By Nick Timiraos 

Federal Reserve officials said a recent slowdown in U.S. economic activity was likely to persist because of difficulties states have encountered in suppressing the coronavirus pandemic, which could require more government spending to support the economy.

"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," Boston Fed President Eric Rosengren said on Wednesday in a webinar with the South Shore Chamber of Commerce in Massachusetts.

Mr. Rosengren said he expected the unemployment rate, which stood slightly above 10% in July, would be slow to decline given worsening public-health situations in some states that were quick to lift lockdown orders in May. Easing restrictions prematurely "hurt both the economy and public health," he said.

By contrast, Mr. Rosengren pointed to data on infection and death rates from Europe, which imposed tighter limits on commercial activity in the spring and has seen a stronger rebound in economic activity in recent weeks due to much lower infection rates.

Visits by Europeans to retail and recreation locations have now created a more robust recovery compared with the U.S., he said.

Negotiations between the White House and top Democrats over another round of relief for households and businesses collapsed on Friday, with each side accusing the other of not showing enough willingness to compromise on core issues, including state and local aid and jobless benefits, as well as the overall dollar total. A series of executive actions President Trump took over the weekend aimed at providing some stopgap coronavirus relief have done little to kick-start talks.

Republicans are seeking to approve a bill that costs roughly $1 trillion, well below the $3.5 trillion that Democrats have said is necessary. Congress has approved nearly $3 trillion in earlier relief measures, including a large package in late March. At that time, national leaders hoped the virus could be brought under control in a matter of weeks, not months.

"Congress will have to build a bigger bridge...now that we know the coronavirus is not behind us and now that we're in this for a longer period of time than we hoped," said San Francisco Fed President Mary Daly on a conference call with reporters on Wednesday.

Ms. Daly said additional relief to state and local governments would be important to prevent deeper cutbacks in services and layoffs of public workers. "There is not a situation where states misspent or misallocated, " she said. "It's a pandemic. It's a shock not of their making."

Mr. Rosengren said Wednesday worries about increased federal debts were misplaced so long as the virus was spreading. "If you want to make sure the debt doesn't explode, you have to make sure you get the pandemic under control," he said.

The central bank Ëcut its short-term benchmark rate to near zero in March and is buying $120 billion in Treasury and mortgage bonds a month. Officials have indicated they are likely to hold rates at their current levels for years, and they are in the middle of discussions over how to structure any more specific guidance about their plans.

Ms. Daly said market participants appeared to understand well the Fed's rate intentions for now, but that "there will probably come a time when additional clarity is required."

The Fed has also established a suite of emergency lending programs to support borrowing for cities, states and businesses. The Boston Fed is administering the Main Street Lending Program, which offers loans of at least $250,000 to qualified small and midsize businesses.

The Fed will purchase 95% of eligible loans from banks and began accepting loans last month. Some lawmakers and oversight groups have criticized the program's slow start -- it purchased 13 loans valued $92 million through July 31 -- and called the initiative a failure.

Mr. Rosengren said Wednesday he strongly disagreed with that characterization and expected the program to gradually ramp up as lenders become more comfortable with it and as the economy faces a more difficult recovery.

Mr. Rosengren said more than $250 million in loans have been made under the program, and that an additional $600 million in loans were in the pipeline. Much of the increase in lending has occurred recently, he said.

Write to Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

August 12, 2020 18:42 ET (22:42 GMT)

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