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Boston Fed chief warns economic hit from coronavirus could last longer than expected

Eric Rosengren said the economy won’t begin to rebound until there is widespread testing available to allow people to be comfortable returning to work

Federal Reserve Bank of Boston President Eric Rosengren
Federal Reserve Bank of Boston President Eric RosengrenSteven Senne/Associated Press

Boston Federal Reserve Bank president Eric Rosengren said Wednesday that the economic shock from the coronavirus pandemic will be deeper and more protracted than once thought, and Massachusetts will feel the pain sooner than other states.

Rosengren expects the US unemployment rate will rise to at least 10 percent by the end of the second quarter, from 3.5 percent at the end of February. Massachusetts will likely have a higher jobless rate than other states because a shutdown started here before many other parts of the country, he said.

“That will be a very dramatic increase in the unemployment rate,” Rosengren said in an interview. “Ten percent is a very severe problem. Ten percent was the peak of the financial crisis” in 2009.

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Rosengren, an economist by training, said it’s difficult to forecast the extent of the economic crisis without first knowing the trajectory of the pandemic. The two are inextricably linked.

But given the path of the virus in the United States — which a new federal government estimate projects could kill as many as 240,000 Americans — he expects the economy to shrink in the second and third quarters amid a painful recession. And he doesn’t anticipate a fast recovery.

“Already we’re looking worse than many other countries,” he said. “That means it may be challenging for the economy as well.”

Rosengren’s prediction came as the toll of the virus continued to rise, and the state made plans for the growing number of patients.

Governor Charlie Baker on Wednesday suggested the cavernous Boston Convention and Exhibition Center in the Seaport could be used to treat people who are suffering from COVID-19 but who don’t need acute hospital-level care.

Standing in Worcester’s DCU Center, a sports arena being converted to a 250-bed field hospital, Baker said state health officials are looking at sites for similar operations around Massachusetts.

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“There are two for sure, one here and one at the BCEC in Boston," he said, adding that the state is reviewing other sites as well.

State health officials announced Wednesday that the number of deaths from the pandemic in Massachusetts had risen by 33, or 37 percent, to 122, up from 89 the day before.

Among them was the youngest reported victim so far in the state. Riley Rumrill, 31, who state records show had an unspecified preexisting medical condition, is believed to be the first person in Massachusetts under the age of 50 to die of the virus. He died Sunday at Boston Medical Center.

Baker said this week that the virus would likely start to peak between April 7 and 17 in Massachusetts. Forecasts are predicting that by summer the virus will have killed nearly 1,800 people in the state.

While other economists are predicting a robust rebound perhaps as soon as the fall, Rosengren instead says any recovery is linked to the availability of widespread COVID-19 testing. Even when stay-at-home orders are lifted, Rosengren said, he expects many people to remain uncomfortable about resuming normal life — going to the office, taking public transportation, and eating out at restaurants.

“Without testing everybody, you don’t know how many people are infected,” he said. “Until you can test everybody, it’s going to be difficult for the economy to fully come back.”

Meanwhile, Wall Street turned increasingly pessimistic about the prospects for a quick recovery. On Wednesday, the Dow Jones industrial average posted its biggest-ever drop on the first day of a new quarter, after major indexes fell more than 20 percent in the first three months of the year. The Dow fell 973 points, or 4.4 percent, to 20,943. The Standard & Poor’s 500 fell 4.4 percent.

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On Thursday, the US Labor Department is set to report jobless claims that could surpass last week’s record of 3.2 million as more states shutter their economies to contain the pandemic.

“I wouldn’t be surprised if it were above 5 million, and it’s not going to stop after this week,” said Arindrajit Dube, an economics professor at the University of Massachusetts Amherst.

In Massachusetts, claims rose almost twentyfold last week to 147,995 on an unadjusted basis. Companies in the hospitality industry and retailers have been shedding jobs as social distancing measures kept customers away or forced them to close their doors.

Rosengren said unemployment will be disproportionately distributed among hourly workers — the people who staff hotels and restaurants, for example. This underscores his concern that the pandemic will worsen income inequality in this country. He said he worries that unemployment assistance, even at a newly fortified level, will not last long enough for many people who need it. Access to health care for lower-wage earners will also be a big problem.

“I do think it’s going to be a more persistent problem than many people are estimating,” Rosengren said. “Individuals and firms have to take on more debt. … I do expect that’s going to cause a longer tail to this than many were anticipating.”

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As the number of coronavirus cases grew in the United States over the past month, economists have furiously revised forecasts downward. At Goldman Sachs, economists see the economy shrinking 34 percent on an annualized basis in the second quarter, while the jobless rate will hit 15 percent by midyear.

S&P Global Ratings, in a report released on Monday, marked down US GDP growth for all of 2020 to a contraction of 1.3 percent, including a 12 percent decline in the second quarter. S&P expects the unemployment rate to top 10 percent in the second quarter.

Perhaps the only silver lining is that as dark as the forecasts have become, some economists see the potential for a significant rebound later this year and into 2021. Goldman expects GDP to bounce back by an annual rate of 19 percent in the third quarter. S&P forecasts a 3.2 percent GDP growth in 2021.

The short-term outlook has been dire because officials have forced the economy into hibernation in order to save lives. But long term, that makes financial sense. One MIT study of the 1918 flu pandemic found that cities that acted more aggressively to limit social and civic interactions saw more economic growth once restrictions were lifted.

Still, when it comes to propping up the economy during the pandemic, the federal government has taken aggressive action so any downturn doesn’t turn into a Great Depression.

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The Fed, for example, has taken a number of steps to ease the flow of credit and cash: lowering the federal funds rate to near-zero, buying up Treasury bonds, stabilizing money market funds. Congress just passed a huge $2 trillion economic rescue package, aimed in part at helping small businesses weather the storm and giving laid-off workers a financial lifeline by boosting unemployment benefits.

How effective these extreme measures will be, Rosengren said, remains to be seen. He said he is hopeful that the Fed and Congress can minimize some of the hits the economy is taking, but he thinks small businesses will likely need additional help.

“My guess is it won’t be enough,” Rosengren said of the current package. “Many small businesses are going to experience problems for a much longer period of time than the support in the current draft of the legislation.”

James Rooney, chief executive of the Greater Boston Chamber of Commerce, agreed. He moderated a conversation online on Wednesday afternoon with the Fed president as nearly 800 members listened in.

“Small businesses, in particular, they don’t have the cash reserves to withstand a moment like this," said Rooney. "The biggest concern is their survivability.”

Larry Edelman, Tim Logan, and Martin Finucane of the Globe staff contributed to this report.



Shirley Leung is a Business columnist. She can be reached at shirley.leung@globe.com. Jon Chesto can be reached at jon.chesto@globe.com. Follow him on Twitter @jonchesto.