Fed Warns of High Downside Risks
In its semiannual monetary report to the Senate Finance Committee the Fed warns of six downside risks.
The risks are not spread evenly. Low wage earners and small businesses are particularly vulnerable.
Please consider the Fed’s Monetary Policy Report to the Senate Committee on Banking, Housing, and Urban Affairs and to the House Committee on Financial Services.
The report is 66 pages long and is full of interesting charts and comments.
Let’s start with Powell’s statement on risk: “Despite aggressive fiscal and monetary policy actions, risks abroad are skewed to the downside.”
Six Downside Risks
- The future progression of the pandemic remains highly uncertain.
- The collapse in demand may ultimately bankrupt many businesses.
- Unlike past recessions, services activity has dropped more sharply than manufacturing—with restrictions on movement severely curtailing expenditures on travel, tourism, restaurants, and recreation and social-distancing requirements and attitudes may further weigh on the recovery in these sectors.
- Disruptions to global trade may result in a costly reconfiguration of global supply chains.
- Persistently weak consumer and firm demand may push medium- and longer-term inflation expectations well below central bank targets.
- Additional expansionary fiscal policies— possibly in response to future large-scale outbreaks of COVID-19—could significantly increase government debt and add to sovereign risk.
Labor Market
The severe economic repercussions of the pandemic have been especially visible in the labor market. Since February, employers have shed nearly 20 million jobs from payrolls, reversing almost 10 years of job gains. The unemployment rate jumped from a 50-year low of 3.5 percent in February to a post–World War II high of 14.7 percent in April .
Unemployment Rate by Race
Labor Force Participation Rate
Employment Declines by Wage Group
Low Wage Earner Employment
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