Powell issues stark warning

Lachlan Maddock
— 1 minute read

US Federal Reserve chairman Jerome Powell cratered market optimism with a warning that a “prolonged recession” means the massive policy response will not be “the final chapter”.

Addressing the Peterson Institute for International Economics, chairman Powell made it clear that the darkest days of the COVID-19 crisis – when the Fed had to step in to ensure the smooth operation of markets – are far from over. 

“While the economic response has been both timely and appropriately large, it may not be the final chapter, given that the path ahead is both highly uncertain and subject to significant downside risks,” chairman Powell said. “Economic forecasts are uncertain in the best of times, and today the virus raises a new set of questions.”


Those questions include how quickly and sustainably the virus will be brought under control; whether new outbreaks can be avoided; and how long it will take for confidence and spending to return to normal levels. 

The Fed launched a series of massive repo operations and “QE infinity” to support markets. But Mr Powell warned that while the Fed would continue to provide assistance where it could, its role was limited to lending, not spending. 

“The recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems,” Mr Powell said. “Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery. This trade-off is one for our elected representatives, who wield powers of taxation and spending.”

Chairman Powell also revealed that lockdowns had hit lower-income households hardest, with almost 40 per cent of households making less than $40,000 a year losing a job in March.

Markets tumbled on the comments, with the Dow finishing down 2 per cent.


Powell issues stark warning
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