Powell warns of downward spiral of layoffs, recession without further coronavirus aid

Federal Reserve Board Chair Jerome Powell warned Tuesday that a failure to provide further support for the coronavirus-wracked economy could lead to a downward spiral of layoffs and economic decline.

In a Tuesday speech to the National Association of Business Economics (NABE), the Fed chief urged Congress and the White House to strike another deal on fiscal support as the U.S. economy continues to suffer from high unemployment and low demand due to the pandemic.

“Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses. Over time, household insolvencies and business bankruptcies would rise, harming the productive capacity of the economy, and holding back wage growth,” Powell said.

“Even if policy actions ultimately prove to be greater than needed, they will not go to waste. The recovery will be stronger and move faster if monetary policy and fiscal policy continue to work side by side to provide support to the economy until it is clearly out of the woods.”

Powell’s Tuesday speech is the latest appeal from the Fed chief to push lawmakers and the White House toward a long-sought deal on COVID-19 fiscal relief before Election Day. He and several top Fed officials have warned throughout the summer and early fall that a failure to follow up on the success of the $2.2 trillion CARES Act could derail the recovery from the coronavirus recession.

Powell and dozens of economists have credited the CARES Act with dampening the initial blow of the coronavirus pandemic through direct payments to U.S. households, expanded and increased unemployment benefits, emergency loans to small businesses and aid for state and local governments.

“In a typical recession, there is a downward spiral in which layoffs lead to still-lower demand and subsequent additional layoffs. This dynamic was disrupted by the infusion of funds to households and businesses,” Powell said. 

But the pace of the economic recovery has declined steadily over the summer as crucial CARES Act provisions expired and the aid they furnished began to wash out of the economy. 

U.S. job gains have decreased in each of the past four months, falling to 661,000 in September, according to data released by the Labor Department last week. Permanent job losses and layoffs have also risen sharply since August, and thousands of small businesses have failed or closed up shop as they face a potential winter spike in coronavirus cases and an uncertain future.

Powell also noted that the brunt of the economic crisis has fallen the hardest on low-income households, communities of color and women — all of which made historic economic gains in the decade of expansion that preceded the pandemic.

“Combined with the disproportionate effects of COVID on communities of color, and the overwhelming burden of child care during quarantine and distance learning, which has fallen mostly on women, the pandemic is further widening divides in wealth and economic mobility,” Powell said.

“A long period of unnecessarily slow progress could continue to exacerbate existing disparities in our economy. That would be tragic, especially in light of our country’s progress on these issues in the years leading up to the pandemic,” he continued.