MNI POLICY: US Faces Biggest Risk From Renewed Shutdowns: IMF

--Fed Could Hold Rates Until Inflation Exceeds 2%, Boost QE

By Greg Quinn

     WASHINGTON (MNI) - The U.S. economy's biggest risk is new shutdowns linked

to the recent surge in Covid-19 cases, and policymakers should offer continued

fiscal support and consider strengthening QE and forward guidance to help the

recovery, the IMF said Friday.

     "The principal risk, and one that is the most difficult to quantify, is

that a resurgence in the number of COVID-19 cases in the U.S. could lead to

renewed, partial shutdowns," the IMF said in its annual Article IV statement.

"While a cautious public health approach will mitigate this risk, the recent

increase in infection rates in some states is already leading to a slowdown or

partial reversal of reopening decisions." 

     "It will likely take a prolonged period to repair the economy and to return

activity to pre-pandemic levels. All in all, globally there will be difficult

months and years ahead and it is of particular concern that the number of

COVID-19 cases is still rising," the IMF said.

     The world's largest economy will shrink at a 37% annualized pace in 2Q and

by 6.6% this year, the IMF said. The downturn shows signs of long-lasting damage

such as laid-off workers, a potential rise in corporate bankruptcies and

government debt rising to 160% of GDP by 2030 even without new stimulus. 

     "The very large amount of slack in the economy increases the risk of an

extended period of low, or even negative, inflation. This could mute the impact

of monetary policy (given the effective lower bound) and cause businesses and

consumers to delay demand," the IMF said.

     The IMF said the Fed could play a key role:

     --"There is potential to bolster the monetary support that has already been

put in place. In the coming months, asset purchases could be scaled up to

increase policy stimulus and the Federal Reserve could adapt its forward

guidance to more firmly anchor market expectations about the future path for

policy (e.g. by committing to maintain policy rates at the lower bound at least

until inflation rises above 2 percent for a sustained period of time)."

     --"These actions could potentially be supported by the introduction of

yield curve control. The current credit and liquidity facilities should be

regarded as unusual and exigent tools and should be phased-out (as planned)." 

     --"The risk-reward trade-off does not appear to favor the introduction of

negative policy rates in the U.S. context."

     The IMF also criticized President Donald Trump's America First policies,

saying they are "undermining the openness and stability of global trade" and

"treating undervalued currencies as a countervailable subsidy represents a

significant risk to the multilateral trade and international monetary systems."

     Closer to home, there is a risk of creating "an important headwind to

growth" if state and local governments pull back on stimulus over the next year,

the IMF said, adding to pressures already facing disadvantaged people. 

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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