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Fed officials worry rise in COVID-19 cases is muting economic recovery

The recent jump in coronavirus cases appears to be slowing the U.S. recovery, highlighting the need to prioritize public health measures to ensure the economy fully rebounds, Federal Reserve officials said Aug. 12.

The country's recovery from its deepest downturn in decades "may be losing steam," Boston Fed President Eric Rosengren said in a speech. He pointed to a softening in real-time consumer spending data since mid-June, particularly in some states in the South and West where coronavirus cases have surged in recent weeks as local economies began to open back up.

A full recovery will remain difficult as long as the virus "poses significant threats to public health," hampering consumers' willingness and ability to spend money, Rosengren said on a webinar.

"Limited or inconsistent efforts by states to control the virus based on public health guidance are not only placing citizens at unnecessary risk of severe illness and possible death — but are also likely to prolong the economic downturn," Rosengren said in remarks to a regional chamber of commerce in Massachusetts.

At a separate event, Dallas Fed President Robert Kaplan advocated for "strict adherence" to healthcare protocols, particularly widespread usage of face masks, to limit the virus's spread. Although some businesses, like bars, may need to stay closed, the economy can reopen to avoid greater damage, but only if it is done "the right way," Kaplan said.

U.S. GDP shrank by an eye-popping 32.9% on an annualized basis during the second quarter, although it will likely recover a sizable chunk of those losses in the third and fourth quarters, Kaplan said. But the resurgence of coronavirus cases in some parts of the country has "muted the recovery," he added.

"We're still rebounding, but not as fast as we might have," Kaplan said during a Lubbock, Texas, chamber of commerce webcast.

Some local businesses are also reporting declines in foot traffic, with some consumers voluntarily pulling back on their spending as they realize the virus "isn't behind us," San Francisco Fed President Mary Daly told reporters after an Economic Club of Las Vegas event.

Asked about the long-term economic outlook, Daly said that the recovery will be "slow and gradual" and ultimately dictated by the virus. One safe assumption, she added, is that the recovery will not be V-shaped, meaning that a full rebound will not be immediate.

Fed officials slashed their benchmark interest rate to near 0% in March and have taken other emergency steps in response to the crisis, such as buying more than $2 trillion in securities and launching several emergency lending facilities.

Congress also approved significant fiscal stimulus earlier in the year, although talks of a new package have broken down and led to an expiration of two major programs: the Paycheck Protection Program and a $600-per-week boost in unemployment benefits.

A continuation of stimulus from the Fed and Congress will be "critical" in mitigating the economic damage, but the outlook is "quite uncertain" and depends largely on the virus's spread, Rosengren said.

Rosengren's Boston Fed district is operating one key program from the central bank: its Main Street Lending Program for small and midsize businesses. The $600 billion program, which launched July 6, has faced criticism for getting off to a slow start.

But Rosengren noted that the fact that the program offers loans that must be repaid, rather than the PPP's forgivable loans, has naturally limited the initial uptake. Loans between businesses and banks also take some time to negotiate and add to the complexity of the program, he added.

"Some seem eager to suggest that the Main Street program's modest initial activity is evidence of failure. I completely disagree," he said.

There are currently more than $856 million in loans active in the portal, and officials expect to see more activity in the coming weeks as the virus continues and borrowers gain awareness of the program, Rosengren said.

"Unfortunately, should the fall bring a resurgence of the virus as many epidemiological models predict, this program may become even more essential," he added.