MNI POLICY:Brainard: US in Long Slowdown, Sustained Aid Needed

By Pedro Nicolaci da Costa

     WASHINGTON (MNI) - The Federal Reserve and Congress will need to keep

supporting a Covid-ravaged economy for a sustained period as the economy will

"face headwinds for some time," Fed Governor Lael Brainard said Tuesday.

     "With a dense fog of COVID-related uncertainty shrouding the outlook, the

recovery likely will face headwinds for some time, calling for a sustained

commitment to accommodation, along with additional fiscal support," Brainard

said.

     The Fed will need to shift the focus of monetary policy "from stabilization

to accommodation by supporting a full recovery," Brainard said in prepared

remarks to a webinar sponsored by the National Association for Business

Economics. "The recovery is likely to face headwinds even if the downside risks

do not materialize, and a second wave would magnify that challenge."

     The Fed must "avoid the premature withdrawal of necessary support," she

said. 

     Risks to the job recovery are to the downside, and there could also be a

wave of insolvencies and a permanent loss of production capacity, she said. The

Fed should also seek to replicate the job outcomes at the end of the last

expansion rather than using outdated Phillips Curve relationships, she said. 

     Brainard said the central bank "remains actively committed to supporting

the flow of credit to households and businesses and providing a backstop if

downside risks materialize."

     Other speech highlights:

     --"With some of the fiscal support measures either provided as one-off

payments or slated to come to an end in July, the strength of the recovery will

depend importantly on the timing, magnitude, and distribution of additional

fiscal support."

     --"With the policy rate constrained by the effective lower bound, forward

guidance constitutes a vital way to provide the necessary accommodation."

     --"Forward guidance and asset purchases were road-tested in the previous

crisis, so there is a high degree of familiarity with their use. Given the

downside risks to the outlook, there may come a time when it is helpful to

reinforce the credibility of forward guidance and lessen the burden on the

balance sheet with the addition of targets on the short-to-medium end of the

yield curve."

     --"Given the lack of familiarity with front-end yield curve targets in the

United States, such an approach would likely come into focus only after

additional analysis and discussion."

--MNI Washington Bureau; +1 202 371 2121; email: pedro.dacosta@marketnews.com

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