Wrong to doubt strong economy rebound
Federal Reserve Bank of St. Louis President James Bullard said the U.S. economy should recover strongly in the second half of 2020 if the government and businesses respond forcefully to the coronavirus, with massive testing to prevent fresh outbreaks.
“There is no reason it can’t come back in a ‘V’ shape,” Bullard said in a virtual discussion Tuesday to the St. Louis Regional Chamber. “I know it’s become popular to say that is not going to happen. I think it can happen.”
The central bank has responded aggressively to blunt the effect of the pandemic on the U.S. economy, launching an unprecedented range of emergency programs to support as much as $2.3 trillion in loans and slashing interest rates to almost zero.
Most economists expect a recovery that will be moderate and drawn out, with unemployment initially surging before declining to around 8% in the final three months of 2020, according to a Bloomberg News survey this month. Even in 2022, unemployment is expected to average 5%.
A robust recovery “can happen if this is managed appropriately, if you make sure everyone is comfortable and able to pay their bills through the second quarter, if you can get the virus under control,” Bullard said. “As incidents of the disease go way down, then I think you should be able to reopen. Ideally you would like to test everybody. If you can’t test everybody, you are going to have to use relatively crude substitutes like taking everybody’s temperature.”
The partial shutdown in the U.S. economy could halve gross domestic product this quarter and push unemployment to around 30%, Bullard estimated last month. Today, he said there are a range of outcomes possible for the jobless rate.
“Most people think today the unemployment rate is already in the double-digit range,” Bullard said, referring to unemployment insurance as “pandemic relief.” “Ideally, the unemployment rate would spike at a high level then come down again as we get the economy started up again on the other side of this crisis.”
Bullard, who has been among the most dovish Fed officials the last three years, has urged a comprehensive government response to the pandemic, arguing that businesses and workers should be fully backed during the shutdowns as part of what amounts to an investment in public health.
Bullard called the shelter-at-home quarantine that has shuttered important parts of the economy an inefficient but appropriate response as the pandemic spread through the country. He estimated it is costing the U.S. $25 billion every day in lost household income.
Fed officials have been unified in backing broad assistance. “We’ll use our authority forcefully and aggressively until we’re confident the economy’s recovered,” said Vice Chairman Richard Clarida on Monday.
As part of its emergency programs, the Fed will loan to state and local governments and fund the purchases of some types of high-yield bonds issued by companies that were rated investment grade before the start of the crisis but have since been downgraded.
Chicago Fed chief Charles Evans said that it was entirely appropriate to “socialize” the costs of responding to the pandemic because it was affecting the entire nation.
“There’s just no way you could have insured against this. That is a role for government, to sort of socialize more of these losses,” he said during a virtual discussion hosted by the Carnegie Mellon University Tepper School of Business. “That’s going to determine what the society and capitalism looks like going forward.”
Officials have pointed out that the central bank’s response has been much swifter than during the 2008 financial crisis, when it took them months to ramp up their response, while this time it was rolled out in a matter of a few weeks. Atlanta Fed President Raphael Bostic said that reflected hard-earned experience.
“We are going to act as soon and as aggressively as we can. One thing we learned coming out of the Great Recession was that Fed policy is most effective if it goes big and it goes early,” he said during an interview with Yahoo Finance later on Tuesday. “So we are not going to try to time this. As soon as we see a problem and there’s a solution that we have tools that are appropriate to address, we are going to get out there and do that.”