Fed officials warn of ‘thick fog’ looming for the US economy as recovery concerns deepen

WASHINGTON (Reuters) – The US economy will recover more slowly than expected amid a surge in new cases of coronavirus across the country, and a broad second wave of the disease could cause economic pain to deepen again Federal Reserve officials warned Tuesday.

One by one, the Fed’s policymakers have become more pessimistic in recent days, resetting expectations for the recovery and warning that recent improvements in economic data, such as job growth, may be fleeting.

“The pandemic remains the key driver of the course of the economy. We are still surrounded by a thick fog of uncertainty, and downside risks predominate, ”Fed Governor Lael Brainard said in a speech at a virtual event organized by the National Association for Business Economics.

He called on the central bank of the United States to commit to providing sustained accommodation through forward orientation and large-scale asset purchases, and said additional fiscal support would be “vital” to the strength of the recovery, particularly with the first round of pandemic economic support programs will expire soon.

Since March, the Fed has reduced interest rates to near zero, increased large-scale asset purchases, and launched numerous other crisis programs designed to oil the United States’ financial system and channel credit to households and businesses. .

Coronavirus cases in the United States increased in 46 of 50 states last week and deaths rose nationwide for the first time since mid-April, according to a Reuters analysis.

Richmond Federal Reserve Chairman Thomas Barkin warned Tuesday that unemployment in the US could rise again as companies adjust to a recession that is likely to be longer than expected and initiatives such as expire. the Payment Check Protection Program (PPP).

“A group of companies large and small are realizing that this is not a two-month problem and are reformulating their business,” possibly jeopardizing two strong months of job growth, Barkin said in comments broadcast online to Charlotte. Rotary Club.

Small PPP loan business recipients who may have kept employees to meet loan forgiveness terms may now consider firing them as the program expires and demand remains weak.

Robert Kaplan, chairman of the Dallas Fed, speaking on CNBC, cited “a lot of overcapacity in the economy,” which he called “disinflationary.”

Federal Reserve officials, after initially waiting for the virus to be rapidly controlled in the United States to allow the economy to recover quickly, admitted that the forecasts for economic growth made at their last political meeting in June largely lacked Consider the possibility of a second wave.

The new surge in cases has led some states to delay or pause reopens at a time when other advanced nations around the world have been able to reopen their economies more sustainably due to successful mitigation strategies.

Philadelphia Fed President Patrick Harker, also at the Fed’s webinar, said the increased cases could cause further damage to the economy and consumer confidence.

James Bullard, the chairman of the St. Louis Fed, issued a somewhat optimistic note, saying his base case is that the economy continues to grow in the second half of the year, but still offered caution. “However, the downside risk is substantial, and better execution of a risk-based granular policy will be critical to keeping the economy out of the depression,” Bullard said in comments to the New York Economic Club. He expects Congress by the end of the month to pass a new “substantial” tax package to keep homes and businesses stable.

Brainard warned that a second broad wave of infections could even trigger a second downturn in activity, as well as reactivate financial market volatility at a time of greatest vulnerability.

“Non-bank financial institutions may come under pressure again … and some banks may withdraw from loans if they face increasing losses,” Brainard said.