A senior Federal Reserve official has warned that the failure to reach a deal on a hefty package of additional stimulus measures for the US economy could throw a wrench into a rebound from the coronavirus pandemic.
In one of the most direct interventions on fiscal matters from a leading US central banker, Charles Evans, president of the Federal Reserve Bank of Chicago, said the course of the US recovery would “critically depend” on “substantial additional support” from fiscal authorities to avoid sharp reductions in household spending and a wave of business failures.
“Partisan politics threatens to endanger additional fiscal relief. A lack of action or an inadequate one presents a very significant downside risk to the economy today,” he added.
The call from Mr Evans signals growing alarm within the US central bank at the stalemate in Washington over a fresh injection of fiscal stimulus, with the White House and Republicans on Capitol Hill at odds with Democrats over the size and details of a new package.
While the Democratic-led House of Representatives in May passed a bill allowing $3tn in new spending — on top of the $3tn authorised in previous legislation — Republicans and the Trump administration have balked at the cost, among other provisions. Despite multiple rounds of negotiations, a compromise has been elusive.
The impasse has already left millions of unemployed Americans with much-reduced federal jobless benefits cheques after $600-a-week payments introduced at the start of the pandemic expired at the end of July.
It has also left many small businesses across the country uncertain about whether they will receive a new round of federal support to stay afloat, after spending the bulk of funds allocated to them in the initial weeks of the Covid-19 crisis.
State and local governments have been particularly hard hit by the lack of federal aid to help shore up their finances. Democrats’ calls to provide them with more assistance has been met by strong resistance from Republicans and the White House.
The Fed’s Mr Evans made a strong case for additional funding to state and local governments, saying they may be forced to take “some difficult actions” if no deal was reached.
“They could cut back on the provision of health resources or other social services, which would make battling the virus and the recession even more difficult. And they might end up furloughing workers, which could have large effects, as state and local governments account for about 13 per cent of total employment,” he said.
Fed officials normally try to avoid making specific fiscal policy recommendations, arguing that it is the realm of elected officials.
Throughout the coronavirus crisis, Jay Powell, the Fed chairman, and his colleagues have been more vocal about the importance of continuing to offer fiscal support for the US economy — though not quite as forcefully as Mr Evans was on Thursday in remarks to the Lakeshore Chamber of Commerce in Hammond, Indiana.
Negotiations over a new fiscal stimulus bill are expected to take centre stage next week as many lawmakers return to Washington after the summer recess, in the hope that a deal can be reached by the end of the month to coincide with a deadline to fund government operations.
Republicans who control the Senate are expected to propose a smaller package of measures, worth about $500bn. Chuck Schumer, the top Democrat in the Senate, has already dismissed it as “emaciated”.
“Their proposal appears to be completely inadequate and, by every measure, fails to meet the needs of the American people,” Mr Schumer said.
In his remarks, Mr Evans said he was expecting unemployment to drop to about 9 per cent by the end of the year and reach about 5-5.5 per cent by the end of 2022. But even a slow recovery is predicated on making progress in containing coronavirus, as well as additional fiscal support, the Chicago Fed chief said.