The Fed takes actions such as these only in extraordinary circumstances, like those we face today. For example, our authority to extend credit directly to private nonfinancial businesses and state and local governments exists only in "unusual and exigent circumstances" and with the consent of the Secretary of the Treasury. When this crisis is behind us, we will put these emergency tools away.
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. Economic forecasts are uncertain in the best of times, and today the virus raises a new set of questions: How quickly and sustainably will it be brought under control? Can new outbreaks be avoided as social-distancing measures lapse? How long will it take for confidence to return and normal spending to resume? And what will be the scope and timing of new therapies, testing, or a vaccine? The answers to these questions will go a long way toward setting the timing and pace of the economic recovery. Since the answers are currently unknowable, policies will need to be ready to address a range of possible outcomes.
The overall policy response to date has provided a measure of relief and stability, and will provide some support to the recovery when it comes. But the coronavirus crisis raises longer-term concerns as well. The record shows that deeper and longer recessions can leave behind lasting damage to the productive capacity of the economy.3 Avoidable household and business insolvencies can weigh on growth for years to come. Long stretches of unemployment can damage or end workers' careers as their skills lose value and professional networks dry up, and leave families in greater debt.4 The loss of thousands of small- and medium-sized businesses across the country would destroy the life's work and family legacy of many business and community leaders and limit the strength of the recovery when it comes. These businesses are a principal source of job creation — something we will sorely need as people seek to return to work. A prolonged recession and weak recovery could also discourage business investment and expansion, further limiting the resurgence of jobs as well as the growth of capital stock and the pace of technological advancement. The result could be an extended period of low productivity growth and stagnant incomes.
We ought to do what we can to avoid these outcomes, and that may require additional policy measures. At the Fed, we will continue to use our tools to their fullest until the crisis has passed and the economic recovery is well under way. Recall that the Fed has lending powers, not spending powers. A loan from a Fed facility can provide a bridge across temporary interruptions to liquidity, and those loans will help many borrowers get through the current crisis. But the recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems. 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 tradeoff is one for our elected representatives, who wield powers of taxation and spending.
Thank you. I look forward to our discussion.
References
Blanchard, Olivier J., and Lawrence H. Summers (1987). "Hysteresis in Unemployment," European Economic Review, vol. 31 (February–March), pp. 288–95.
Board of Governors of the Federal Reserve System (2019), Report on the Economic Well-Being of U.S. Households in 2018 (PDF). Washington: Board of Governors, May.
Davis, Steven J., and Till von Wachter (2011). "Recessions and the Costs of Job Loss (PDF)," Brookings Papers on Economic Activity, Fall, pp. 1–72.
Martin, Robert F., Teyanna Munyan, and Beth Anne Wilson (2014). "Potential Output and Recessions: Are We Fooling Ourselves?" IFDP Notes. Washington: Board of Governors of the Federal Reserve System, November 12.
——— (2015). "Potential Output and Recessions: Are We Fooling Ourselves? (PDF)" International Finance Discussion Papers 1145. Washington: Board of Governors of the Federal Reserve System, September.
Reifschneider, Dave, William Wascher, and David Wilcox (2015). "Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy," IMF Economic Review, vol. 63 (May), pp. 71–109.
Romer, Christina D., and David H. Romer (1989). "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz (PDF)," in Olivier J. Blanchard and Stanley Fischer, eds., NBER Macroeconomics Annual 1989, vol. 4. Cambridge, Mass.: MIT Press, pp. 121–84.
1. Board of Governors, 2019. Also see the Federal Reserve's Survey of Household Economics and Decisionmaking (forthcoming) and its Report on the Economic Well-Being of U.S. Households in 2019, Featuring Supplemental Data from April 2020 (forthcoming). Return to text
2. Romer and Romer, 1989. Return to text
3. For example, see Reifschneider, Wascher, and Wilcox, 2015; Blanchard and Summers, 1987; and Martin, Munyan, and Wilson, 2014, 2015. Return to text
4. Davis and Von Wachter, 2011. Return to text
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