Fed Is Wary That Economic Pain Could Last, April Minutes Show


Federal Reserve officials are painting a relatively bleak picture of the United States economy’s path forward amid the coronavirus pandemic, suggesting that activity may take time to bounce back even as lockdowns lift and warning that second-wave outbreaks could inflict serious damage on businesses and the labor market.

While the Trump administration has been suggesting a more positive outlook for the United States economy, the nation’s foremost economic authority — its central bank — has taken a much more cautious view, warning that the bounce back may be halting and that a full recovery cannot take hold until the health threat posed by the deadly virus is under control.

Central bank officials met remotely April 28 and 29, and notes from the gathering released Wednesday showed that they discussed ways in which the sharp economic decline already underway could create longer-lasting fallout. Among their worries: Lockdowns meant to contain the pandemic are weighing on emerging market economies, leaving United States companies more indebted, spurring consumer caution and heightening financial vulnerabilities.

“Participants expressed concern that the possibility of secondary outbreaks of the virus may cause businesses for some time to be reluctant to engage in new projects, rehire workers or make new capital expenditures,” according to the minutes.

In discussing the outlook for the economy, Fed officials said that “the economic effects of the pandemic created an extraordinary amount of uncertainty and considerable risks.” Lifting lockdown orders could allow economic activity to recover, especially if infections faded enough to make consumers comfortable, but that was seen by policymakers as an optimistic scenario.

“A number” of Fed officials saw a “substantial likelihood of additional waves of outbreak” that would cause further social distancing and widespread business closures, leading to a “protracted period of severely reduced economic activity.”

The central bank’s influential staff was even more blunt, stating that “a more pessimistic projection” involving a second outbreak “was no less plausible than the baseline forecast.”

Jerome H. Powell, the Fed chair, struck a similarly cautious tone at a virtual news conference after the April meeting, warning that the recovery could take time and pledging that monetary policymakers would do what they could to cushion the blow and get the labor market back on track.

The minutes make clear that his dim assessment closely reflected his colleagues’ views.

Fed meeting participants worried that the labor market might suffer longer-run damage if the crisis lingered and workers lost skills amid heightened unemployment, a concern that Mr. Powell repeated during a Senate Banking Committee hearing on Tuesday. He warned that the economy was not likely to quickly rebound even once states ended lockdowns and that households and businesses might need more support to get through the downturn.

“We have 20-some million people out of work; we want to do everything we can to create a world where they can go back to their jobs or find new jobs,” Mr. Powell said at the hearing. “That’s something all of us as policymakers should be strongly focused on.”

The unemployment rate, which was hovering near a 50-year low of 3.5 percent before states began to enforce lockdowns meant to contain the coronavirus back, jumped to 14.7 percent in April as tens of millions lost their jobs. While many of those job cuts are temporary furloughs, they could become permanent if businesses fail.

The Congressional Budget Office expects that the jobless rate will still be above 8 percent at the end of 2021, based on economic forecasts released yesterday.

Policymakers are hopeful that those efforts, together with major spending programs passed by Congress and signed by President Trump, could limit the economic damage, but they have repeatedly said more policy help may be needed.

The April minutes show that officials “acknowledged that even greater fiscal support may be necessary if the economic downturn persists.”

Republican lawmakers have begun trying to shift the economic discussion away from more financial support to helping the economy by reopening states and cutting taxes, suggesting that more aid may not be forthcoming. The Trump administration has said it would veto a $3 trillion bill that Democrats passed in the House last week.

The Fed’s next steps could involve explicitly promising to keep rates low — tying them to either economic thresholds or a specific time span — or refining their bond-buying program, based on the minutes. Many analysts have suggested that the Fed could transition its current asset purchase program, meant to keep markets functioning smoothly, into one meant to boost the economy.

“Members agreed that the Federal Reserve was committed to using its full range of tools to support the U.S. economy in this challenging time,” the minutes said.

Fed officials are also alert to financial stability risks if the pandemic drags on. They said at the April meeting that banks “could come under greater stress, particularly if adverse scenarios for the spread of the pandemic and economic activity were realized,” and “a number” of officials suggested banks should be encouraged to stop making shareholder payouts.

Central bankers have so far been reluctant to make large banks, which have temporarily suspended share buybacks, stop dividend payouts.

The Fed’s next scheduled meeting is June 9 and 10.