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Fed Chair Warns Of ‘Prolonged Recession’

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Stocks Plunge As Fed Chair Warns Of Prolonged Recession

The Dow Jones Industrial Average fell 516 points yesterday to close 2.17% lower. This came after Federal Reserve Chair Jerome Powell warned of a “prolonged recession” as the country battles the coronavirus pandemic.

The S&P 500 fell 1.77% and the Nasdaq slipped 1.56% as banks, airlines and cruise lines took the brunt of the selloff, with Bank of America slipping 4.57% and Citigroup dropping 4.13%. Wells Fargo fell 6.28% and JPMorgan Chase lost 3.45%.

Carnival and Norwegian Cruise Line fell 7% and Royal Caribbean slipped 4.98%. American Airlines fell 5.6% while Delta Air Lines plunged 7.7% and United Airlines dropped 9.01%.

Recession and Recovery

Speaking at the Peterson Institute for International Economics, Powell said, ”what comes though is there is a growing sense I think that the recovery may come more slowly than we would like. The path ahead is both highly uncertain and subject to significant downside risks.”

He added “The passage of time can turn liquidity problems into solvency problems,” and said that sending more “fiscal support” to families and businesses “could be costly but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery.”

Powell did say that he and the rest of the Fed policymakers were against turning to negative interest rates in an effort to boost the economy. Many expected this move to happen later this fall, and even President Trump tweeted about them being a “gift.”

“It’s an unsettled area. I know that there are fans of the policy, but for now, it’s not something we’re considering,” Powell said yesterday. “We think we have a good toolkit, and that’s the one we’ll be using,” he then added.

He also said, “The committee’s view on negative rates really has not changed. This is not something we’re looking at. The evidence on negative rates is mixed.”

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A Challenging Job

Powell said the economic uncertainty and the potential of a long recession due to the pandemic makes an already challenging job even more so.

“Economic forecasts are uncertain in the best of times, and today the virus raises a new set of questions. How quickly and sustainably will it be brought under control? Can new outbreaks be avoided as social-distancing measures lapse?”

Powell’s questions come after Dr. Anthony Fauci testified in front of the Senate Health, Education, Labor and Pensions Committee. Fauci also warned against opening up the economy too quickly.

“My concern that if some areas — cities, states or what have you — jump over those various checkpoints and prematurely open up, without having the capability of being able to respond effectively and efficiently, my concern is we will start to see little spikes that might turn into outbreaks.”

He later added, “There is a real risk that you will trigger an outbreak that you may not be able to control, which in fact, paradoxically, will set you back, not only leading to some suffering and death that could be avoided but could even set you back on the road to try to get economic recovery.”

“Everyone’s scared and everyone’s shell shocked,” said Kent Engelke, chief economic strategist at Capitol Securities Management. He also mentioned that Powell and Fauci “didn’t say anything new, they just validated the fears we have.”

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