Fed officials worry about lasting economic scars from crisis

WASHINGTON (Reuters) – After rolling out trillions of dollars in support of the U.S. economy during the coronavirus pandemic, Federal Reserve officials have begun to warn of possible lasting scars for the workforce and productivity if the recovery does not it handles well.

In separate comments on Friday, the heads of three regional Fed banks said the aggressive efforts already made to keep companies and businesses afloat are just the beginning of what will be required for the economy to return to normal, with recycling of workers and renewed social safety nets and other necessary steps once the health crisis is alleviated.

“We need to work on the recovery rate of the economy” after the crisis, said Richmond Fed President Thomas Barkin, noting that companies may be operating less efficiently under the rules of social distancing, investment Entrepreneurship can be hampered by eroded trust, and workers can pull back from the job market by rethinking how to care for children and elderly parents in an era when daycare and nursing homes are at greater risk.

Barkin spoke in the midst of a mosaic finale to the coronavirus blockades that have seen some states open up their economies already and others maintain restrictions, while companies and their employees struggle to find the right balance. Workers who remain on the job face risks: Meat processing plants have been forced to go offline due to outbreaks among workers, while companies that reopened are likely to face higher costs and fewer customers.

“We will return to somewhat normal operations, at a gradual rate,” Barkin told the Maryland Chamber of Commerce in a webcast. But “I’m concerned about the landing site: how strong the economy will be at the end of this.”

St. Louis Fed President James Bullard and Dallas Fed President Robert Kaplan expressed similar concerns that coming out of the crisis may be slow and complex.

The unemployment rate will not only rise to catastrophic levels of up to 20% in the coming months, for example, but will likely remain high until the end of the year or more, Kaplan said in an interview on Fox Business Network.

“We will probably end the year with an unemployment rate of 8-10%,” said Kaplan, a figure that would mean perhaps 10 million more unemployed in the coming months compared to the beginning of the year. “We are going to need a stimulus for the rest of the year and next year for us to grow faster, so let’s reduce this unemployment rate.”

That contrasts with initial hopes of an economic rebound as rapid and historic as the decline of the past few weeks.

‘RISK OF DEPRESSION’

This week, the Fed reformulated its promise to keep interest rates low and continue to offer trillions of dollars in credit across the economy, as long as it is needed to keep it stable during the fight against a pandemic that has killed more than 62,000 people in the whole country.

But that may be just the beginning of a fight that will require critical political choices about how and what to reopen, what health protections are necessary to keep the virus contained, and how to compensate for any financial or other injury that arises.

Bullard, in an interview with the Wall Street Journal, said he was concerned about the possibility of an economic slump if both the closure takes too long and the reopening is not handled well.

“I think we are taking a risk of depression here if we are not careful and we do not execute this properly in the coming months,” Bullard said, suggesting a “much more granular, much more risk-based” approach by the time states or industries are back online.

“You can press the pause button in the US economy, but if you try to keep it paused for too long, many other problems will start to accumulate and you will start to have many bankruptcies and many business failures.” Bullard said.