Fed’s Brainard: Lack of fiscal deal could reignite coronavirus recession

Federal Reserve board member Lael Brainard warned Wednesday that the U.S. economy could slip back into recession if the White House and Congress cannot strike a deal on fiscal stimulus. 

Brainard said in a speech that a failure to approve more coronavirus relief funding poses “the most significant downside risk” to the economy other than a massive resurgence of COVID-19. She warned that without further assistance for millions of unemployed workers and cash-strapped state and local governments, the recovery from the onset of the pandemic could grind to a halt or even reverse.

“Too little support would lead to a slower and weaker recovery,” Brainard said.

“Premature withdrawal of fiscal support would risk allowing recessionary dynamics to become entrenched, holding back employment and spending, increasing scarring from extended unemployment spells, leading more businesses to shutter and ultimately harming productive capacity.”

Brainard and other top Fed officials have warned since May that extending the aid passed through the Coronavirus Aid, Relief and Economic Security (CARES) Act would be crucial to a steady recovery. She and a broad, ideologically diverse range of economists credit the $2.2 trillion stimulus bill with dampening the economic blow of the pandemic and paving the way to a quicker rebound.

“With unemployment and reduced hours likely to persist, many of these households are unlikely to be able to sustain recent levels of consumption without additional fiscal support as well as extended loan forbearance and eviction moratoriums,” she said on Wednesday.

“The financial security of displaced workers will depend importantly on whether unemployment benefits will be extended or supplemented—and if this will occur before any remaining savings accrued from the CARES Act funding run out.”

Brainard and her colleagues’ pleas for further fiscal support have become increasingly dire and direct as the White House and House Democrats attempt to strike a deal on another round of aid before Election Day. 

Speaker Nancy Pelosi (D-Calif.) and Treasury Secretary Steven Mnuchin have spent weeks in near daily negotiations to strike a long-shot pre-election stimulus deal. While Pelosi on Tuesday cited progress toward resolving Democratic concerns with the Trump administration’s offer, there is no formal deal yet with less than two weeks until Election Day.

An eventual Pelosi-White House deal, which would likely cost roughly $1.8 trillion, also faces hurdles in the GOP-controlled Senate. Senate Republican leaders have warned that there is little support among their conference for another $1 trillion-plus bill, though Majority Leader Mitch McConnell (R-Ky.) said Tuesday he would bring such a measure up for a vote anyway.

If all members of the Senate Democratic Caucus vote for a potential stimulus package of that size, it would need the support of 13 Senate Republicans to reach President Trump’s desk.