Fed chair Powell warns of "lasting" economic damage without more stimulus

Fed chair Powell warns of

Fed chair Powell warns of "lasting" economic damage without more stimulus

He warned of a recession worse than any since World War Two, and called for additional fiscal spending to stem the fallout from the pandemic - a pointed comment from a central banker who has avoided giving advice to elected officials.

Although Powell is the latest in a parade of policymakers to brush off the notion that they might push rates into negative territory, futures tied to Fed interest rate policy expectations were pricing a small chance of sub-zero U.S. rates by March next year.

There is "nothing fundamentally wrong with our economy", Powell told viewers, while pointing out the USA central bank's outsized ability to take on lending risk and provide a financial "bridge" over the temporary economic weakness the country was experiencing. He added that the fiscal response so far - almost $3 trillion worth of support for businesses, households, health-care providers and state and local governments - has been "the fastest and largest response for any postwar downturn".

"But the coronavirus crisis raises longer-term concerns as well", he said, adding the record shows that deeper and longer recessions can leave behind lasting damage to the productive capacity of the economy.

"Avoidable household and business insolvencies can weigh on growth for years to come", the Fed Chairman said.

Powell's remarks on Wednesday mirrored warnings this week from a clutch of regional Fed presidents who outlined the country's uncertain future.

He said: "As I have said for a long time, dealing with China is a very expensive thing to do".

Fed-funds futures also don't trade as often as other instruments that bet on interest-rate policy, such as eurodollar futures, which allow companies to lock in an interest rate on US dollars held in foreign banks. "Now, when we are facing the biggest shock that the economy has had in modern times, is, for me, not the time to prioritize considerations like that".

Markets are looking ahead to the release of the European Central Bank's latest economic bulletin at 0800 GMT and the latest USA jobless claims data at 1230 GMT. "The committee's view on negative rates really has not changed", Powell said.

"So the argument that the Fed has to go negative to reduce the costs of elevated deficits doesn't seem to hold water", said Cloherty. "This is not something that we're looking at".

House Democrats proposed a $3-trillion virus relief bill Tuesday, combining aid to state and local governments with direct cash payments, expanded unemployment insurance and food-stamp spending as well as a list of progressive priorities such as funds for voting by mail and the troubled U.S. Postal Service. Powell may have technically steered clear of crossing that line, but he left little doubt where he comes down on the question of more stimulus.

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