Powell warns failure to reach COVID-19 deal could ‘scar and damage’ economy

Federal Reserve Board Chairman Jerome Powell warned Wednesday that a lack of further fiscal support from Congress and President Trump could “scar and damage” a U.S. economy restrained by the coronavirus pandemic.

During a Wednesday press conference, Powell expressed optimism that Democrats and Republicans would find a path forward on another coronavirus relief bill despite a weeks-long stalemate between negotiators.

“There does seem to be an appetite on the part of all the relevant players to doing something. The question is how much and when,” Powell said.

But he added that the Fed’s improving outlook for the world’s largest economy depended on lawmakers and the White House bridging deep divides over the scale and scope of another package.

“If there’s no follow-up on that, if there isn’t additional support and there isn’t a job for some of those people who are from industries where it’s going to be very hard to find new work,” Powell said, “that will start to show up in economic activity. It’ll also show up in things like evictions and foreclosures and things that will scar and damage the economy.”

Powell’s latest plea for more fiscal support came after the Fed announced in its last policy meeting before the November election that it would hold rates steady near zero percent. Fed officials do not expect the bank to hike rates again until 2022 at the absolute earliest, but 13 of the 17 Fed board members and reserve bank presidents do not expect a rate hike through the end of 2023, according to projections released Wednesday.

Fed officials also upgraded their forecasts for the economy after the unemployment rate declined to a surprisingly strong 8.4 percent in August. They now expect the unemployment rate to decline to a median of 7.6 percent by the end of the year, well below the 9.3 percent median projected in June.

Powell cautioned that those projections were based on the assumption that Congress would approve another fiscal aid package to extend enhanced unemployment benefits that expired on July 31, boost struggling state and local governments with further aid, and provide financial support to avoid evictions.

That bet may not be safe given the persistent impasse since early August between Democrats and Republicans over another fiscal package.

Sen. John Thune (S.D.), a member of GOP leadership, said Thursday that a deal in the range of $1.5 trillion — a middle ground between current Democratic and Republican offers — would likely lead to “heartburn” among Republicans on Capitol Hill.

“If the number gets too high, anything that got passed in the Senate will be passed mostly with Democrat votes and a handful of Republicans,” he told reporters in the Capitol. “So it’s going to have to stay in a sort of realistic range if … we want to maximize, optimize the number of Republican senators that will vote for it.”

Thune’s comments came after Trump encouraged Republicans in a Wednesday tweet to aim for a larger package, a request quickly touted by Speaker Nancy Pelosi (D-Calif.) and Senate Minority Leader Charles Schumer (D-N.Y.).

“We are encouraged that after months of the Senate Republicans insisting on shortchanging the massive needs of the American people, President Trump is now calling on Republicans to ‘go for the much higher numbers’ in the next coronavirus relief package,” Pelosi and Schumer said in a joint statement after Trump’s tweet.

The deadlock has persisted despite signs that the recovery from the coronavirus recession is slowing.

Roughly 11.5 million Americans have not yet found work after losing their jobs earlier this year. The number of new jobs added by the U.S. economy has slowed for two consecutive months.

Weekly claims for unemployment insurance have plateaued at levels far above pre-pandemic records, and the number of permanent job losses rose again in August after stabilizing in July. Other troubling signals of a fading recovery include three consecutive months of slowing consumer spending gains and retail sales gains.

A crucial step to stem those declines, Powell said, is for Congress and the White House to reach an agreement on COVID-19 relief, though he did not specify a preferred price tag for such a deal or what provisions it should include.

“I think the real question is when and how much, what will be the contents,” Powell said of a deal to speed up the recovery.

“And, you know, no one has any certainty around that. But broadly speaking, if we don’t get that, then there would certainly be downside risks,” he added.