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FOMC Member Says V-Shaped Recovery Impossible Without Medical Miracle

Last Updated September 23, 2020 1:48 PM
Laura Hoy
Last Updated September 23, 2020 1:48 PM
  • The Federal Reserve’s Neel Kashkari said we should be preparing for 18 months of rolling shutdowns.
  • That means the government will have to keep the economy on life-support for a prolonged period.
  • By that timeline, there’s no way the U.S. comes out of this unscathed.

Up until now, the Federal Reserve has been remarkably optimistic about the U.S. economy as it squares up against coronavirus. But comments from Neel Kashkari, chief of the Fed Bank of Minneapolis, suggests those rosy projections were based largely on hopes for a vaccine. 

Federal Reserve Sees 18 Months of Pain

Over the weekend, Kashkari told CBS he’s expecting 18 months of pain  as the U.S. suffers through rolling shutdowns that will continue to weigh heavily on the economy. Kashkari admitted that “barring some health-care miracle,” a V-shaped recovery looks impossible:

It seems like we’re going to have various phases of rolling flare ups, different parts of the economy turning back on, maybe turning back off again. This could be a long, hard road that we have ahead of us. It’s hard for me to see a v-shaped recovery in that scenario.

Kashkari believes that only a medical breakthrough will put the U.S. economy on course for a sustained recovery.

L-Shaped Recovery Looking More Likely

Kashkari’s comments are worrying, especially when you consider that the Federal Reserve’s strategy has always been to throw enough money at the problem to bridge the gap until the economy is restarted. Without the hope of a V-shaped recovery, the central bank’s plans to tide the nation over look flawed.

Federal Reserve, Powell
The Fed has thrown everything it has at the economy, but it can’t prop it up forever. | Source : NICHOLAS KAMM / AFP

The deteriorating tone of U.S. central bankers adds to speculation that the economy is embarking an a prolonged downturn that could resemble an L-shape rather than a V or even a U. Art Cashin, UBS’ Head of Floor Trading says it’s unlike anything he’s seen in his 50 years on the NYSE floor : 

This wasn’t caused by inflation, or asset bubbles, or bad investments, or anything else that has led to recessions in the past

He noted that L is the most likely shape of recovery, saying even when the economy does reopen people will be cautious about returning to life as normal. 

Cashin isn’t alone in his prediction. Barclays said it’s also concerned about the potential for an L-shaped recovery, saying depth of economic damage will be hard to recover from. The bank still believes a U-shaped recovery is most likely, but cautioned that a recession that takes years to recover from is a distinct possibility. 

Sharp Economic Rebound Looks Impossible

The second quarter has become a focus for analysts trying to make predictions about the speed of this recovery.

JP Morgan believes GDP will fall a whopping 40% from April to June  with unemployment climbing to 20%. But even that gloomy outlook assumes the nation will spring into recovery mode during the second half of the year. 

coronavirus, lockdown, federal reserve
If rolling shutdowns become the norm for the next 18 months, it’s hard to imagine a scenario where the economy isn’t severely impacted. | Image: AP Photo/Dita Alangkara

If Kashkari is right, and shutdowns continue to crop up around the country for the next 18 months, a second half recovery looks unlikely. Infectious Disease Expert Dr. Anthony Fauci’s guidance suggests Kashkari is right.

While Fauci conceded that parts of the U.S. economy may be able to reopen in May, he cautioned there was a risk that another outbreak would follow . 

Recurring outbreaks could wipe out huge portions of U.S. businesses— especially in the travel and hospitality sectors. That will keep unemployment high and consumer spending low.

So, the question becomes how long the Federal Reserve and U.S. government can keep the economy on life-support. It’s one thing to prop it up for a month, or even a full quarter. But if we’re talking about 18 months as Kashkari is suggesting, the likelihood of a rapid recovery looks very unlikely. 

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.