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MNI POLICY: Fed's Mester Sees Rising Downside Risks

(MNI) WASHINGTON
WASHINGTON (MNI)

The Fed can offer forward guidance about rates and QE as additional ammunition to fight the coronavirus recession, Federal Reserve Bank of Cleveland President Loretta Mester said Wednesday as she conceded that reopening the economy has proven to be challenging amid a surge of new coronavirus cases.

"The increase in virus cases that we've seen in recent weeks has raised the downside risks to the outlook and is a stark reminder that there are several different scenarios that could play out," she said in remarks prepared for a virtual economic conference at Pomona College in Claremont, Calif.
"As the economy emerges from the reopening phase and moves into the recovery phase, the focus of Fed policy will expand from supporting market functioning and the flow of credit to ensuring that appropriate monetary policy accommodation remains in place to support the economy's return to more normal levels of economic activity and employment and inflation's moving back up," she said.
"Although our policy rate is already at its effective lower bound, the tools that we used to support the recovery from the Great Recession, including forward guidance about the future path of policy and purchases of longer-term Treasuries and agency mortgage-backed securities, can be used to provide additional accommodation."
Clearly communicating the Fed's strategy will also make its future actions more effective, she added, and the Fed plans to "in the near future" announce some changes as part of its revised policy framework.

UNCERTAIN FORECASTS

Mester, who votes on rates this year, expects the unemployment rate to remain elevated at around 9% by the end of the year, with GDP falling 6% relative to last December, but noted that uncertainty around the forecast is "extremely high."
"We are in an unprecedented situation and outcomes depend not only on appropriate economic policy but also on public health considerations," she said.

The Fed's asset purchases since March and emergency lending facilities have helped relieve stress in financial markets and support the flow of credit to individuals and businesses, but the central bank cannot make the types of grants that have "made a significant difference," Mester said.

She urged Congress to do more to support the economy via expanded unemployment benefits and cash payouts to families and businesses. "More fiscal support is needed to provide a bridge for households, small businesses, and state and local municipalities that have borne the brunt of the economic shutdown until the recovery is sustainably in place," she said.

MNI Washington Bureau | +1 202-371-2121 | jean.yung@marketnews.com
USPolicy NewsHomepageFederal ReservePolicy StoryNorth AmericaStoryRegionCentral Bank News
MNI Washington Bureau | +1 202-371-2121 | jean.yung@marketnews.com
USPolicy NewsHomepageFederal ReservePolicy StoryNorth AmericaStoryRegionCentral Bank News

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