The virus and the forceful measures taken to control its spread have induced a sharp decline in economic activity and a surge in job losses. Indicators of spending and production plummeted in April, and the decline in real GDP in the current quarter is likely to be the most severe on record. Even after the unexpectedly positive May employment report, nearly 20 million jobs have been lost on net since February, and the unemployment rate has risen about 10 percentage points, to 13.3 percent. As was highlighted by the Bureau of Labor Statistics, this figure likely understates the extent of unemployment; accounting for the unusually large number of workers who reported themselves as employed but absent from their jobs would raise the unemployment rate by about 3 percentage points. The downturn has not fallen equally on all Americans, and those least able to shoulder the burden have been the most affected. In particular, the rise in joblessness has been especially severe for lower-wage workers, for women, and for African Americans and Hispanics.
In recent weeks, some indicators suggest a stabilization or even a modest rebound in some segments of the economy, such as retail merchandise and motor vehicle sales. Employment rose in many sectors of the economy in May, and the unemployment edged down as some workers returned to their jobs from temporary layoffs. With the easing of social distancing restrictions across the country, people are increasingly moving about, and many businesses are resuming operations to varying degrees. At the same time, many households have been receiving stimulus payments and unemployment benefits, which are supporting incomes and spending. Activity in many parts of the economy has yet to pick up, however, and overall output is far below earlier levels. Moreover, despite the improvements seen in the May jobs report, unemployment remains historically high.
Since March, we have been purchasing sizable quantities of Treasury and agency mortgage-backed securities in order to support the smooth functioning of these markets, which are vital to the flow of credit in the economy. Our ongoing purchases have helped to restore orderly market conditions, and have fostered more accommodative financial conditions. As market functioning has improved since the strains experienced in March, we have gradually reduced the pace of these purchases. To sustain smooth market functioning and thereby foster the effective transmission of monetary policy to broader financial conditions, we will increase our holdings of Treasury and agency mortgage-backed securities over coming months at least at the current pace. We will closely monitor developments and are prepared to adjust our plans as appropriate to support our goals.
The Federal Reserve is also undertaking programs to provide stability to the financial system and to more directly support the flow of credit in the economy—for households, for businesses of all sizes, and for state and local governments. These programs benefit the economy by providing financing where it is not otherwise available. In addition, by serving as a backstop to key credit markets, the programs can increase the willingness of private lenders to extend credit. Many of these programs rely on emergency lending powers that are available only in very unusual circumstances, such as those we find ourselves in today. We are deploying these lending powers to an unprecedented extent, enabled in large part by financial backing and support from Congress and from the Treasury. We will continue to use these powers forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery. When the time comes, after the crisis has passed, we will put these emergency tools back in the toolbox.
Jerome Powell’s responses as indicated to the various questions:
JEANNA SMIALEK. Hi, Chair Powell. Thank you so much for taking our question. I’m — I’m curious about your inflation forecast, which are — are pretty low across the forecast horizon. I guess just, given how low you see inflation being over the coming years, why is policy appropriate now and why not just kind of throw everything you can and everything and the kitchen sink at it currently? And if — if you could just talk a little bit about what urgency you see in returning it back to that 2 percent target?
CHAIR POWELL. Our current policy stance is appropriate. And remember, we’re using – we’re using our — our emergency 13(3) lending tools to an unprecedented extent. We have asset purchases and we’ve now said that we won’t go any lower than this, and — but that we’re prepared to adjust, as appropriate, and rates are at the effective lower bound. So, we have all of our tools in — in use in a strong way. And so, what we’re — what we’re waiting for is to — is to learn more. I — I think, actually, if you look at the May employment report, it’s a pretty good — probably the biggest data surprise that anybody can remember. It’s a pretty good illustration of just how uncertain these times are. The economy is reopening, we’re going to learn a whole lot about the — the path of the economy in the next incoming months, so that’s really what we’re — what we’re looking for. In terms of inflation, you’ll know that we — we had a 128-month expansion and we never did quite get inflation back to 2 percent on a symmetric, sustained basis. We got close for the last couple of years, but we never did quite get there. So, I think we have to be humble about our ability to move inflation up, and particularly when unemployment is — is going to be above most estimates of the natural rate for — certainly above the median in our — in our — in our SEP, well through the end of — past the end of 2022. So, I do — I think we’re in the right place now, we — we are looking carefully at what the — as we learn more and — and better understand the — the path of the economy, we will be assessing, what’s the best way to deploy all of our tools to achieve our goals in the best possible way. And I’ll — I’ll just say again that we are — the — the May employment report, of course, was a — was a welcome surprise, very pleased. We hope we get many more like it, but I think we have to be honest, it’s a — it’s a long road, it’s – it’s — depending on how you count it, well more than 20 million people displaced in the labor market, it’s going to take some time, and we are going to be deploying our tools — all of our tools to their full extent in pursuit of that — of those goals, however long it takes.
JAMES POLITI. Thanks very much, Chair Powell. There have been plenty of comparisons with the Great Depression of the 1930s, since the crisis began. I mean is that scenario sort of got more dire as data comes out and we’re looking at a more traditional and sudden recession? And are you at all concerned that the performance — the strong performance in the stock market in the last few weeks is disconnected from economic reality?
