Fed officials warn of long road ahead for U.S. economic recovery

Federal Reserve officials are hanging up hopes for a V-shaped economy recovery, warning that the U.S. economy is at risk of suffering damage that could make for a bumpy road in the short to medium-term.

“My own forecast would be a couple very difficult months ahead of us,” said New York Fed President John Williams Thursday. Williams said he would expect some recovery in the second half of 2020, but emphasized that the question will be: “how strong.”

In a separate webcast Thursday, Fed Vice Chairman Richard Clarida also said he expects some recovery in the second half of 2020. But Clarida expressed skepticism that regular economic activity will return to pre-crisis levels after the economy re-opens.

“The net effect, I believe, will be for aggregate demand to decline relative to aggregate supply, both in the near term and over the medium term,” Clarida said. With social distancing measures likely to be enforced well after shelter-in-place measures are lifted across the country, the absence of a vaccine may keep restaurants, bars, and planes from returning to normal crowds.

Both Williams and Clarida committed to keeping interest rates at near-zero for some time.

Those comments echo those of Fed Chairman Jerome Powell, who said May 13 that the COVID-19 crisis could wreak longer-term and “lasting damage” in the form of en masse bankruptcies and skills deterioration among the working classes.

In brief remarks Thursday, Powell reiterated his concern that low-income households are among the most vulnerable. Fed research shows that 39% of households making less than $40,000 a year experienced a job loss in March.

“Those taking the brunt of the fallout are those least able to bear it,” Powell said during a Fed-hosted listening session featuring small business owners and community groups from across the country.

Business owners like Boston-based Joanne Chang said sales have been down about 75% to 80% and worries that to keep workers reasonably spaced from one another, she won’t be able to restaff all of the workers that she had to furlough.

“We certainly hope to be able to grow to the point where we need everybody back but realistically with social distancing we don’t think that’s going to be the case,” Chang said.

Fed officials hope that low interest rates, asset purchases, and its nine liquidity facilities will set the U.S. economy up for a fast recovery. But in the absence of a vaccine, the Fed has emphasized that the pace of recovery is extremely uncertain.

The Fed’s next policy-setting will take place June 9 and 10, in which the Fed will offer an updated set of economic projections.

Powell quoted John Kenneth Galbraith on Thursday, joking that “economic forecasting exists to make astrology look respectable."

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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