By Lindsay Dunsmuir
WASHINGTON (Reuters) – There is a great deal of uncertainty about the path ahead for the U.S. economy and the Federal Reserve should use forward guidance and large-scale asset purchases for a “sustained” period in order to help the recovery, Fed Governor Lael Brainard said on Tuesday, as she offered a downbeat assessment of the risks ahead.
“The pandemic remains the key driver of the economy’s course. A thick fog of uncertainty still surrounds us, and downside risks predominate,” Brainard said in prepared remarks to a virtual event hosted by the National Association for Business Economics.
“The recovery likely will face headwinds for some time, calling for a sustained commitment to accommodation, along with additional fiscal support,” she added.
The U.S. central bank has since March slashed interest rates to near zero, ramped up large-scale asset purchases and launched numerous other crisis programs designed to grease the U.S. financial system and funnel credit to households and businesses.
At the Fed’s last meeting, policymakers discussed reviving a Great Recession-era promise to keep interest rates low until certain conditions are met, such as inflation meeting or even modestly exceeding the Fed’s 2% inflation goal.
In her remarks, Brainard noted that yield curve control may also be appropriate at some point, but would require further analysis and discussion.
U.S. coronavirus cases rose in 46 out of 50 states last week and deaths rose nationally for the first time since mid-April, according to a Reuters analysis.
Fed officials, who initially hoped that the virus would be brought swiftly under control in the United States to allow the economy to recover more quickly, have voiced growing concern that the economic outlook will likely now be hobbled for years to come.
The renewed surge in cases has prompted some states to dial back or pause reopenings at a time when other advanced nations around the world have been able to reopen their economies more sustainably due to successful mitigation strategies.
Brainard warned a broad second wave could weigh on the recovery and even prompt a second dip in activity as well as reignite financial market volatility at a time of greater vulnerability.
“Nonbank financial institutions could again come under pressure…and some banks might pull back on lending if they face rising losses,” Brainard said.
(Reporting by Lindsay Dunsmuir; Editing by Andrea Ricci)