Ex-Fed Chief Janet Yellen: 'Impossible to Know at This Point How Deep the Recession Will Be'

By Susan Jones | April 1, 2020 | 7:12am EDT
Former Federal Reserve Chairman Janet Yellen (Photo via Smith Collection/Gado/Getty Images)
Former Federal Reserve Chairman Janet Yellen (Photo via Smith Collection/Gado/Getty Images)

(CNSNews.com) - Janet Yellen, the former head of the Federal Reserve, said the economic downturn caused by the coronavirus pandemic "has been rapid and sharp...different than any we've ever experienced in America."

And it's sure to get worse before it gets better, she told a video conference hosted by the Brookings Institution on Monday:

Frankly, it's impossible to know at this point how deep the recession will be. It depends critically on long the period of social distancing lasts. The hope is that lockdown can be lifted in May, and activity will begin to normalize in the early summer.

For the longer period of confinement, it certainly seems possible. There could be a second wave of infections after activity resumes. Every indication, so far, suggests there will be a huge plunge in output in the second quarter. The decline will be reported at an annual rate and could easily be 20 percent or higher.

I expect a very large rise in unemployment. The 3.3 million initial unemployment claims that were reported last Thursday suggests that the unemployment rate may already have spiked to 5.5 percent or so. That would be a two-percentage-point increase from February.

Now, we won't see that in Friday's employment report because it's based on earlier data, but unemployment will surely rise a lot. Hopefully, the fiscal package will soon begin to kick in and help limit the increase in joblessness.

The depth of the recession, I think, will partly depend on what happens to overall financial conditions. The virus has caused significant financial tightening. The Fed is doing everything they can to keep financial markets functioning and credit available to households and firms.

Still, practiced borrowing rates are significantly higher now, naturally, because lenders are fearful about losses and defaults. State and local governments also face higher rates, but the Fed actions have brought about some improvement.

Yellen said we still don't know if the recession "will be V-shaped or U-shaped" or even worse, L-shaped: 

If the lockdown ends reasonably soon and the monetary and fiscal support that are now in place enable households and businesses to resume activity, when the confinement ends, we'll likely see a V with positive growth by the fourth quarter of the year. But that's a best-case scenario, and I'm worried that damage may occur that could lead to a prolonged recession.

One concern is that firms will end up severing their relations with their workers. The fiscal package is designed to prevent that, but it is already happening to a significant extent. That will make it harder for workers to get new jobs and for businesses to start up again smoothly.

In addition, firms will experience losses. There may well be bankruptcies, and there could be a prolonged period in which firms scale-back investment in hiring to deal with debt burdens. There have also been disrupt--disruptions in supply chains worldwide. Our recovery will be smoother if it's accompanied by global progress.

Households and firms have been somewhat protected by the fiscal package, but nevertheless, they may emerge with significantly worsened balance sheets with higher debts and lower assets. And that may lead them to tighten their belts and restrain spending even after health concerns abate. So, if the lockdown lasts a long time, I'd also expect banks to come under pressure.

I will be watching carefully high-frequency data such as confidence surveys, credit market developments, week--weekly unemployment insurance claims, traveling, shopping data, and I'm even beginning to watch one of Alan Greenspan's favorite statistics freight car loadings.

Yellen admitted that "these are certainly scary times," but she said she's encouraged by the government response, especially "the commitment to do all that's needed to get the economy and protect households and businesses so we can restart.

"I've never seen a more rapid Fed response, and they're giving it their absolute all. They've thrown everything they possibly can into responding quickly. And we are seeing bipartisan cooperation in Congress to quickly get out a package that is very meaningful.

"And in spite of the problems we've discussed today, it really provides a lot of support to households and businesses that are affected by this. And we're seeing more cooperation around the world, understanding that we have to work together to restore economic activity. So, I think people should feel reassured that policymakers are on this."

Working in favor of the eventual economic recovery - "I don't think an increase in inflation is necessary or even likely," Yellen said. And she said she sees "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."

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