Fed Warns of High Downside Risks


In its semiannual monetary report to the Senate Finance Committee the Fed warns of six downside risks.

The risks are not spread evenly. Low wage earners and small businesses are particularly vulnerable.

Please consider the Fed's Monetary Policy Report to the Senate Committee on Banking, Housing, and Urban Affairs and to the House Committee on Financial Services.

The report is 66 pages long and is full of interesting charts and comments. 

Let's start with Powell's statement on risk: "Despite aggressive fiscal and monetary policy actions, risks abroad are skewed to the downside."

Six Downside Risks 

  1. The future progression of the pandemic remains highly uncertain.
  2. The collapse in demand may ultimately bankrupt many businesses.
  3. Unlike past recessions, services activity has dropped more sharply than manufacturing—with restrictions on movement severely curtailing expenditures on travel, tourism, restaurants, and recreation and social-distancing requirements and attitudes may further weigh on the recovery in these sectors. 
  4. Disruptions to global trade may result in a costly reconfiguration of global supply chains. 
  5. Persistently weak consumer and firm demand may push medium- and longer-term inflation expectations well below central bank targets.
  6. Additional expansionary fiscal policies— possibly in response to future large-scale outbreaks of COVID-19—could significantly increase government debt and add to sovereign risk.

Labor Market

The severe economic repercussions of the pandemic have been especially visible in the labor market. Since February, employers have shed nearly 20 million jobs from payrolls, reversing almost 10 years of job gains. The unemployment rate jumped from a 50-year low of 3.5 percent in February to a post–World War II high of 14.7 percent in April .

Unemployment Rate by Race 

Unemployment Rate by Race - Monetary Policy Report

Labor Force Participation Rate

Labor Force Participation Rate - Monetary Policy Report

Employment Declines by Wage Group 

Employment Declines - Monetary Policy

Low Wage Earner Employment

Employment for lower-wage earners remains roughly 35 percent lower than in February, compared with 5 to 15 percent lower employment for higher-wage earners. These differences are also consistent with results from a recent survey conducted by the Federal Reserve Board that indicated that among households with an annual income of $40,000 or less, nearly 40 percent of individuals who were employed in February experienced job loss in March or early April, compared with 20 percent of the population overall.

Small Businesses

More than 99 percent of U.S. firms have fewer than 500 employees, and almost 90 percent have fewer than 20 employees. Altogether, businesses with fewer than 500 employees account for almost half of private sector jobs.

A wide variety of data reveal an alarming picture of small business health during the COVID-19 crisis. Surveys of small businesses suggest that pessimism about business viability is prevalent.6 The majority of small businesses have seen revenue losses, and half of small businesses do not expect to return to their usual  level of operations within the next six months.

Data from Homebase, a provider of scheduling and time sheet services for small local businesses, show that between 30 and 40 percent of establishments in sectors deeply affected by social distancing have gone inactive since February 15.

New Business Applications

New Business Applications - Monetary Policy

Direct Subsidies Skew Unemployment Rates Globally

Unemployment rate in advanced economies - Monetary Policy

Several European and Asian countries have thus far experienced sizable declines in hours worked but relatively small increases in unemployment given the size of the drop in economic activity, partly reflecting direct wage subsidies provided by the governments to keep workers on firms’ payrolls. 

I put a spotlight on employment but there are many other charts in the report on inflation, treasury rates, inflation expectations, and other topics that you might be interested in.

Fed Projects 2020 Growth at -6.5%, Unemployment 9.3%

The Fed also included charts from the latest FOMC report on Wednesday.

For discussion, please see Fed Projects 2020 Growth at -6.5%, Unemployment 9.3%

Fed's New Tool

Also, please see Fed's New Tool: Not Thinking About Thinking

The Fed does not expect a V-shaped recovery and neither do I.


Comments (20)
No. 1-11

The absence of self-reflection is the main downside risk.

Tony Bennett
Tony Bennett

If June beginning of bounce ... better replace the phone book with a credit card ...


Week Ending May 30, 2020

Total U.S. weekly rail traffic was 395,714 carloads and intermodal units, down 17.3 percent compared with the same week last year.

WASHINGTON, D.C. – June 10, 2020 – The Association of American Railroads (AAR) today reported U.S. rail traffic for the week ending June 6, 2020.

For this week, total U.S. weekly rail traffic was 433,171 carloads and intermodal units, down 15.6 percent compared with the same week last year.

Tony Bennett
Tony Bennett

For all the talk that the Federal Reserve will print and buy it all up.

Its balance sheet grew < $4 billion last week.

Jack and Joan
Jack and Joan

We are probably headed for a depression. It is only a matter of the banks closing.


Fed looks around for risks, doesn't realize that they are the biggest source of systemic risk.


Bad news has been good news since when, maybe 2008, when the Fed really started blatantly trying to prevent any risk asset price discovery? The first rounds of TARP and all that? Can bad news be good news for risk asset prices forever, or only until they destroy the currency?


The poor will be crushed, but they'll make a nice cushion for the rest.


Mish, this is good economic thinking. I did not even look at all the charts you posted because there comes a point when charts and economic theory are meaningless when it comes to misery and income inequality. I could post charts about the Venezuelan economy prior to Chavez taking over, and as bad as it is in that country if they held a fair and honest election tomorrow nothing would change because the people may be stuck dealing with a new reality that is terrible, but they at least are not dealing with the income inequality that they had before Chavez. Yes the country is a mess, yes probably a basket case. But, this is what income inequality does to nations. They would rather suffer in a hopeless situation where all suffer than have a top 10%that lives an ideal sybaritic life whale the majority are starving. We in the states are almost there now.

We all like to believe it can't happen to us. Well it has. Our economy has shrunk so fast and so much that the data is not even reliable, if it were we would already see we are worse off than we were in the Great Depression. And we will see that, it is just we can't now because the data fell so far so fast that we have nothing to compare to. So much was relieved by emergency measures that are set to expire next month, and the early reopenings are already clearly making a second wave that will be worse than the first, 26 states are reporting significan increases in hospitalizations due to Covid with partial reopening. And there stands that ass clown Mnuchin saying we cannot close the economy again. He speaks for Trump, and he is saying people will have to get sick and die but Wall Street is more important.

Fuck it Mish. I am not going to be a compliant consumer, I can't afford to be anyway, what little is available in goods and services if half again to twice what it cost last Christmas. You keep arguining for deflation. I can't wait. I am going broke just trying to live.


Sad that the Fed recognizes that the lowest wage earners suffer the greatest economic impact while our self serving elected officials in Washington pass bills that provide the greatest relief to the rich and powerful. Something smells in Washington.


Don’t get me wrong. I am not advocating for payouts to anyone. Let the zombie corporations and poorly managed companies (airlines etc.) declare banruptcy and let the strong survive. Massively painful in the short term but hugely beneficial in the long run. The law of the jungle - survival of the fittest.


What are the possible narratives behind the New Business Applications figures? I'm surprised that they're as high as they are in May vs May 2019

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