Two Fed Officials Voice Concern on Economy as Virus Cases Surge -- Update
19 November 2020 - 8:52PM
Dow Jones News
By Michael S. Derby
Two Federal Reserve officials at the heart of central bank
decision making this year sent warnings Thursday about what lies
ahead for the economy as coronavirus cases spiral higher.
Loretta Mester of the Cleveland Fed and Robert Kaplan of the
Dallas Fed both expressed worry about the economy in separate
Bloomberg Television interviews, but were reticent to detail what
more the Fed could do to help. Both regional Fed bank presidents
hold voting roles on the interest-rate-setting Federal Open Market
Committee this year.
"Over the horizon, 2021 is going to be a very strong year with
[gross domestic product] rising probably 3 1/2 percent or greater,
although a lot of that growth will be in the back half of the
year," Mr. Kaplan said in the television interview. But the
challenge, he said, "is getting through the next six months" with
virus cases rising and a vaccine still not widely available.
Mr. Kaplan said economic activity over the last three months of
the year could once again contract, following the third quarter's
rebound.
He said he wouldn't rule out the U.S. sliding back into
recession. "The risks are all the downside," he said. "The only
good news, if there is negative growth and the rebound stalls, our
own view is it will be temporary" and not go beyond a quarter or
two.
Ms. Mester said the economy needs renewed aid from the
government as it continues to face big challenges in the
coronavirus pandemic.
"The fact that we don't have a fiscal package is very
concerning," she said. "With the disparate impact of this pandemic,
that's where fiscal policy plays a role, because fiscal policy can
be really targeted to households and small businesses that really
need the aid." She added that states and local governments, which
are on the front lines of the crisis, also need help.
Ms. Mester drew a distinction between the need for more fiscal
aid and the idea of a greater response from the Fed, which already
has interest rates at near-zero levels amid its continuing
bond-buying stimulus and emergency-lending programs.
"We're in a good place with our monetary policy, because we are
very accommodative," Ms. Mester said, and it isn't clear the Fed
could do something new given the economic outlook, she said.
"You have to look across different sectors and sort of evaluate
what tool will help the most, to bring up the sectors that are
weakened in this and really affected by this," Ms. Mester said.
"It's not clear to me that monetary policy necessarily is the right
tool to address those concerns."
Mr. Kaplan said options available to the Fed to aid the economy
include extending emergency-lending efforts, which he thinks should
happen. The Fed also could change the types of bonds it buys, but
he doesn't want the size of the program to increase from its
current pace of around $120 billion a month.
The FOMC is set to meet next month amid rising anticipation that
the central bank will try to engineer more stimulus from the tools
it has available, as elected leaders have yet to deliver renewed
aid.
Some economists believe the Fed will tweak its bond-buying
stimulus program toward purchases of longer-dated securities, but
there are questions about how much benefit this would bring given
already low long-term borrowing rates.
Speaking with Yahoo Finance on Wednesday, Richmond Fed leader
Thomas Barkin said, "Every month we engage in those asset purchases
is more stimulus." He said he wasn't ready to commit to any changes
in the effort now, noting real-world borrowing costs are already
quite low. Mr. Barkin isn't currently an FOMC voter.
Write to Michael S. Derby at michael.derby@wsj.com
(END) Dow Jones Newswires
November 19, 2020 15:37 ET (20:37 GMT)
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