Federal Reserve Board Chairman JeromePowell. (Photo: Bloomberg)

A day after congressionalDemocrats revealed an additional $3 trillion economic relief planfor an ailing economy, Federal Reserve Chairman Jerome Powellcrystallized the choice before legislators: more, expensive fiscalsupport or prolonged economic damage.

In a speech to the PetersonEconomic institute, Powell noted that the current downturn is"unprecedented" in its "scope and speed" and "worse than anyrecession since World War II."

It "has caused a level of painthat is hard to capture in words, as lives are up-ended amidgreater uncertainty about the future," said Powell, noting thatalmost 40 percent of Americans who were working in February andearning less than $40,000 a year lost their jobs in March. At lastcount, 33 million Americans have filed for unemployment benefitssince late March, wiping out more than a decade of job gains, andthe U.S. unemployment rate for April soared to 14.7percent.

The fiscal response to theselosses, providing roughly $2.9 trillion to households, businesses,healthcare providers, and state and local governments is equivalentto about 14 percent of GDP. It has been "the fastest and largestresponse for any post-War downturn," said Powell. But it may not beenough.

"Deeper and longer recessions canleave behind lasting damage to the productive capacity of theeconomy," Powell said. Long stretches of unemployment can damage orend careers, leaving families in deep debt. The loss of thousandsof small and medium-size businesses can destroy a life's work andfamily legacy—and, along with reduced business investment andexpansion, limit the scope of the economic recovery, explainedPowell.

"We ought to do what we can toavoid these outcomes, and that may require additional policymeasures," said Powell.

He noted that the Fed willcontinue to use its tools "to their fullest" until the economicrecovery is well under way, but that will taketime.  

"Additional fiscal support couldbe costly but worth it if it helps avoid long-term economic damageand leaves us with a stronger recovery," said Powell. "Thistradeoff is one for our elected representatives, who wield powersof taxation and spending."

In the Q&A with theinstitute's president, Adam Posen, following his speech, Powellnoted that the Fed doesn't play a formal role in fiscal policy andwon't take a position about particular bills. "It's not our role tosupervise Congress. It's the other way around. They have oversightover us." 

He said the Fed—which hasundertaken multiple programs to support the economy, including arevived quantitative easing program; expanded swap lines; andlending programs for businesses, consumers, and state and localgovernments—remains committed to innovating in response to theeconomic crisis, but he noted its limitations.

"We can make loans to solventborrowers who don't have access to other private sources ofcapital. … The passage of time is really all it takes to turn aliquidity problem into a solvency problem. We'll be a big help tocompanies for a while, but over a longer period of time it may bethat more fiscal help is needed."

Powell said the Fed's Main Streetlending program for small and midsize businesses that lack access to capital markets will be live in a fewweeks. 

From: ThinkAdvisor