Fed Chair Diagnoses Economy Step-by-Step: "US Economy at Early Stage of Recovery"

Retail Sales Increase by 17.7%... Caution Urged Despite Signs of Recovery
Recovery Unlikely Until COVID-19 Is Controlled Enough for Large Gatherings
IMF Expected to Release Worse Global Economic Growth Forecast Than -3%

[Asia Economy Reporter Naju-seok] Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), stated that "the U.S. economy is in the second phase of a three-stage recovery period" and "there is still a long way to go." Although U.S. retail sales in May showed a surprising rebound, his economic outlook remained unchanged, expecting a "slow recovery."

On the 16th (local time), Powell appeared via video at the U.S. Senate Banking Committee and said, "Full recovery of the U.S. economy will not be achieved until we can be confident that COVID-19 is under control."

[Image source=Reuters Yonhap News]

On the same day, the U.S. Department of Commerce reported that May retail sales increased by 17.7% compared to the previous month, far exceeding the initially expected growth rate of 8.4%. This was due to improved consumer sentiment following the easing of economic restrictions.

At the hearing, Powell divided the U.S. economic recovery after the COVID-19 crisis into three stages. The first stage is a sharp economic downturn, followed by the second stage where the market recovers with increased rehiring, and the third stage is a return to the pre-pandemic state. He said, "Although everything is uncertain, it appears that economic activity is resuming and consumption is increasing, entering the early phase of the second stage," adding, "The significant increase in May retail spending reflects this."

However, Powell emphasized that it will take a considerable amount of time to move from the second to the third stage. To enter the third stage, where employment and consumption stabilize, trust must be restored to the extent that not only indoor contact but also large outdoor gatherings are safe. Powell said, "It will take time to reach the third stage," and "Since nearly 25 million people have lost their jobs, there is a long way to go before they return to work." His series of remarks are interpreted as a caution against premature optimism about economic recovery in the U.S.

Powell particularly expressed concern about the possibility of polarization within the U.S. due to COVID-19. He said, "The unemployment shock will be significant for low-income workers, including racial minorities, sexual minorities, and women." In this regard, he expressed his intention to mobilize all policy tools available to the Fed and mentioned that Congress should also take fiscal policy measures.

The International Monetary Fund (IMF) also stressed caution. Gita Gopinath, IMF Chief Economist, said, "For the first time since the Great Depression, both advanced and developing countries will fall into recession," and "The upcoming World Economic Outlook will show a worse negative growth rate than previously forecast." The IMF projected last month that the global economic growth rate for this year would be -3.0%.

The stock market showed an upward trend. Strong consumer demand and the Fed's direct corporate bond purchase measures had a significant impact. The Dow Jones Industrial Average closed up 2.04% at 26,289.98, the S&P 500 rose 1.90% to 3,124.74, and the Nasdaq increased 1.75% to 9,895.87. However, the afternoon session on the same day saw some hesitation in gains following Powell's cautious remarks. U.S. President Donald Trump tweeted, "The May retail sales growth rate showed the largest increase ever," adding, "This is much higher than market expectations and is significant for both the stock market and jobs."

Market experts are paying close attention to Powell's remarks. This is because the recent optimism about the U.S. economic recovery is seen as a temporary effect of stimulus measures. Since various stimulus packages, including direct payments of up to $1,200 per individual to U.S. citizens, played a major role in boosting consumption, it is uncertain how the economy will perform afterward.

Doug McMillon, CEO of Walmart, the largest U.S. retailer, said, "I believe stimulus-related spending was a major factor in promoting consumption. However, I do not expect this level to continue."

Powell also cautioned against overinterpretation of the Fed's corporate bond purchases. He explained that the Fed's move to buy corporate bonds was not an increase in the total amount of purchases but a shift from exchange-traded funds (ETFs) to individual bond purchases. Powell said, "The Fed does not intend to buy more corporate bonds." He added, "We do not want to disrupt the bond market like an elephant destroying price signals," and "If market conditions improve, we can slow down or stop purchases."

This content was produced with the assistance of AI translation services.