Fed Chief Powell Sees Bumpy Road Ahead, but Not Another Great Depression

In "60 Minutes" interview, he warns of dramatic second quarter GDP shrinkage, no full rebound until a vaccine is ready and nixes idea of negative interest rates.
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The nation can expect a gradual and most likely bumpy recovery as the lockdowns are lifted amid the Covid-19 outbreak, suggested Fed Chief Jerome Powell, but, he said, a full-blown sequel to the Great Depression is not likely.

"The big thing we have to avoid," said Powell, "is a second wave of the virus."  

Powell, however, in his lengthy interview with CBS News' "60 Minutes" correspondent Scott Pelley on Sunday cautioned: "I think, though, it'll be a while before we really feel well recovered."

Assuming the U.S. can somehow escape a second wave of the coronavirus, it will see the economy recover steadily through the second half of 2020 after a potential peak jobless rate of up to 25% and dramatic shrinkage of gross domestic product. People will also enter the reopening cautiously, he said, with a tight grip on their wallets. 

"So certain parts of the economy will recover much more slowly," he said, according to an advanced transcript of the exchange, adding that the only path to a sure recovery will be a vaccine. 

"The Fed is dealing with two uncertainties," said Tom Graff of BrownAdvisory, who often writes about the Fed for TheStreet's Real Money Pro. "During any recession, there are always a variety of ways the economy could progress, so they are dealing with that now. But Fed Chair Powell is also dealing with the uncertainty around the virus."

Graff noted that Powell -- as he said during the interview -- must rely on outside data and forecasts about the pandemic.

"He was pressed on how soon there might be a treatment or whether the nascent economic reopenings would trigger a second wave of the virus. No one knows the answer to these things, and yet Powell must set policy as best they can," said Graff by email.

As of Sunday, the U.S. was on track to hit 1.5 million total known cases of Covid-19. The U.S. was also quickly approaching 90,000 deaths -- a number that surpasses the total number of cases reported in all of China, according to the Johns Hopkins map of the outbreak. While some parts of the nation appeared to see a slowdown in the rise in cases, others, like Texas, saw numbers shoot up.

Earlier Sunday, health and government officials made the rounds on news shows, giving warnings about what could happen if the economy opens too quickly and what could happen if it doesn't. 

Peter Navarro, who has no medical background but is a trade adviser to the president, said on NBC News' "Meet the Press" that opening up the economy is not really "a question of lives vs. jobs" -- contending that "indirectly, you're going to kill a lot more people" by having extended lockdowns in place.

Dr. Tom Frieden, the former Centers for Disease Control and Prevention director, however, told "Fox News Sunday" that while he understands how Americans want to "get back to our lives ... if we go too fast, it will backfire and we can see explosive spread that could bring us back in.... The virus is the enemy here."

Other doctors were also careful to avoid another outbreak. "The rush to reopen businesses and suspend distancing in many states is likely to restart exponential epidemic growth," said Dr. David N. Fisman, a professor of epidemiology at the University of Toronto, to TheStreet by email.

Powell, however, said he sees the "beginnings" of the U.S. economy climbing back over the next couple of months, but he gave many warnings of possible bumps ahead on the road to recovery. 

For one, Powell said, "there's a real risk that if people are out of work for long periods of time, that their skills atrophy a little bit and they lose contact with the workforce. This is something that shows up in the data -- that longer and deeper recessions tend to leave behind damage to people's careers. And that weighs on the economy going forward."

The same can happen to entire businesses, he cautioned, pointing out the risks to small- and medium-size businesses who -- if they go under -- would cause damage to ripple out beyond their own operations. 

"You know, it's really the job creation machine," said Powell of these smaller businesses that remain in jeopardy. "And if that happens, it will take some time to recover from it."

Federal policies currently in place, however, could help soften the blow, he suggested, praising Congress' $3 trillion in stimulus so far. 

"By keeping people and businesses out of insolvency just for maybe three or six more months while the health authorities do what they can do," he said, "we can buy time with that. And so I think that kind of support may be appropriate."

The Fed learned since the Great Recession just how damaging periods of unemployment are, noted Graff. "The Fed always tried to fight unemployment, but there is a better understanding of the long-term damage done to lifetime earnings. This is clearly an acute worry for Powell."

Graff also noted that Powell specifically talked about avoiding “unnecessary” or “avoidable” insolvencies. 

"He is making a crucial distinction that investors need hear. Smaller firms that declare bankruptcy usually disappear. Larger firms are often taken over by creditors and continue to operate. The more small firms that fail during this period, the longer the recession lasts," said Graff. 

Powell -- building on earlier statements -- quashed any talk of taking interest rates negative, and noted that certain sectors of the economy would likely not come back until a vaccine is available. Sporting events, live entertainment, airlines and similarly hurt businesses can expect continued hard times, said the Fed chief.

"It'll be quite challenging for them. Lots of the rest of the economy, though, can move ahead," Powell said.

"In the long run, and even in the medium run, you wouldn't want to bet against the American economy. This economy will recover. And that means people will go back to work." 

Powell, however, declined to say whether the economy would see a "V"-shaped recovery and was cautious about how much GDP would shrink in the second quarter.

"You know, the numbers are going to be very high. And it's hard to be precise. I wouldn't want to guess. The public estimates that are out there are reasonable. And, you know, they'll be very, very high."

Pelley, the interviewer, asked if shrinkage of GDP in the second quarter could hit 20%, and Powell said by at least that percentage.

"Easily. You know, could easily be in the twenties or thirties."

Pelley followed up, "You expect the third quarter to see growth? To not be negative?"

"I think that's going to be the key question; I expect that there'll be growth in the second half. I think that the recovery -- so the third quarter begins in July. I think there’s a good chance that there'll be positive growth in the third quarter. And I think it's a reasonable expectation that there'll be growth in the second half of the year. I would say though we're not going to get back to where we were quickly. We won't get back to where we were by the end of the year. That's unlikely to happen."

Graff called the interview telling, in that Powell emphasized that the Fed definitely isn't out of ammo. 

"The takeaway from that exchange is this: In this phase of the recession, the Fed is focused on keeping firms alive such that there are jobs to come back to once the economy reopens," said Graff. "They have all the programs they need to achieve that. They’ll make the programs bigger if they have to, but don’t expect any other kind of stimulus for now. Negative rates, buying stocks, etc. None of that is happening."