"So there is clearly a risk of a second outbreak or a second wave. And you know, that will be challenging," Powell made the remarks on Friday in a virtual discussion with former Fed Vice Chairman Alan Blinder, held by the Princeton University. "I think a second wave would really undermine public confidence and might make for a significantly longer recovery and weaker recovery," Powell said.
The Fed has gone all out to steady financial markets since March, lowering borrowing costs and creating credit backstops for companies and local governments reeling from the economic fallout of lockdowns to stop the spread of the novel coronavirus.
More than 101,000 Americans have died from Covid-19, the respiratory illness caused by the virus, and many health officials are worried that infections could spike in the weeks and months ahead as states reopen their economies.
Powell, a graduate of Princeton, spoke a few hours before his youngest daughter was to graduate from the Ivy League college.
"We of course would continue to react," Powell said. "We are not close to any limits that we might have, I would say ... but I would worry almost more that a second outbreak would undermine confidence."
The remarks were a somber reminder that the trajectory of the crisis facing the Fed is a function of the public's health, a factor over which the world's most powerful central bank has no control.
The US central bank has announced 11 programs to cushion the effects of the economic cratering, and all but two have come on line. The Fed is "days away from making our first loans" under the "Main Street Lending Program" to medium-sized companies, Powell said on Friday, and weeks from opening a lending program for states, counties and large cities.
Investors are now thirsty for clues about when the Fed may restart large-scale bond-buying and firm up promises about how long the purchases might continue. Powell's remarks, his last public ones before the Fed's June 9-10 policy meeting, did little to slake that thirst.
Asked about limits to the Fed's crisis toolkit, for instance, Powell said there were few, noting that in fighting "an emergency of a nature we haven't really seen before ... we crossed a lot of red lines that had not been crossed before, and I am very comfortable that this is that situation where you do that."
The Fed's lending programs are backstopped by the US Treasury under rules reserved for emergencies. And in an effort to stabilize financial markets, the Fed has ballooned its balance sheet, which it had been trimming before the coronavirus pandemic, to a record-setting level of more than $7 trillion (5.7 trillion pounds). It may need to do more before the crisis is over, to keep borrowing rates low even as the economic recovery takes hold.
STAYING THE COURSE
Powell has repeatedly promised to keep monetary policy loose until the recovery is well on its way and the US unemployment rate
- widely expected to surpass 20 per cent in the second quarter - has returned to healthy levels. Global investors have been doing the Fed's work so far, bidding down US Treasury yields to record-low levels - the yield on the benchmark 10-year note has been below 1.0 per cent since late March.
But between a possible economic rebound and the trillions in extra debt the Treasury is in the midst of issuing to help pay for the economic rescue, pressure may build in the other direction, and market analysts are pushing for guidance.
Powell offered none on Friday, though he suggested the Fed would stay the course for now.
"Of course our balance sheet can't go to infinity," he said. "I would say that I am comfortable with where we are now and the path we are on, and don't see risks based on what we're doing right now to inflation or to financial stability."
When asked about the Fed's stance on negative interest rates, Powell said "we don't think that that's an inappropriate tool here in the US".
"I would say the evidence on whether it actually works is mixed," he said. "There were clearly some negative side effects."
In response to the Covid-19 crisis, the Fed cut interest rates to near zero at two unscheduled meetings in March and began purchasing massive quantities of US treasuries and agency mortgage-backed securities to repair financial markets.
The central bank also announced a Main Street Lending Program, among other things, to help medium-sized businesses hit by the Covid-19 pandemic. Businesses with up to 15,000 employees or up to $5 billion in annual revenue are eligible.
The Fed is only "days away" from making its first loans to midsize businesses under the new Main Street Lending Program, Powell said, noting that it will offer loans in sizes between half a million and $100 million.
The Commerce Department on Thursday revised down the GDP in the first quarter to a 5.0 per cent annualised contraction in a second estimate, 0.2 percentage point lower than the advance estimate in April. Despite the revision, analysts say the figure still does not fully capture Covid-19's economic damage.
Powell recently said the unemployment rate could peak around 20 per cent or 25 per cent, and the US economy
could shrink dramatically in the second quarter, at an annualised rate of more than 20 per cent or 30 per cent.