• Powell said it is unlikely the economy will recover fully until consumers think the coronavirus has been contained
  • Layoffs have it workers, minorities and women the hardest and the downturn could widen the gap between rich and poor
  • He said direct aid from Congress could make a critical difference in mitigating economic damage from the pandemic

Federal Reserve Chairman Jerome Powell warned lawmakers Tuesday the U.S. economy could suffer major long-term damage as a result of the coronavirus pandemic, with unemployment remaining high and sweeping small business failures – even if the economy looks like it’s improving.

“The longer the downturn lasts, the greater the potential for longer-term damage from permanent job loss and business closures,” Powell told the Senate Banking Committee, urging lawmakers to provide more stimulus to avert the danger.

Congress currently is grappling with whether to extend programs set up in the $2.2 trillion CARES Act, which temporarily enhanced unemployment benefits and provided help for small businesses. Senate Republicans have been dragging their feet on another round of stimulus, saying the impact of the first rounds need to be assessed first.

President Trump has expressed support for another round of stimulus and House Democrats already have passed a $3 trillion bill that would include a second round of direct payments to taxpayers.

Powell said it is unlikely the economy will recover fully until the virus “is contained” and public confidence returns. He said layoffs hit low-income workers, minorities and women hardest, broadening disparities between rich and poor.

“If not contained and reversed, the downturn could further widen gaps in economic well-being that the long expansion had made some progress in closing,” Powell said.

Powell said direct support to consumers and businesses “can make a critical difference … in limiting long-lasting damage to the economy.”

Powell said even though May’s unemployment rate was nearly 7 points lower than what economists had expected, it was still at least 13.3% -- the Bureau of Labor Statistics noted its collection method likely produced an undercount and the rate is actually several points higher. Retail sales for the month jumped a record 17.7%, compared with a 16% drop in April.

“Long periods of unemployment can erode workers' skills and hurt their future job prospects. Persistent unemployment can also negate the gains made by many disadvantaged Americans during the long expansion,” Powell said.

The Fed last week decided against raising key interest rates and said they likely will remain at zero to 0.25% for the next two years, barring any major developments. The Federal Open Markets Committee predicted elevated unemployment through 2022, with the rate at 9.3% by the end of this year. It also predicted a 6.5% drop in the gross domestic product this year.