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Powell warns recession ‘has not fallen equally on all Americans,’ public health crisis will dictate recovery

Appearing before the Senate Banking, Housing and Urban Affairs Committee on Tuesday morning, the Fed chair offered the latest summary of the pandemic’s toll on the U.S. economy.

Fed Chair Jerome H. Powell speaks at a virtual news conference on June 10. (Andrew Harrer/Bloomberg News)

Fed Chair Jerome H. Powell highlighted the recession’s uneven toll on the American workforce in his latest testimony before a Senate banking panel, emphasizing the heavy job losses for low-income households and minority-owned businesses.

“The burden of the downturn has not fallen equally on all Americans. Instead, those least able to withstand the downturn have been affected most,” Powell told the Senate Banking, Housing and Urban Affairs Committee on Tuesday morning.

Many of the Fed’s tools to prop up the economy, including keeping interest rates at zero through 2022, and its various loan and bond-buying programs, also tend to exacerbate economic inequalities in the United States, critics say. For example, most of the 20 million unemployed Americans are not in a strong position to qualify for a cheap loan.

During the Senate hearing, Powell warned that the crisis could widen the economic gaps that had started to narrow during the economic expansion following the Great Recession.

Questioned by lawmakers about the risks for minority workers and women, along with the rising unemployment rate among African Americans, Powell said the Fed was focused on returning the labor market to its pre-pandemic levels, on top of its emergency measures to flood the economy with liquidity and roll out emergency lending programs.

"What we learned during the last long expansion is that a tight job market is probably the best single thing that the Fed can do to support all low- to moderate-income communities,” he said.

But the path forward is unclear. Powell framed the current economic crisis as one wholly unlike past recessions. In 2020, apart from government stimulus or monetary policy, recovery rests on controlling a deadly pandemic and giving the public confidence that the disease is contained. And the public health crisis has spiraled on, with several states facing spikes in coronavirus cases.

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“Much of that economic uncertainty comes from uncertainty about the path of the disease and the effects of measures to contain it. Until the public is confident that the disease is contained, a full recovery is unlikely,” Powell said, according to the statement.

He noted signs of progress as businesses reopen and the government extends loans and grants but warned that “significant uncertainty remains about the timing and strength of the recovery,” jeopardizing the gains made by many disadvantaged Americans since the Great Recession, Powell said in prepared remarks.

“The longer the downturn lasts, the greater the potential for longer-term damage from permanent job loss and business closures. Long periods of unemployment can erode workers’ skills and hurt their future job prospects,” he said.

The most severe job losses have hit low-wage earners who held restaurant, retail and hospitality jobs that vanished as the country shut down. A recent Fed survey showed that among households with an annual income of $40,000 or less, nearly 40 percent of workers in February lost jobs in March or early April, compared with 20 percent of the overall population.

Democratic lawmakers pressed Powell on how the Fed’s response will extend to minority-owned businesses and those who have suffered some of the deepest job losses. Last month, the unemployment rate among African Americans rose to 16.8 percent, while white unemployment fell to 12.4 percent.

Sen. Sherrod Brown (D-Ohio) asked Powell whether the Fed would commit to a study on how the central bank’s policy contributes to systemic racism in the economy, and Powell said he would discuss that with his colleagues before making a commitment. Sen. Elizabeth Warren (D-Mass.) asked Powell whether the economy could be described as “healthy” when Americans are divided by “serious racial gaps.”

“I think that’s a longer-run weakness in our economy,” Powell said. “That is not a healthy feature of our economy.”

Lawmakers also pointed to a letter Tuesday from former Fed chief Ben Bernanke, calling on Congress to roll out more relief and prevent “prolonged suffering and stunted economic growth.” The letter was signed by Bernanke, Heather Boushey, president and chief executive of the Washington Center for Equitable Growth, and Cecilia Rouse, dean of the Woodrow Wilson School of Public and International Affairs at Princeton University, and endorsed by more than 100 scholars, including former Fed chief Janet L. Yellen, three former chairs of the Council of Economic Advisers and two Nobel laureates.

Signatories said further aid is especially needed for black, Latino and Native American communities that have been disproportionately hurt by the pandemic and recession. Additional legislation should provide “continued support for the unemployed, new assistance to states and localities, investments in programs that preserve the employer-employee relationship, and additional aid to stabilize aggregate demand.”

“An adequate response must be large,” the letter states, "commensurate with the nearly $16 trillion nominal output gap our economy faces over the next decade.”

Powell has said the Fed’s emergency response kept the economic downturn from deepening even further, and on Tuesday made clear that Congress’s response has been effective, even if there is more work to be done. Fed leaders have argued that Congress is better equipped to send aid directly to households and businesses. In recent days, presidents of regional Fed banks have called on lawmakers to boost spending on education, digital infrastructure, health care and child care to make for a stronger economy that is also more equitable in the long term.

Powell will testify on the Hill again on Wednesday before the House Financial Services Committee.

The Fed’s maneuvers to steer the economy toward a recovery in this public health crisis have gone far beyond its interventions during the last downturn. On Monday, the Fed launched its much-anticipated Main Street Lending Program, aimed at helping small and midsize businesses. The central bank also said it would start buying a slew of corporate bonds of large companies, including those that aren’t asking for relief.

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Still, Powell has emphasized that the recovery will take time and that more aid will be needed from Congress as millions of Americans risk losing their jobs permanently. Last week, the Fed predicted that the unemployment rate will fall only to 9.3 percent by the end of this year and to 6.5 percent by the end of 2021.

During the Senate hearing, Sen. Richard C. Shelby (R-Ala.) questioned Powell about the Fed’s vast and growing balance sheet, asking whether the portfolio carries long-term risk.

Powell said that he did not think the balance sheet presented any real threat to inflation or the country’s financial stability, and that the Fed is focused on providing any accommodation the economy needs “for as long as it needs it."

Sen. Patrick J. Toomey (R-Pa.) asked why the Fed decided to buy corporate bonds and if the program comes with an exit strategy.

Powell said the Fed wanted to be in position “if things turn out bad for the economy.”

“I don’t see [the bond-buying program] as wanting to run through the bond market like an elephant, snuffing out price signals and things like that," Powell said.

Toomey added that despite calls for further relief from Congress, much of the already authorized stimulus funding has not been spent. He pointed to data released earlier Tuesday that showed that retail sales spiked 17.7 percent in May, along with last month’s jobs report, which showed that the U.S. workforce added 2.5 million jobs.

“I think we should be careful in evaluating what’s necessary before we go forward," Toomey said.