MNI POLICY: Fed's Brainard Says Covid Poses Downside Risks

The U.S. economy faces risks that are "tilted to the downside" including weakening job gains and slow inflation because of Covid-19, Federal Reserve Governor Lael Brainard said on Tuesday.

"The longer COVID-19-related uncertainty persists, the greater the risk of shuttered businesses and permanent layoffs in some sectors," she said in the text of remarks to a Brookings conference.

"The magnitude and timing of further fiscal support is a key factor for the outlook," she said, adding the Fed's framework change last week "puts us in a stronger position to support a full and timely recovery." Brainard also suggested the change was a recognition the central bank may have tightened policy prematurely in the past.

"The longstanding presumption that accommodation should be reduced preemptively when the unemployment rate nears the neutral rate in anticipation of high inflation that is unlikely to materialize risks an unwarranted loss of opportunity for many Americans," Brainard said.

The Fed's shift away from a strict 2% inflation target to a more flexible goal that allows and even strives for some modest overshoot to make up for past shortfalls was a recognition of the difficulties of conducting monetary policy with official interest rates already around zero, she said.

Accommodate, Not Offset

"Consistent with this, I would expect the Committee to accommodate rather than offset inflationary pressures moderately above 2 %, in a process of opportunistic reflation," Brainard said.

On recent economic developments, she said that "despite some bounceback in July, inflation remains weaker than pre-crisis, and it is likely to take some time to return closer to target," and that job growth "appears to have slowed." Housing has been more of a bright spot, she said.

"With the recovery likely to face COVID-19-related headwinds for some time, in coming months, it will be important for monetary policy to pivot from stabilization to accommodation," she said. "It will be important to provide the requisite accommodation to achieve maximum employment and average inflation of 2 percent over time, following persistent underperformance."