Fed's Brainard says more fiscal, monetary support needed

(Reuters) – Despite a “heartening” early bounceback from the initial hit to the U.S. economy delivered by the COVID-19 pandemic, the recovery has been uneven and will require continued support from the Federal Reserve and fiscal authorities to ensure it becomes broadbased and sustainable, Federal Reserve Governor Lael Brainard said on Wednesday.

FILE PHOTO: Federal Reserve Board Governor Lael Brainard speaks at the John F. Kennedy School of Government at Harvard University in Cambridge, Massachusetts, U.S., March 1, 2017. REUTERS/Brian Snyder

Brainard, in remarks to an online conference of the Society of Professional Economists, said the economy’s overall gains since the worst of the crisis mask big disparities among sectors and among Americans that could hold back the overall recovery.

The Fed, she said, is committed to providing “sustained accommodation” to the economy for as long as needed. At the same time, the biggest risk to her outlook for recovery is that fiscal support from the federal government will be withdrawn too soon.

“This strong support from monetary policy – if combined with additional targeted fiscal support – can turn a K-shaped recovery into a broad-based and inclusive recovery that delivers better outcomes overall,” Brainard said.

Brainard’s reference to a “K-shaped” recovery nods to an increasingly popular description of the rebound from the spring’s low point in activity, under which many households and small businesses have seen little improvement.

“Premature withdrawal of fiscal support would risk allowing recessionary dynamics to become entrenched, holding back employment and spending, increasing scarring from extended unemployment spells, leading more businesses to shutter, and ultimately harming productive capacity,” Brainard said.

Among the more troubling developments from the recession caused by the pandemic, she said, are that job losses have occurred disproportionately among minority populations and, more recently, that prime-age working women have left the labor force.

“If not soon reversed, the decline in the participation rate for prime-age women could have longer-term implications for household incomes and potential growth,” she said.

Brainard signaled that the Fed will not only keep rates at their current near-zero level for years, but will, even after liftoff, raise them only gradually to keep rates at levels designed to stimulate economic growth.

The central bank will “have the opportunity” in the months ahead to clarify how the Fed’s asset purchase program could best work in combination with forward guidance on rates, she said.

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