By Jon Hurdle
PHILADELPHIA (MaceNews) – Philadelphia Federal Reserve President Patrick Harker said on Tuesday that interest rates will remain low until policy-makers see clear evidence that the economy is recovering from the Covid-19 pandemic.
“We have committed in the FOMC to move rates to essentially zero. The Fed Funds rate is between zero and 25 basis points so we are back to where we were during the financial crisis” of 2008-09, Harker said during a conference call on the national and regional economic outlook, hosted by the Delaware State Chamber of Commerce.
“We have committed to keeping rates there until we see, in my view – and I’m using my own words – a demonstrable move towards a normal economy, particularly with respect to unemployment and economic growth and of course inflation.
“Right now we are not seeing any pressure on inflation, in fact the opposite so that is not really a concern right now, but we have committed to keeping rates low for long until there is real measurable progress toward moving the economy back off this bottom that we’re hitting,” he said.
Asked to forecast unemployment over the next 12 months, Harker said there’s great uncertainty now over the shape of an economic recovery. “The reality is we don’t really know because it all depends on how seriously we take intelligently reopening.”
Amid warnings from top scientists that a hasty reopening could unleash a new wave of infection, Harker said: “It all comes down to our behavior. If we rush back into crowded places without the proper precautions, we could see this second wave, and in that case, we could see GDP take a pretty big hit again.
“If we don’t take our time to open intelligently – and I’m not saying not to open – that second wave could be very painful,” he said.
If that happens, consumers will “vote with their feet” and stay away from stores and restaurants, and “we could be back in a bad situation,” Harker said.
“I’m really hoping that our leadership throughout the country – governors and federal leadership – does take the time to intelligently reopen,” he said.
Harker said the coronavirus itself, not the shutdowns mandated by state governments, hurt the economy. “The economic slowdown, particularly on the consumer side, was observable even before states like Delaware took serious action to curtail the spread of the virus,” he said, noting that airline bookings and foot traffic into restaurants had already begun to crater before the states ordered closures.
He warned that the second-quarter economic data will be “brutally painful” as a result of the virus and the government-ordered shutdowns. “You can take your pick: bad, really bad, or really, really bad,” he said.
Beyond that — under an optimistic scenario — the economy would largely reopen in June, technology is in place to contain the virus, and there is no second wave, Harker said. If so, there would be a “severe contraction” in second-quarter GDP, followed by a significant rebound in the second half, although that would not be enough to fully offset the contraction in the first half of the year.
But in a less-hopeful scenario, the economy would reopen too quickly, unleashing a second wave of infections and reversing a recovery. Those circumstances would lead to a “painful” contraction in 2021 as shutdowns were reintroduced.
In the longer term, there will be a recovery but it may be uneven, with consumer-related industries such as retail and restaurants continuing to suffer. Some may close permanently, he warned.