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Fed officials warn on ‘thick fog’ ahead for U.S. economy as recovery concerns deepen

WASHINGTON (Reuters) – The U.S. economy will have a slower-than-expected recovery amid a surge in novel coronavirus cases across the country, and a broad second wave of the disease could cause economic pain to deepen again, Federal Reserve officials warned on Tuesday.

FILE PHOTO: Federal Reserve Board building on Constitution Avenue is pictured in Washington, U.S., March 19, 2019. REUTERS/Leah Millis

One by one, Fed policymakers have become more downbeat in recent days, resetting expectations on the recovery and cautioning that recent improvement in economic data such as job gains may be fleeting.

“The pandemic remains the key driver of the economy’s course. A thick fog of uncertainty still surrounds us, and downside risks predominate,” Fed Governor Lael Brainard said in a speech to a virtual event hosted by the National Association for Business Economics.

She called on the U.S. central bank to commit to providing sustained accommodation through forward guidance and large-scale asset purchases, and said additional fiscal support would be “vital” to the strength of the recovery – particularly with the first round of pandemic economic support programs expiring soon.

The Fed has since March slashed interest rates to near zero, ramped up large-scale asset purchases and launched numerous other crisis programs designed to grease the U.S. financial system and funnel credit to households and businesses.

U.S. coronavirus cases rose in 46 out of 50 states last week and deaths rose nationally for the first time since mid-April, according to a Reuters analysis.

Richmond Fed president Thomas Barkin warned on Tuesday that U.S. unemployment could rise again as businesses adjust to a likely longer recession than first anticipated, and initiatives like the Paycheck Protection Program (PPP) expire.

“A bunch of companies large and small are realizing this is not a two-month issue and recasting their business,” possibly jeopardizing two strong months of job growth, Barkin said in webcast remarks to the Charlotte Rotary Club.

Small business recipients of PPP loans, meanwhile, may have kept employees on staff to meet the terms of loan forgiveness, but may now consider laying them off as the program expires and demand remains weak.

Fed officials initially hoped that the virus would be brought swiftly under control in the United States to allow the economy to bounce back quickly, and admitted that the forecasts for economic growth made at their last policy meeting in June largely did not factor in the possibility of a second wave.

The renewed surge in cases has prompted some states to dial back or pause reopenings at a time when other advanced nations around the world have been able to reopen their economies more sustainably due to successful mitigation strategies.

A more “granular” health strategy, including ubiquitous mask usage, is needed to avoid a possible economic depression, St. Louis Federal Reserve President James Bullard also said on Tuesday in comments to the Economic Club of New York.

Bullard said his base case is that the economy continues to grow in the second half of the year but “the downside risk is nevertheless substantial, and better execution of a granular, risk-based policy will be critical to keep the economy out of depression,” Bullard said. He said he expected Congress by the end of the month to approve a “substantial” new fiscal package to keep households and businesses stable during the fight against the virus.

Brainard warned that a broad second wave of infections could even prompt a second dip in activity as well as reignite financial market volatility at a time of greater vulnerability.

“Nonbank financial institutions could again come under pressure … and some banks might pull back on lending if they face rising losses,” Brainard said.

Reporting by Lindsay Dunsmuir; Editing by Andrea Ricci and Jonathan Oatis

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