Janet Yellen, the former chairwoman of the Federal Reserve, warned Monday that the longer the economy is locked down, the worse the recession will be. But she added she was encouraged by the actions of the Fed and the Congress to support the economy.
“It’s impossible to know at this point how deep the recession will be,” said Yellen, who served as chairwoman of the Fed from 2014 to 2018. “It depends critically on how long the period of social distancing lasts.”
Speaking as part of an online panel hosted by the Brookings Institution, Yellen said the hope is that the “lockdown” can be lifted in May and economic activity will begin to return to normal in early summer. “But a longer period of confinement certainly seems possible,” she said, adding “there could be a second wave of infections after activity resumes.”
Yellen, a distinguished fellow at Brookings, praised the Fed, saying she has “never seen a more rapid Fed response, and they’re giving it their absolute all, they’re throwing everything they possibly can into responding quickly.” She also expressed support for the $2.3 trillion economic package passed by Congress and signed by President Donald Trump last week.
Yellen said in a best-case scenario, an economic recovery could resume in the fourth quarter of the year. But she said it’s possible that economic damage that occurs in the meantime “could lead to a prolonged recession.”
Among her worries, she said, are that companies will continue to lay off workers despite the package passed by Congress, and that firms experiencing losses will cut back on investment and employment. Disruptions in global supply chains are also a threat, she said, adding that consumers and businesses may tighten their belts and restrain spending even after health concerns abate.
Yellen said the fall in economic growth “could easily be 20 percent or higher” in the second quarter of the year, and she said she expects a “very large rise in unemployment.” Unemployment claims vaulted to more than 3 million last week, which she said suggests the unemployment rate may already have risen to 5.5 percent, a 2 percentage point increase from February.
The cost of borrowing has risen because lenders are fearful of losses and default, she said. But she added that the Fed is “doing everything they can to keep financial markets functioning and credit available to households and firms.”
She credited the Fed with lowering its target range for short-term interest rates, resuming the purchase of assets including Treasuries and mortgage backed securities, restarting most of the emergency lending facilities it put in place during the 2008 financial crisis and inventing “some new ones to deal with problems that weren’t so important back then.”
Yellen said while the huge increase in federal borrowing needed to finance spending will raise debt held by the public as a share of the economy, the spending is needed to prevent “even more of an economic collapse.”
“I think we’re still in a world of very low interest rates as far as the eye can see, and so I don’t think there’s going to be an unmanageable additional debt burden and interest burden because of the spending that we're doing now,” she said.
In its March baseline, the Congressional Budget Office estimated debt held by the public would reach $17.8 trillion in fiscal 2020, or about 80 percent of an estimated $22.1 trillion in gross domestic product. But those estimates do not account for the recent legislation passed to combat the pandemic.