Optimism in the Time of COVID; Businesses Seem Much Better Adapted to Remaining Open

Federal Reserve: Optimism in the Time of COVID; Businesses Seem Much Better Adapted to Remaining Open

September 23, 2020 Vice Chair for Supervision Randal K. Quarles, Federal Reserve Randal Quarles

At the 2020 Virtual D.C. Summit, Institute of International Bankers, Washington, D.C. (via webcast)

I want to thank the Institute of International Bankers for inviting me to discuss the outlook for the global and U.S. economies at what I believe is an important juncture in the evolution of what I refer to as the "COVID event": the outbreak of COVID-19 and the government and social response to it.

First, I will discuss the global economy before turning to our domestic economy and its outlook. From there, I will discuss my views on monetary policy, including the new long-run monetary policy strategy recently announced by the Federal Open Market Committee (FOMC). And I will wrap up with a brief discussion on financial stability and regulatory issues.

Let me start with a picture of the global economy. Although challenges remain, especially among some emerging market economies, significant support to households and businesses from central banks and fiscal authorities has contributed to a strong rebound in a number of advanced and some emerging Asian economies since those countries began to loosen restrictions. In these economies, the reopening of factories has led to a resurgence of industrial production. Retail sales are rebounding and in some countries are already above levels seen before the COVID event. However, international trade has been slower to increase.

The extent of the recovery in some jurisdictions has been surprisingly robust compared to many analysts' expectations earlier this year. The momentum is feeding into many private-sector forecasts that suggest prospects are good for strong economic growth in the United States and other advanced economies over the rest of this year and next. However, the hole that countries are in remains deep, and significant downside risks still exist.

Perhaps the most discussed risk has been that a "second wave" of the virus could trigger a return to widespread mobility restrictions and business closures. Several countries, including some portions of the United States, have seen a substantial resurgence of infections in recent months. This has been accompanied, however, by substantially lower hospitalization and death rates in most cases, and so far most countries have been able to address the resurgence without reinstituting severe restrictive practices. Mobility indexes have been little changed in Europe and the United States, and the declines in Asia have been modest.1 Businesses — which have adjusted operations and, in some cases, changed business models — seem much better adapted to remaining open. I am also hopeful that better testing, tracing, and treatment regimens, as well as improved understanding by the public about how to manage the risks of the disease, will allow firms, individuals, and governments to address public concerns about the virus while avoiding a second severe downturn or a protracted stagnation.

Still, the economic fortunes of households and businesses around the world remain at risk. Incomes and employment are likely to lag below pre-COVID event levels for some time, which would put stress on the finances of many families. Some people may remain reluctant to return to full engagement in social and economic life, weighing especially on the service sector. Even with support from monetary and fiscal policy, large numbers of businesses may close. These closures may lead to some longer-term scarring of the economy through lower investment, reduced capacity, and long-term unemployment leading some to drop out of the labor force altogether. While I am optimistic that recovery is underway and the worst outcomes can be avoided, these concerns suggest that policymakers around the world need to remain watchful and ready to act further.

Now let me focus on U.S. economic conditions and the outlook. The historic collapse in economic activity in March and April will take time to reverse. However, the economy has rebounded more strongly than almost any forecaster expected. That resilience reflects the economy's underlying strength upon entering the recession and demonstrates its inherent flexibility, as well as the dynamism of the American people. For example, the Census Bureau reports that applications by people seeking to start new businesses have surged this summer.2

The median of projections for 2020 by FOMC participants in September showed that both gross domestic product (GDP) and inflation had been revised up significantly from the median in the June projections.3 I expect that robust GDP growth over the rest of this year and in 2021 will lead to strong employment gains and move inflation closer to 2 percent. I would still caution that there is an unusually large amount of uncertainty now about any outlook, and I see the risks to the outlook as weighted to the downside. However, given the trends I previously discussed in the way countries are adjusting to the COVID event, I am optimistic that the United States can avoid the highly adverse outcomes that many feared would materialize.

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Federal Reserve: Optimism in the Time of COVID; Businesses Seem Much Better Adapted to Remaining Open

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