Central Banks Unlikely to Pull Back on Stimulus Anytime Soon, BlackRock's Seth Says
The Federal Reserve may put off providing further guidance on its interest rate and balance sheet policies until the fall as it grapples with the enormous uncertainties thrown up by the coronavirus crisis, Vice Chairman Richard Clarida suggested Thursday.“We are really in an uncharted situation right now,” he told the New York Association of Business Economics. “My own sense is that we’ll begin to get a better sense of the scenario and the trajectory the economy is on in early fall.”
Policy makers though will provide new forecasts for the economy and the appropriate path for interest rates at their June 9-10 meeting, he said. The Fed’s Summary of Economic Projections, which is updated quarterly, was suspended in March after much of the economy was shut down to contain the contagion.
The Fed has pledged to keep short-term interest rates effectively at zero until it is confident that the economy has weathered the coronavirus shock and is on track to achieve its maximum employment and price stability goals. It also has said it will continue to purchase Treasury securities and mortgage-backed securities in the amounts needed to support smooth functioning of those markets.
Fed Chairman Jerome Powell separately cautioned that the burden of the economy’s unprecedented slowdown to stem the spread of COVID-19 was falling disproportionately on the most vulnerable Americans.
Fed officials have assured the nation they are committed to doing everything in their power to prevent lasting economic harm from the virus. Clarida said policy makers may well need to provide additional support beyond the unprecedented actions they’ve already taken.
“Depending on the course the virus takes and the depth and duration of the downturn it causes, additional support from both monetary and fiscal policies may be called for,” he told the New York Association for Business Economics via webcast.
While promising that the Fed will continue to act aggressively to counteract the economic blow from the coronavirus crisis, Clarida also stressed the limit of central bank’s support -- it can only lend out money, not spend it -- and said budgetary action was essential.
Those comments echo remarks made over the past week by Powell and come ahead of expected negotiations between Republican and Democratic lawmakers and the White House over another fiscal package. Lawmakers have already passed nearly US$3 trillion of measures to cushion the economy from what Clarida called the “severe” blow from the coronavirus-driven economic lock down.
Treasury Secretary Steven Mnuchin agreed Thursday that more budgetary action may be needed. “I think there is a strong likelihood we will need another bill,” he said Thursday at an online event hosted by the Hill newspaper -- but he also reiterated the Trump administration’s position that more stimulus isn’t necessary immediately.
Second Half Rebound
Clarida said he expects the economy to begin to pick up and unemployment to start to fall in the second half of the year, though he added it will take some time for the economy to fully recover.
The jobless rate more than tripled in April to 14.7 per cent as employers cut an unprecedented 20.5 million jobs. A further rise is expected this month.
The Fed vice chairman said the virus crisis was a disinflationary shock and suggested that the drag on prices may last for a while.
“While the COVID-19 shock is disrupting both aggregate demand and supply, the net effect, I believe, will be for aggregate demand to decline relative to aggregate supply, both in the near term and over the medium term,” he said.
Before the onset of the crisis in mid-March, Clarida said he had expected the inflation gauge that the Fed targets to come in at 1.8 per cent to 1.9 per cent for the year. He’s now marked that forecast down to 1.4 per cent to 1.5 per cent, with the risk it could come in even lower. The Fed has a 2 per cent inflation target.
Besides cutting interest rates effectively to zero and buying trillions of dollars of Treasury and mortgage-backed securities, the Fed has announced plans for nine emergency lending programs and funneled hundreds of billions of dollars to foreign central banks.
Clarida said those efforts had helped ease financial conditions since the middle of March, considerably so in many markets. He stressed that the programs were temporary, but suggested that they would not be wound down until the Fed is “confident the economy is solidly on the road to recovery.”
“While this easing of financial conditions is, of course, welcome, whether it proves to be durable will depend importantly on the course that the coronavirus contagion takes and the duration of the downturn that it causes,” he said. “At a minimum, the easing of financial conditions is buying some time until the economy can begin to recover.”