MNI POLICY: US Needs Fiscal Push, Fed May Need Guidance: OECD

By Greg Quinn and Brooke Migdon

     WASHINGTON (MNI) - Congress should extend fiscal stimulus as damage from

Covid-19 lingers while the Federal Reserve should be ready with forward guidance

and expanded QE if the economy weakens further, the OECD said Thursday.

     The banking system also faces risks if stimulus is withdrawn and there is a

surge in bankruptcies from highly leveraged companies, the Paris-based group

said in an annual review of the world's largest economy. 

     "A sharp fiscal retrenchment would be counter-productive and as such the

temporary provisions in the recent tax reform should not be allowed to expire.

Furthermore, automatic stabilizers and additional measures implemented as part

of the crisis reaction should be allowed to play out," the OECD report said. 

     The OECD said the deficit that could reach 15%-17% of GDP this year has

been easily financed so far and doesn't go much further in adding to the

longer-term challenges of the government's debt burden. Some lawmakers want to

curb relief checks to encourage people to return to jobs as the economy

re-opens, even with a recent surge in new cases in states like Texas and

Florida. 

     --STATE SUPPORT

     "In addition, fiscal support for state and local governments during a

period when their revenues have dried up would counter an unwelcome fiscal

contraction just as the economy is beginning to regain its footing," the OECD

wrote in its 2020 Economic Survey of the United States.

     The Fed must likely rely on tools besides negative interest rates given the

trouble they would pose to the nation's banking system, the OECD said. 

     "Given potentially limited room for manoeuvre, drawing up contingency plans

for forward guidance and large scale asset purchases, including the

possibilities for expanding the range of eligible assets in case of an even more

severe downturn would be advisable," the OECD said.

     The Fed should also consider average inflation targeting that allows for an

overshoot following this prolonged period of weak prices, though the

implementation is "complicated," the OECD said. 

     U.S. unemployment should reach 12.9% by year-end if the Covid-19 pandemic

is not controlled before the end of the summer, the OECD said, or 11.3% in a

"single-hit scenario." GDP will fall 7.3% this year under a single-hit and 8.5%

under a second wave.

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

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