Federal Reserve officials warned of “extremely elevated” levels of uncertainty around the economic outlook and said they expect that the pandemic will continue to exact a heavy toll on America’s economy, newly released minutes from a July policy meeting show.
Officials at the meeting “noted that the path of the economy would depend significantly on the course of the virus and that the ongoing public health crisis would weigh heavily on economic activity, employment, and inflation in the near term and posed considerable risks to the economic outlook over the medium term,” the document shows.
Besides the virus, risks to America’s fledgling economic recovery include business uncertainty about the sustainability of the recent surge in consumer spending compounded by a possible pullback in stimulus. Congress has, since March, approved around $3.6 trillion in new spending to counteract the pandemic blow to the economy but talks have stalled on further measures, prompting President Donald Trump to take executive action to extend pandemic unemployment benefits and payroll tax deferral to provide relief to American families.
Federal Reserve Chairman Jerome Powell and other Fed officials have expressed concern that the end of the additional unemployment aid and the expiration of support for small businesses will slow the recovery.
“There will be a need for more support from us, and from fiscal policy,” Powell said after the July meeting, referring both to the Fed’s arsenal of stimulus measures, like interest rate adjustments and the bold asset-buying program that has seen the Fed’s balance sheet swell to around $7 trillion, and congressional spending power.
Fed officials said in the minutes that the rebound in consumer spending had been “particularly strong,” in part because of the relief provided by Congress. But businesses remained cautious about their spending, the minutes said, as they “continued to report extraordinarily high levels of uncertainty and risks.”
The difficulties faced by companies include disrupted supply chains, ongoing closures and reopenings related to the virus, and “elevated employee absenteeism.” Businesses also worried about the uncertainty surrounding any further relief package from Congress, the minutes said.
“The staff continued to observe that the uncertainty related to the economic effects of the pandemic was extremely elevated and that the unusual nature of the pandemic-related shock made assessments about how the economy might evolve in the future more challenging than usual,” officials said, noting that a pessimistic scenario was just as likely as their baseline prediction.
Fed officials’ base case assumption is that as the outbreak subsides, the current restrictions on social interactions and business operations will ease gradually through next year, leading to GDP growth and a considerable drop in unemployment.
The pessimistic scenario involves an acceleration of the CCP virus outbreak later in the year, sparking another round of strict limitations on social interactions and business operations, leading to a drop in GDP and another jump in the unemployment rate, which currently sits at 10.2 percent.
Asked about the threat of a second wave of infections derailing the economic recovery, White House economic adviser Larry Kudlow told reporters Wednesday: “The hope is that the decline in cases and fatalities will continue. That’s the great hope.”
“I think the economy is on a self-sustaining recovery and it’s a V-shaped recovery,” Kudlow said. “We’re seeing terrific numbers.”
Recent encouraging data showed that construction of new homes in the United States surged by a prediction-beating 22.6 percent in July as homebuilders continue their rebound from the COVID-induced slowdown. Applications for building permits, a good indication of future activity, surged 18.8 percent from June, the highest rate since January and up 9.4 percent from July 2019, reinforcing the view that America’s housing market is one of the bright spots in the economic crisis triggered by the outbreak.
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