Fed’s Jerome Powell: More spending by Congress may be needed to avoid long-term economic damage

Federal Reserve Chairman Jerome H. Powell said Wednesday that Congress might need to spend more on coronavirus relief to pull the nation out of an economic crisis that has cost more than 20 million jobs.

“While the economic response has been both timely and appropriately large, it may not be the final chapter, given that the path ahead is both highly uncertain and subject to significant downside risks,” Mr. Powell said in a webcast event with the Peterson Institute for International Economics.

Markets sank in a sign of pessimism after Mr. Powell’s warning about the threat of a prolonged recession. The Dow Jones Industrial Average fell 2.2% to 23,248, while the S&P 500 fell 50 points, or 1.7% to 2,820.

Mr. Powell’s comments came a day after House Democrats announced a $3 trillion measure to provide more aid to states and cities, as well as for laid-off workers. Congress and the White House have already approved about $2.8 trillion in aid for businesses, workers and states to weather the crisis.

“Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery,” he said. “This tradeoff is one for our elected representatives, who wield powers of taxation and spending.”

The Fed has cut its prime lending rate to near zero and rolled out several lending and liquidity programs.

The unemployment rate in April rose to 14.7%, and many analysts believe the jobless rate will rise to more than 20% this month. Gross domestic product is expected to plunge deep into negative territory in the second quarter.

Among people who had been working in February, nearly 40% of households earning less than $40,000 a year lost a job in March, he said.

Mr. Powell cautioned that numerous bankruptcies among small businesses and extended unemployment for many people remain a serious risk.

“We ought to do what we can to avoid these outcomes,” he said.

The chairman of the central bank made clear his concern that a recession may last long enough to cause extensive damage to the economy and make a recovery weaker and slower. In such a scenario, unemployed workers would lose skills and their connections in the job market, making it harder for them to find new employment. And with many small businesses bankrupt, fewer companies would be available to hire the jobless.

“Deeper and longer recessions can leave behind lasting damage to the productive capacity of the economy,” the chairman warned in his prepared remarks before holding the online discussion. “Avoidable household and business insolvencies can weigh on growth for years to come.”

χ This article is based in part on wire service reports.