Updated: 05-20-2020

In a speech broadcast via webcast to the Peterson Economic Institute on Wednesday, Fed Chair Powell was less than Pollyannaish about the economic outlook. If anything, he sounded like a realist.

He acknowledged the unprecedented scope of this COVID-19-related downturn, praising at times the extraordinary response by the Federal Reserve and Congress to provide support to lessen its impact. That support, though, may not be enough and probably won't be enough. The Fed chair acknowledged as much.

It's a daunting consideration really. After all, the fiscal support from Congress has amounted to roughly 14% of GDP so far. That's $2.9 trillion, but as noted by Mr. Powell, that may not be the final chapter in this sad economic saga.

While he stressed that the Fed will use its toolkit to do what is necessary to provide more support if needed, the Fed chair was gently urging Congress to be ready to do more. It was a significant suggestion because the Fed chair is typically loathe to enter the realm of fiscal policy, but his foray there in this speech underscored the seriousness of this sad situation, which has invited 36.5 million initial jobless claims over the past eight weeks.

His reminder that the Fed has "lending powers," not "spending powers" was powerful. It was a subtle way of saying that Congress shouldn't rely on the Fed to make the economic recovery happen. Congress needs to stay in the game so to speak to help avert long-term damage being done to the economy, which is the Fed chair's fear right now as jobless claims mount and the risk of permanent job losses and an extended stretch of unemployment increases.

It doesn't have to turn out that way.

The Fed chair is hoping policy support can avert a deep and long recession that does lasting damage to the productive capacity of the economy. To say the least, there is a lot at stake, which is why he is reminding Congress that it shouldn't be blinded right now by the cost of further support measures since additional fiscal support could be the answer for avoiding long-term economic damage. In brief, the implication in Mr. Powell's remark is that the risk of long-term economic damage will go up if Congress isn't willing to step up further.

It sounds like Congress and the White House will be headed down the road of considering more stimulus. House Democrats have unveiled a $3 trillion coronavirus relief package, which has already been decreed by some as "dead on arrival" in the GOP-controlled Senate.

The latter point notwithstanding, the ongoing destruction in the labor market will all but necessitate another fiscal support package. There seems to be a growing partisan divide going into this next round, but regardless, as the November election draws closer, both parties will have a vested interest in providing additional support. That should ensure something gets passed.

What ultimately gets passed is the real issue and the big unknown. In any case, it will mean more debt issuance to finance the relief effort. Strikingly, the Treasury market didn't recoil this week at the thought. Yields on longer-dated securities, which is where a good chunk of the additional issuance will probably fall, came in.

They did so we suspect because this week's economic data and Mr. Powell's speech were sobering reminders that the pace of recovery isn't likely to be as quick, or extensive, as many have hoped.

Be that as it may, it doesn't necessarily have to be deep and long in Mr. Powell's mind if Congress keeps playing a pro-active part on the fiscal side and stokes spending power that is desperately needed as a multiplier effect to the Fed's lending power.

--Patrick J. O'Hare, Briefing.com

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