June 24, 2020 / 4:58 PM / 11 days ago

Fed's Evans: U.S. recovery to take years, outbreaks to slow growth

(Reuters) - Chicago Federal Reserve Bank President Charles Evans on Wednesday said he expects the U.S. economy to take until late in 2022 to recover to its pre-crisis level of output, with some economic growth permanently lost to the effects of the coronavirus pandemic.

FILE PHOTO: Chicago Federal Reserve Bank President Charles Evans speaks during the Global Interdependence Center Members Delegation Event in Mexico City, Mexico, February 27, 2020. REUTERS/Edgard Garrido

“Even after three years, my projected recovery places us below where the economy would have been had the virus not occurred,” he told a Corridor Business Journal conference in Iowa, via videolink. “The economic impact has been catastrophic for an extraordinarily large number of people and businesses, (and) sadly, the cost has fallen most heavily on some of our most vulnerable populations.”

A surprise jump in payrolls in May likely signals stronger underlying demand than analysts had expected, he said. It also probably shows workers and consumers felt comfortable enough to return to stores sooner than anticipated.

And that return, he added, may have its downside.

“My forecast assumes growth is held back by the response to intermittent localized outbreaks - which might be made worse by the faster-than-expected reopenings,” he said.

The Fed earlier this month signaled it will keep interest rates low for years to support growth, and policymakers forecast the economy to shrink about 6.5% this year and unemployment to end the year at 9%.

DOWNSIDE RISKS

With some 20 million Americans out of a job, a drop in spending and economic activity weighing on inflation, and the most uncertain outlook he’s ever seen in his career, Evans said, risks are “weighted to the downside” for even that grim forecast.

“Other forecasts with more severe effects on economic activity are almost equally as plausible in my view,” Evans said adding that while fiscal and monetary policy support have helped, “more may be necessary.”

In particular need are local and state governments, even the most fiscally responsible of which could not have been expected to be prepared to withstand the drop in sales tax and other revenues that are forcing tens of billions of dollars of budget cuts across the country, he said.

“There is a role for the federal government to provide relief assistance of some magnitude,” he said, noting the “awful lot of employment in state and local government and the associated impact from the things that those employees buy or don’t buy if they are laid off.”

Reporting by Ann Saphir; Editing by Chizu Nomiyama and Andrea Ricci

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