MNI POLICY: Fed's Quarles Flags Downside Risks to Recovery

Fed Governor Randall Quarles said Wednesday that officials must stay 'vigilant' and be prepared to do more amid ongoing downside economic risks, despite signs of a stronger recovery than most forecasters anticipated.

Quarles expressed optimism at the initial recovery from a sharp spring slump, but remained concerned about risks posed by the global coronavirus pandemic and other threats.

"A full recovery is still a good way off, however, and risks remain weighted to the downside," he added. "Policymakers will need to remain vigilant."

"While I am optimistic that recovery is underway and the worst outcomes can be avoided, these concerns suggest that policymakers around the world need to remain watchful and ready to act further," he said. "The prescription is for a sustained aggressive use of monetary policy to support the economy."

Quarles warned household and business balance sheets remain under pressure given that income and employment are likely to remain below pre-crisis levels for some time.

"Even with support from monetary and fiscal policy, large numbers of businesses may close," Quarles said. "These closures may lead to some longer-term scarring of the economy through lower investment, reduced capacity, and long-term unemployment."

Looking overseas, Quarles was heartened by what he sees as signs of a robust recovery in parts of Asia. He said international trade, however, remains hampered as global anti-trade sentiment remains high and politically popular. "The hole that countries are in remains deep, and significant downside risks still exist," he said.

The Fed recently announced shifts in its policy framework and new forward guidance on interest rates intended to cement the central bank's intention to meet its dual mandate of low, stable inflation and maximum employment.

"I likely will be even more patient in reacting to small upward deviations (to inflation) given the Committee's move to focus on shortfalls of employment from maximum employment rather than deviations," Quarles said.