MNI INTERVIEW: Fed Could Act If Curve Steepens- Wright

The Federal Reserve stands ready to act if long-term borrowing costs were to spike as the economic impact of Covid-19 evolves, Minneapolis Fed Research Director Mark Wright told MNI.

The Fed has not recently considered additional monetary easing through bond buys in part because they may not be effective, Wright said. "Rates are pretty low right now--maybe that means we've been successful. It's not clear exactly how much more QE could do to flatten the curve," he said in an interview.

"We have discussed what we might have to do if the curve steepened again," Wright said, adding that it would likely involve forward guidance, bond purchases, or some combination of the two. The Fed today is buying USD80 billion a month of Treasuries and USD40 billion of MBS.

In September, the Fed issued new forward guidance indicating a stronger commitment to meeting its 2% inflation target. Minneapolis Fed President Neel Kashkari dissented against the decision because he wanted a firmer commitment given chronic undershooting in the past.

The Fed "had systematically erred on the side of being too tight," Wright said. "We need to make sure we don't make the (same) mistake in the future."

ECONOMIC PATH

Asked if a prolonged period of low rates risk destabilizing the financial system, Wright said it was a threat that needed monitoring. Other tools like the Fed's countercyclical capital buffer would be more appropriate than tighter monetary policy, he said.

While the strength of the initial recovery from the second quarter's historic pandemic-driven slump surprised Wright, he's worried that a second wave of the disease could again suppress consumer spending.

"It's hard to be confident about the future path of the economy right now," he said. "We're looking a little bit nervously at the rising case numbers and even more at the rising hospitalization numbers."

The Fed's September economic forecasts indicated the central bank broadly expects the labor market to recover within three years. But Wright conceded that built into those estimates is a great deal of uncertainty about the timetable of a potential vaccine or effective treatments for Covid-19.

He said it's too soon to tell whether the current recession will leave longer-term scars on the labor market, such as hampering the ability of workers to move from one sector to another.

"The longer it drags on, the more those relationships are severed, the harder it will be to recover," he said.