MNI POLICY: Powell Says Less Risk From Overdoing Stimulus

Federal Reserve Chair Jay Powell on Tuesday warned the U.S. economy could fall into an extended slowdown without more government aid to support workers and businesses through Covid-19, and said there is less risk in "overdoing" policy interventions.

"A prolonged slowing in the pace of improvement over time could trigger typical recessionary dynamics, as weakness feeds on weakness," he told an economics conference held online. "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."

The risk of providing too much support is smaller than not doing enough, he said, calling the risks of policy intervention "asymmetric."

"Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses," he said. Personal and business bankruptcies would rise, harming the productive capacity of the economy and holding back wage growth over the long run.

"By contrast, the risks of overdoing it seem, for now, to be smaller. Even if policy actions ultimately prove to be greater than needed, they will not go to waste," he said.

UNEVEN RECOVERY

The recovery has so far progressed "more quickly than generally expected," he said, while adding the improvement has moderated since June and noting higher permanent job loss and recent layoffs. Even as the unemployment rate dipped to 7.9% last month, it's really running around 11% when accounting for mistaken characterizations of job status and the decline in labor force participation, he said.

"Rapid initial gains from reopening may transition to a longer than expected slog back to full recovery as some segments struggle with the pandemic's continued fallout," he said.

A prolonged period of slow progress could exacerbate existing disparities, Powell noted. "That would be tragic, especially in light of our country's progress on these issues in the years leading up to the pandemic."

Initial avalanche of job losses fell most heavily on low-wage workers in services, comprising large numbers of minorities and women. Employment in the bottom quartile of the wage distribution in August was still 21% below its February level, while it was only 4% lower for other workers, he said, citing the Fed's analysis of ADP private payroll data.