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Fed officials raised concerns in June that U.S. could enter a much worse recession later this year if coronavirus cases continued to spike

The Washington Post logo The Washington Post 7/1/2020 Rachel Siegel
a man wearing a suit and tie: Federal Reserve Chair Jerome H. Powell testified on Tuesday before the House Financial Services Committee on his department's response to the coronavirus pandemic. © Tasos Katopodis/Pool/EPA-EFE/REX/Shutterstock Federal Reserve Chair Jerome H. Powell testified on Tuesday before the House Financial Services Committee on his department's response to the coronavirus pandemic.

Federal Reserve officials raised concerns about additional waves of coronavirus infections disrupting an economic recovery and triggering a new spike in unemployment and a worse economic downturn, according to minutes released Wednesday by the central bank about its June 9-10 meeting.

Fed Chair Jerome H. Powell has repeatedly said that the path out of this recession will depend on containing the virus and giving Americans the confidence to resume normal work and spending habits. But the notes from the two-day meeting reveal how interconnected Fed officials view a prolonged economic recession with the pandemic’s continued spread — and why Powell often asserts that lawmakers will need to do more to carry millions of Americans out of this crisis.

“In light of the significant uncertainty and downside risks associated with the pandemic, including how much the economy would weaken and how long it would take to recover, the staff judged that a more pessimistic projection was no less plausible than the baseline forecast," the minutes read. “In this scenario, a second wave of the coronavirus outbreak, with another round of strict limitations on social interactions and business operations, was assumed to begin later this year, leading to a decrease in real GDP, a jump in the unemployment rate, and renewed downward pressure on inflation next year.”

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On June 10, when this Fed meeting concluded, there were 20,456 new coronavirus cases in the United States, according to a Washington Post analysis. The situation has deteriorated markedly since then, and there were 44,474 new cases reported on Tuesday. Anthony S. Fauci, the government’s top infectious-disease specialist, warned this week that the country could soon face 100,000 new coronavirus cases a day “if this does not turn around." 

Notably, the Fed’s discussion about these concerns came before the big spike in coronavirus cases picked up in the past two weeks. The latest surge has forced California, Florida and Texas to reimpose restrictions on restaurants and bars, and nine other states have postponed or scaled back reopening plans. The reversal means that many Americans — including hourly and low-wage service employees — have been kicked out of the workplace for a second time.

That grim reality is colliding with what experts have dubbed a “fiscal cliff,” when the $600-per-week increase in unemployment benefits is set to expire at the end of this month. Congress is currently facing a swath of decisions about how or whether to extend government aid this summer. Powell has often said that more will likely be needed from Congress to provide direct relief to struggling households and businesses.

Powell and other Fed officials stop short of outlining exactly what lawmakers should do in a new stimulus package or other legislation. But the meeting minutes underscore what the central bank’s leaders have said in public, which is that the Fed’s tools can only go so far.

The Fed has propped up a slew of emergency programs to prop up the markets and extend loans to municipalities and small and mid-sized businesses. But the central bank only has authority to lend — not spend. Testifying before the House Financial Services Committee on Tuesday, Powell said that for many companies and industries desperate for help, “more debt may not be the answer here."

Among the risks noted by Fed officials at the June meeting: “fiscal support for households, businesses, and state and local governments might prove to be insufficient.”

Still, those concerns are much different than the forecast the White House has offered, as President Trump has predicted a sharp increase in economic growth. Earlier this week, senior White House economist Larry Kudlow said that the “overwhelming” evidence pointed to a V-shaped recovery.

Powell has hesitated to say precisely what type of bounce back — including a V, U or W-shaped recovery — the country could face, and emphasizes that the situation remains extraordinarily uncertain.

But the Fed has taken steps to incorporate a range of possibilities, including more dire ones, into its emergency response. Last week, the Fed released new data on how the country’s largest banks would fare under those three scenarios, and concluded that if there is slower U-shaped recovery or a W-shaped scenario, several financial firms “would approach minimum capital levels."

Others within the central bank have been more direct. In an interview with The Post on Wednesday, Mary C. Daly, president of the San Francisco Federal Reserve Bank said she “would hesitate to call this a recovery,” and specifically said the country was not in the midst of a V-shaped rebound.

Heather Long contributed to this report.


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