted its worst consequences on low-income and minority groups, and the contraction of GDP in the second quarter “is likely to be the most severe on record,” said the central bank head, who was testifying via videoconference.
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Economic data have offered some promising signs that a recovery is underway, cheering Wall Street investors. US markets closed higher again on Tuesday and major indices have recouped much of the losses suffered since the pandemic struck in March.
Earlier in the day, the US Department of Commerce said that retail sales posted a surprise spike of 17.7 percent last month, coming in nearly double the gain economists had expected, while the Fed reported that industrial production rebounded by 1.4 percent, after two months of steep declines.
That adds to the data released earlier this month showing the economy adding 2.5 million jobs last month as the unemployment rate ticked down to 13.3 percent, as well as various surveys showing consumers and businesses becoming more optimistic about their prospects.
However, Powell said that despite the positive data, the economy has shed 20 million jobs and “the levels of output and employment remain far below their pre-pandemic levels, and significant uncertainty remains about the timing and strength of the recovery.”
He said that the burden from the business shutdowns to contain the spread of the coronavirus “has not fallen equally on all Americans.”
“Instead, those least able to withstand the downturn have been affected most,” with the heaviest job losses felt by Hispanics, African Americans and women, Powell said. “If not contained and reversed, the downturn could further widen gaps in economic well-being that the long expansion had made some progress in closing.”
Powell, who once again lamented racial injustice amid nationwide protests over the killings of African Americans, said racial gaps in employment are “not a healthy feature” of the US economy.
The Fed has slashed interest rates to zero and flooded the financial system with cash, as well as rushing out a series of lending programs to support businesses, state and local governments.
However, the Fed can only lend, not spend, and Powell again told lawmakers that more support might be needed, adding that there would be “an awful lot of unemployed people for some time.”
In a separate address, US Federal Reserve Vice Chairman Richard Clarida was more direct, saying aid is “essential to sustain economic activity and complement what monetary policy cannot accomplish on its own.”
US Congress continues to debate whether to extend the extraordinary unemployment benefits put in place in the CARES Act passed to counter the pandemic, with many Republicans advocating scaling back the aid.
Former US Fed chairman Ben Bernanke on Tuesday coauthored a letter to congressional leaders urging additional support to address the economic suffering, adding that it “must be large.”
“Congress must pass another economic recovery package before most of the support in the CARES Act expires this summer,” he wrote in the letter cosigned by former US Fed chair Janet Yellen and two Nobel laureates, as well as numerous economists.
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