Chicago’s Federal Reserve chief responds to economic crisis in Mid-Year Economic keynote

Chicago Fed President and CEO Charles Evans offers his thoughts on the current economic situation and the road ahead, while in-person attendees listen on as part of the CBJ’s June 24 Mid-Year Economic Review event. PHOTO BRIAN DRAEGER

By Dave DeWitte

Despite unprecedented fiscal and monetary intervention, the U.S. economy is likely to take more than two years to get back to the pre-COVID levels of the fourth quarter of 2019.

That was the outlook of Federal Reserve Bank of Chicago President and CEO Charles Evans, who suggested at the CBJ’s 2020 Mid-Year Economic Review that even more stimulus might be needed.

“The economic impact has been catastrophic for many individuals and businesses,” said Mr. Evans, speaking remotely to the June 24 event at the Coralville Marriott.

He noted that unemployment has skyrocketed from a 50-year low of 3.5% at the end of 2019 to 13.5% in May, and that the Federal Open Market Committee’s (FOMC’s) consensus view is that GDP, the broadest measure of the nation’s economic output, will shrink 6.5% for the year.

The Federal Reserve System “will use every tool at its disposal” to bring the economy out of recession, Mr. Evans said. However, with states reopening their economies, there remains a vast amount of uncertainty surrounding how fast economic activity will recover, and much will depend on finding public health solutions that restore safety and confidence.

As the shutdowns of nonessential businesses began and non-essential travel came to a near-halt in March, the FOMC cut the benchmark interest rate, known as the overnight rate, to a range of 0-0.25% in March to boost the economy. Most FOMC members surveyed don’t think it will rise from that level through the end of next year. The federal government also launched a $2.1 trillion series of fiscal stimulus programs to blunt the impact on households, hospitals, businesses, state governments and bondholders.

There is evidence the stimulus programs have helped, Mr. Evans said, citing unemployment statistics for May showing an unexpectedly large drop. He said it’s not clear the May jobless figures are that meaningful, however, and he finds predicting the economy’s movements with any accuracy impossible now because of the uncertain timing surrounding public health solutions to the pandemic, which will largely determine how fast consumer spending and business activity return.

“The future is more uncertain now than at any other time in my professional career,” Mr. Evans said, adding, “We really are in uncharted territory.”

Appointed in 2007, Mr. Evans is the longest serving Federal Reserve Bank president on the 12-member FOMC, which sets monetary policy. His view that the economy won’t return to its pre-COVID-19 level until the fourth quarter of 2022 is largely in line with the broad consensus view of the committee, but he stressed that he anticipates temporary and intermittent flare-ups of COVID-19 after the economy reopens that will require costly public health interventions until more permanent solutions are found.

At the June FOMC meeting, members forecast that the economic recovery will begin in the second half of this year. After a 6.5% GDP decline this year, the FOMC median estimate calls for a 5% rise in 2021, and a 3.5% rise in 2022.

The committee’s median unemployment rate forecast is for a decline to 9% at the end of 2020, and to 5.5% by the end of 2022.

“That is nearly 1.5% above the median participant’s estimate of its long-run normal level, so it’s going to take some time to get back to the labor market situation we enjoyed at the end of 2019,” Mr. Evans said.

The median FOMC inflation projection for the year is 1.1%, rising only to 1.7% by the end of 2022. Mr. Evans called the low inflation rate “fragile,” falling short of the FOMC’s 2% inflation target. Insufficient inflation signals that consumer spending is weak, and is associated with recessions.

In response to audience questions, Mr. Evans poured cold water on the idea that massive stimulus spending will lead to hyperinflation. He said fears of inflation that led to calls for rate increases during the recent economic expansion largely proved unwarranted, and that reining in interest rates to slow the economy would have suppressed much of the growth that produced jobs and economic opportunity.

He also saw little likelihood of the Fed using negative interest rates, even though central banks in some other countries have taken that approach. In that scenario, borrowers would be credited interest for the loans they take out, and bank depositors required to pay a storage charge.

While concerned about the trillions the government is spending on stimulus programs, Mr. Evans indicated the cost is far better than the alternative of a long-term recession. He said the government will “need to figure out the fiscal prudence,” though this is not the time.

While he expects GDP to recover, Mr. Evans was quick to point out that the economic growth that would have occurred in the interim will be permanently lost. Further reinforcing the need for a proactive approach, he voiced concerns that the recession is wiping out the wage and employment gains that Black, Latinx and female workers were beginning to make during the nation’s longest economic expansion on record.

“After the Great Recession it took many years for the economic recovery to translate into employment and wage gains for disadvantaged workers,” he said. “Even then, there were concerns that these gains were not totally widespread and would not persist. Distressingly, the grim situation we currently face risks jeopardizing those gains. The longer the current recession lasts or the weaker the recovery is, the greater the risk of lasting damage for female, minority, younger and less skilled workers.”

Prolonged periods of unemployment can have lasting effects on productivity and income, Mr. Evans noted, adding that minority, female and younger households have fewer savings to tap in an emergency, and may face greater risk of bankruptcy.

The CBJ’s Mid-Year Economic Review was presented by Bankers Trust, with support from CLA, MidAmerican Energy, Strategic Financial Solutions and UFG Insurance. Following public health precautions, it was the first CBJ event held before a live audience since the pandemic, attracting about 50 physical attendees and nearly 700 online.   CBJ