CHAIR POWELL. I think that the — that the Great Depression isn’t a good example or a likely outcome or like a model for what’s happening here at all, I really don’t. And there — there are just so many fundamental differences. First, the government response has been so fast and so forceful, the origin was quite different. This was a very — an economy that was in a healthy place. Of course, every economy has longer run challenges, and that — and that includes our economy, notwithstanding that 50-year low in unemployment and the longest expansion in our history, and every reason to think it could continue. So, that’s different from what was happening around the time of the Great — the Depression started. The financial system, this time was in — was in — was in very good shape, much better capitalized. So, you know, it’s just not the right model. But I would say we’re learning, you know, every month that passes, we’re seeing more, we’re learning more. And I think particularly the next few months will be very important in learning what the — what the real story will be, because we’ll see the — the significant incoming data about the opening of the economy, the reopening of the economy. You know, and I would say, assuming that the — the — that the disease remains or becomes pretty much under control, I think that what you see is a — is a very weak second quarter, historically weak, and then an — an expansion that builds momentum over time. People will adjust probably a little bit gradually to some of the activities that would — that involve getting together in small — in large groups, in close quarters, those will be the harder parts of the economy to recover, but ultimately we do see a full recovery over time, and that’s really what — you know, what I think — I’m — I’m personally seeing. And you could see significant job growth in — in coming months, as people return to their jobs, but you’re still going to face probably an extended period where it will be difficult for many people to find work, and for — and that’s what you see in — in — in really many, many forecasts at this point. That doesn’t mean it’s right, but that’s sort of a — a broad expectation, certainly not the Depression forecast.
DON LEE. As you know, the vast majority of people who have been laid off are expecting to be recalled by their employers. At this point, what is your expectation of how much of these job losses will be permanent?
CHAIR POWELL. [INAUDIBLE] reliable estimate on that. Clearly, not everyone will go back. But — and I — I would say many will go back, but what’s — what’s going to be the remainder, you know, when we reach sort of what is the new normal? It’s — it’s so uncertain, but it — it could be a good number of millions of people, I think in many — in many estimates. But these — I’d say you’re so early in the process, people are — for example, people are going back and looking at other significant changes in the economy, and they’ve seen how many people go back when, for example, there’s a technological change, and things like that, you may have seen some of this research, and you come up with an estimate, you know, it’s just going to be very hard to say. I — I — but I — my — my assumption is that there will be a significant chunk — chunk, well into the millions. I — I don’t want to give you a number because it’s going to be a guess, but well, well into the millions of people who — who don’t get to go back to their old job and in fact, there isn’t a — there may not be a job in that industry for them for some time. There will eventually be, but it could be some years before we get back to those people finding jobs. I mean, when — when people lose a job, if they can find a job in their own industry, that’s usually the fastest way, is — is they know other people in that industry, different kinds of jobs, that’s usually the fastest. If you have to go to a different industry and start over again, it’s much harder, and that’s where you start to lose people who are, just fall out of the labor force. And — and you know, it’s very tough on their lives. We all know people to whom — to whom that happened in the global financial crisis. And hence, our desire to — to do what we can to support this and — and — and support this recovery with — with the tools that we have.
MICHAEL MCKEE. Mr. Chairman, Michael McKee with Bloomberg Television and Radio. I came across a statistic the other day that amazed me. Since your March 23rd emergency announcement, every single stock in the S and P 500 has delivered positive returns. I’m wondering, given the levels of the market right now, whether you or your colleagues feel there is a possible bubble blowing that could pop and setback the recovery significantly, or that we might see capital misallocation that will leave us worse off when this is over? Second, inequality is not just about wages, it’s also about wealth, and a number of studies have suggested that by keeping rates low for so long and targeting the markets after the great financial crisis, that the Fed did contribute to wealth inequality in this country. And I’m wondering if you think there is some tweak or some message you could give that would affect that?
CHAIR POWELL. What we’ve targeted is broader financial conditions. If you go back to the end of February and early March, you had basically the world markets realized at just about the same time, I remember that Monday, that there was going to be a global pandemic and that this possibility that it would be contained in one province in China, for all practical purposes, was not going to happen. It all — it was — you know, it was Iran, Italy, Korea, and then it became clear in markets. From that point forward investors everywhere in the world for a period of weeks wanted to sell everything that wasn’t cash or a — a short term treasury instrument. They didn’t want to have any risk at all. And so, what happened is markets stopped working. They stopped working and companies couldn’t — couldn’t borrow, they couldn’t roll over their debt. People couldn’t borrow. So, that’s — that’s the kind of situation that can be fair — financial turbulence and malfunction. A financial system that’s not working can greatly amplify the negative effects of what was clearly going to be a major economic shock. So, what our tools were — were put to work to do was to restore the markets to function. And I think, you know, some of that has really happened, as I — as I mentioned in my opening remarks, and that’s a good thing. So, we — we’re not looking to achieve a particular level of any asset price. What we want is investors to be pricing in risk, like markets are supposed to do. Borrowers are borrowing, lenders are lending. We want the markets to be working. And again, we’re not looking to — to a particular level. I think our — our principal focus though is on the — on the state of the economy and on the labor market and on inflation. Now inflation, of course, is — is low, and we think it’s very likely to remain low for some time below our target. So, really, it’s about getting the labor market back and getting it in shape, that’s — that’s been our major focus. And I would say — you know, we — if we were to hold back because — we would never do this, but the idea that, just the concept that we would hold back because we think asset prices are too high, others may not think so, but we just decided that that’s the case, what would happen to those people? You know, what would happen to the people that we’re actually, legally supposed to be serving? We’re supposed to be pursuing maximum employment and stable prices, and that’s what we’re pursuing. We’re also pursuing financial stability, but there you have a banking system that is so much better capitalized, so much stronger, better aware of its risks, better at managing its risks, more highly liquid. You have all of those things and they’ve been lending, they’ve been taking in deposits, they’ve been a source of strength in this situation. So, I would say that we’re tightly focused on our real economy goals. And — and again, not — we’re not — we’re not focused on moving asset prices in a particular direction at all. It’s just, we want markets to be working and I think partly as a result of what we’ve done, they are working and — you know, we hope that continues.
The Special Note summarizes my overall thoughts about our economic situation