The relationship between United States President Donald Trump and Federal Reserve chief Jerome Powell has been anything but a bromance. Trump has never shown any pretence of respecting the US central bank’s independence, while the Fed chief has staunchly refused to indulge Trump’s Twitter bullying on interest rates and other monetary policy matters.
This week, that fraught dynamic was on full display as the two most powerful officials in the world’s most powerful economy offered starkly divergent views on the shape and timing of the US economic recovery.
This is not dry, academic bickering for the ivory tower set. Tens of millions of Americans have been thrown out of work since coronavirus lockdowns swept the nation in March. And given the arbiters of the US business cycle declared this week that the US officially plunged into recession in February, the pressing question for most of the country is how long will it take for the economy – and crucially, the jobs market – to recapture their pre-pandemic mojo.
‘U’ vs ‘V’ shaped recovery
Powell and his fellow policymakers at the Federal Reserve served up sobering reality sandwich to chew on at the conclusion of their two-day meeting on Wednesday.
While the Fed sees the economy picking up in the second half of this year, it still expects it to shrink 6.5 percent in 2020. The unemployment rate, which clocked in at 13.3 percent in May, is forecast to only come down to 9.3 percent by year’s end. Moreover, the Fed doesn’t see it returning to its pre-pandemic February level of 3.5 percent until the end of 2022.
Those data points spell a “U-shaped” recovery, in which growth plummets, then stagnates for a few quarters before picking up steam again.
Meanwhile, Trump, who is pinning his re-election hopes on his stewardship of the economy, has been promoting the idea of a V-shaped recovery. That’s when the economy tanks sharply and then comes roaring back just as swiftly.
That best-case scenario narrative was on full display after the May jobs report surprised economists everywhere by showing the economy added 2.5 million jobs last month, rather than lose millions more.
When the report dropped, Trump framed it as “the greatest comeback in American history”.
Chairman Powell was far more circumspect during his webcast on Wednesday, telling reporters that while the May jobs report was a welcome surprise, “I think we have to be honest. It’s a long road”, given more than 20 million people are currently displaced in the labour force.
That grim assessment poured pessimism all over US stock markets that have been driving higher over the past few months on the belief that a V-shaped recovery was in the offing.
On Thursday, as the major stock indexes cruised towards their worst session since March’s historic selloffs, Trump took the Fed to task on Twitter.
“The Federal Reserve is wrong so often. I see the numbers also, and do MUCH better than they do. We will have a very good Third Quarter, a great Fourth Quarter, and one of our best ever years in 2021. We will also soon have a Vaccine & Therapeutics/Cure. That’s my opinion. WATCH!” said Trump.
The Federal Reserve is wrong so often. I see the numbers also, and do MUCH better than they do. We will have a very good Third Quarter, a great Fourth Quarter, and one of our best ever years in 2021. We will also soon have a Vaccine & Therapeutics/Cure. That’s my opinion. WATCH!
— Donald J. Trump (@realDonaldTrump) June 11, 2020
The unequal recovery
The different takes on the economy by Trump and Powell did not stop at forecasts. They cut right to the heart of the unrest that has swept the US since unarmed African-American man George Floyd was killed in police custody last month.
Last Friday, Trump touted the May jobs report as a “great day” for George Floyd, and “a great, great day in terms of equality” even though the African American unemployment rate rose last month, while the jobless rate for whites declined. The Latino jobless rate ticked down as well in May, but at 17.6 percent, it was the highest when broken out by race or ethnicity.
Powell did not paper over these stark inequalities. He highlighted them on Wednesday, in what was undoubtedly the wokest news conference to date by a Fed chief.
“The downturn has not fallen equally on all Americans and those least able to shoulder the burden have been the most affected,” he said. “The rise in joblessness has been especially severe for lower-wage workers, for women, and for African Americans and Hispanics.”
And he didn’t stop there …
“I want to acknowledge the tragic events that have again put a spotlight on the pain of racial injustice in this country,” Powell continued. “I speak for my colleagues throughout the Federal Reserve System, when I say that there’s no place at the federal reserve for racism and there should be no place for it in our society. Everyone deserves the opportunity to participate fully in our society and in our economy.”
It is worth noting that while the Fed acknowledges disparities, it still has a lot of work to do to redress racial, ethnic and gender imbalances within its own ranks. This is crucial, because as former Fed chair Janet Yellen put it recently, “Diversity is important in ensuring that the research that is done within economics appropriately reflects society’s priorities.”
Loads of uncertainty
Of course, all projections surrounding a US economic recovery are shrouded in uncertainty.
So far, Congress has authorised roughly $3 trillion in spending to help businesses, industries and workers weather the downturn. Powell said this week, “It’s possible that Congress will need to do more.”
US Treasury Secretary Steven Mnuchin, the Trump administration’s lead negotiator on virus relief packages, told CNBC on Thursday he is prepared to ask lawmakers for more money, but those funds would be targeted to sectors that need it most, like the restaurants, hotels and travel.
The greatest unknown though is the potential for a second wave of COVID-19 infections.
Mnuchin said on Thursday, “We can’t shut down the economy again.”
But as Powell pointed out on Wednesday, avoiding lockdowns in the event of a resurgence of infections is no guarantee that the recovery won’t be set back further.
“You could see a public loss of confidence in parts of the economy, that will be already slow to recover so it could hurt the recovery, even if you don’t have a national level pandemic just a series of local ones,” he said.