While the U.S. economy is likely to pick up in the second half of the year, more pessimistic scenarios with new coronavirus infections, massive business shutdowns and bankruptcies are almost as likely as the baseline, a senior Federal Reserve official warned Tuesday.
"A reasonable baseline outlook is that as some of the stay-at-home restrictions are lifted, the economy will begin to grow again in the second half of this year and unemployment will begin to move down," Cleveland Federal Reserve Bank President Loretta Mester said during an online event held by the CFA Society Chicago.
"Under this baseline, by the end of this year, output would still be below its level at the end of last year, by 5 percent or even somewhat more, and the unemployment rate would still be in the high single digits or low double digits," Mester said, adding there is "considerable uncertainty" around what the recovery will look like.
"It isn't difficult to imagine more pessimistic scenarios, especially if an upsurge in virus cases necessitates shutting down activity again or if there is considerably more harm in terms of business and personal bankruptcies or if instabilities in the banking system arise," she said.
"At this point, I think some of the more pessimistic outcomes are almost as likely as the reasonable baseline I just described," Mester said, noting recovery will depend on the evolution of the virus and the success of methods to control its spread.
"It will also depend on how successful policy actions are in ensuring that the temporary disruption in activity does not cause more persistent damage to the economy and that the economy is well staged for a recovery," she said.
The Fed official expected that the reported unemployment rate is likely to go up further, perhaps to 20 percent or even more, as the COVID-19 fallout continues to ripple through the country.
"Certainly, this is the worst and speediest deterioration in the labor market many of us have ever seen," she said.
Mester's remarks came after the Labor Department reported last week that U.S. employers cut a staggering 20.5 million jobs in April, erasing a decade of job gains since the global financial crisis and pushing the unemployment rate to a record 14.7 percent.
