Fed’s Evans Says Lifting Stay-at-Home Orders Bold But Risky

(Bloomberg) -- Recent decisions to begin lifting coronavirus-related stay-at-home orders around the U.S. involve potentially high levels of risk, Federal Reserve Bank of Chicago President Charles Evans said.

“The relaxing of the stay-at-home policies is a bold decision with pretty high risks, in my opinion,” Evans said Tuesday during a conference call with reporters, wading into a politically-charged debate as some U.S. states begin cautiously re-opening, despite the threat of fresh Covid-19 infections.

The Chicago Fed chief offered a subdued outlook for the U.S. economy, saying the unemployment rate probably surged into double digits in April. Economists surveyed by Bloomberg expect the jobs report due out Friday to show that unemployment rose to 16% last month.

Evans and his colleagues on the U.S. central bank's rate-setting Federal Open Market Committee have mostly been pessimistic about the prospects for the economy in recent weeks amid uncertainty over how long the pandemic and associated lockdowns will last. More than 30 million Americans have filed for unemployment insurance benefits since mid-March, when state and local governments began issuing the stay-at-home orders.

Baseline Scenario

He cited a “baseline scenario” among private-sector forecasters which sees unemployment still lingering around 9% by the end of the year, before adding that the reality could turn out to be even worse.

“For example, a second wave of the disease could necessitate re-shuttering activity, like in March,” Evans said. “Or bankruptcies could be larger and more widespread, leading to further destruction of employment and business relationships.”

“I hate to say this, but at this still-early stage, the likelihood of the baseline scenario may only be a bit higher than that of the more pessimistic possibilities,” he said.

The FOMC slashed interest rates to nearly zero in mid-March and launched massive bond-buying programs to pump liquidity into financial markets and alleviate investor panic. It's said it will keep rates at zero “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

Forward Guidance

Evans, who does not hold a vote on FOMC decisions this year, said he didn't see a need for stronger guidance at the moment, because he couldn't imagine that anyone was expecting the Fed to begin raising rates any time soon.

“Of course, if other events intervened, and markets became worried that we wouldn't continue to provide accommodation, we'd have to be much clearer about that,” he said. “That could involve elements of yield-curve control.”

The Chicago Fed chief said the summer months would provide a telling indication of the course the economy will take going forward, as businesses reopen and test consumer appetite for services that involve close contact, like in the leisure, hospitality and travel industries.

He also warned of a repeat of the 1918 experience, citing the second wave of that year's influenza pandemic that occurred in San Francisco due to a relaxation of precautions taken by individuals.

“Individuals' willingness to wear masks out in public, when they're interacting with people in close quarters -- or even at six feet -- I think that could be very important,” Evans said. “Attitudes like that, we'll just have to see how it plays out. It's hard to know.”