There is a “hopeful possibility” that the sharp recession facing the country can be a “temporary downturn,” but this optimistic view comes with several cautionary notes, said Chicago Federal Reserve President Charles Evans, on Tuesday.
“There are many caveats in the hopeful story line, and many, many things must go right in order to minimize the economic pain,” Evans said, during a discussion with students at Carnegie Mellon University in Pittsburgh.
Evans said a candid assessment of the economy is that a deep downturn cannot be avoided.
The trillions of dollars the federal government and the U.S. central bank are providing to cushion the blow from the pandemic has created a chance that the economy could begin to recover in the second half of the year, under the condition that the public health situation allows it, Evans said.
The biggest risk is that the recession will be deep and prolonged because the pandemic experience becomes more severe and delays the recovery even into the first half of 2021, he said.
“This risk may be with us for awhile,” Evans added.
The Chicago Fed president said a spike in inflation was not one of the things he was worried about. In fact, he said he was more concerned that inflation would be too low.
Evans also downplayed risks of “moral hazard,” where the Fed’s help to financial markets could lead investors to take more risks in the future in the belief that the Fed would bail them out if the market turned against them.
In a widespread national shock, the role of government is to socialize more of the losses, Evans said. “There’s no way you could have insured against this,” he said.
“A lot of this right now is, ‘Let’s get everybody to the second half of this year and then think about what the future looks like from there,’ ” Evans said.
U.S. equity benchmarks were higher on optimism the hopeful economic story on the COVID-19 crisis might pan out. The Dow Jones Industrial Average DJIA, +2.28% was up 585 points in midafternoon trading Tuesday.
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