Jerome Powell, Steven Mnuchin split on reopening economy

The Federal Reserve chairman urged caution and said more support would be needed.

US Treasury Secretary Steven Mnuchin exits the office of Senate Majority Leader Mitch McConnell after a meeting in the Capitol. Picture: Getty Images

The nation’s top two economic policy leaders offered contrasting visions about the outlook for the US, with Treasury secretary Steven Mnuchin favouring a wait-and-see approach to more federal aid and Federal Reserve chair Jerome Powell suggesting more would be needed.

Their positions reflected differing views on the prospects for a swift economic rebound from the coronavirus pandemic.

Mr Mnuchin, appearing alongside Mr Powell at an online congressional hearing on Tuesday, reflected the Trump administration’s belief that the biggest danger to the economy was waiting too long to restart activity after two months in which millions of Americans have sheltered in their homes to slow the spread of COVID-19 infections.

“There is the risk of permanent damage” in keeping commercial activity closed down too long, Mr Mnuchin told the Senate Banking Committee.

He echoed comments by President Donald Trump and other administration officials who are predicting a V-shaped recovery — a sharp downturn followed by a strong bounceback.

“We’re going to have a really good third quarter. It’s already happening,” Mr Trump told reporters at the Capitol later on Tuesday after meeting with Senate Republicans. “You see what’s going on. We’re opening up.”

Mr Powell, meanwhile, challenged the premise that there is a trade-off between economic growth and protecting the public’s health. Fear of coronavirus infection was the economy’s biggest hurdle, he said, and the recovery would be held back until Americans believed it was safe to resume commercial activities involving face-to-face contact.

“The No 1 thing, of course, is people believing that it’s safe to go back to work so they can go out,” said Mr Powell. “That’s what it will take for people to regain confidence.”

For the third time in a week, Mr Powell suggested additional spending by Washington could be needed to prevent long-term damage from high unemployment and waves of bankruptcies.

“The scope and speed of this downturn are without modern precedent and are significantly worse than any recession since World War II,” he said.

The Fed and the Trump administration were frequently at odds last year over interest rate policy, with the president faulting Mr Powell for not providing more stimulus during a period of steady economic growth.

More stimulus

Now, the tables are turning, with the Fed now calling for more stimulus and the administration more hesitant.

Mr Powell and other central bank officials have indicated they don’t think a V-shaped recovery is likely. This has fuelled their concern that the government’s initial relief measures may prove insufficient to nurse the economy through a shock with no modern parallel and with interest rates already near zero.

The Boston Fed president Eric Rosengren said he expected the unemployment rate to peak near 20 per cent and to stay above 10 per cent to the end of the year.

“This outlook is both sobering and a call to action,” he said. “Now is the time for both monetary and fiscal policy to act boldly to minimise the economic pain from the pandemic.”

He warned that allowing businesses to reopen without slowing the spread of the virus risked making the economy worse.

“If consumers are afraid to eat out, shop or travel, a relaxation in laws requiring business closures may do little to bring back customers and thus jobs,” said Mr Rosengren. “It is vital that the design and timing of reductions in business restrictions not result in worse outcomes and higher unemployment over a longer period of time.”

The Congressional Budget Office, which released its updated economic forecast, said it anticipated a “gradual and incomplete pattern of recovery” over the next year and a half. It expected the economy would grow faster in 2021 than it projected last month, but would still be 1.6 per cent smaller than it was at the end of 2019, while the jobless rate remained above 9 per cent through the end of next year.

The Fed has slashed rates to near zero and bought more than $US2 trillion ($3 trillion) in Treasury and mortgage securities to stabilise markets. It has promised to lend trillions of dollars more, backed by more than $US200bn in funds from the Treasury. Congress has appropriated nearly $US2.9 trillion so far to support households, businesses, healthcare providers and state and local governments, or around 14 per cent of national economic output.

“We need to take a step back and ask over time is it enough, and we need to be prepared to act further,” Mr Powell said.

Mr Trump’s top advisers have laid out a more optimistic scenario they say justifies waiting to see how the economy fares before providing more aid. The president has said he wants to suspend the payroll tax and eliminate capital gains taxes to spur more hiring and investment.