Fed’s Brainard Says Time to Pivot to Providing Accommodation

(Bloomberg) -- Federal Reserve Governor Lael Brainard, painting a dark picture of the U.S. economic outlook amid a resurgence of virus infections, said the central bank should pivot its forward guidance and asset purchases toward providing longer-run accommodation.

“A thick fog of uncertainty still surrounds us, and downside risks predominate,” Brainard said in remarks Tuesday to a virtual event hosted by the National Association for Business Economics.

“Fiscal support will remain vital,” she added. “Looking ahead, it likely will be appropriate to shift the focus of monetary policy from stabilization to accommodation by supporting a full recovery in employment and a sustained return of inflation to its 2% objective.”

U.S. central bankers held interest rates near zero at their June policy meeting and signaled they would probably stay that way through 2022, according to their updated quarterly forecasts. Brainard said the Fed is facing a monetary policy transition period as it considers how to better communicate about its asset purchases and forward guidance for a period when rates are likely to be stuck near zero. Fed officials next meet July 28-29.

Jobs ‘Unclear’

Brainard said it is “unclear” whether the pace of the recent labor-market recovery will be sustained, and said costly adjustments to the pandemic are likely to impair incomes while rolling flare-ups or even a second wave of the virus could slacken the pace of the recovery or even lead to a double-dip recession.

James Bullard, head of the St. Louis Fed, had a more upbeat view, though he told reporters that data he tracks suggest a slowdown in employment in the July U.S. jobs report.

“You would see a positive report for July, but it wouldn’t be as big of a gain as for May and June. That wouldn’t be surprising because those gains were quite large,” he said after delivering a virtual speech later Tuesday to the Economic Club of New York. The monthly payroll report will be released Aug. 7. The jobless rate in June was 11.1%, down from an April peak of 14.7%.

In his presentation, Bullard laid out scenarios in which the unemployment rate could be lowered sharply by the return of temporary workers to jobs. “I do think there is the potential for the unemployment rate to continue to fall dramatically in the months ahead,” he said, while cautioning not to expect the jobless rate to decline in a “perfectly straight line down.”

Policy Review

The central bank is trying to wrap up a long-run policy review that has considered various tools from yield-curve targets to inflation makeup strategies that would try to hit a 2% target on average over time.

“Forward guidance constitutes a vital way to provide the necessary accommodation,” Brainard said. “Refraining from liftoff until inflation reaches 2% could lead to some modest temporary overshooting, which would help offset the previous underperformance.”

She also said there might come a time when it would be helpful to reinforce policy forward guidance by targeting short-to-medium dated parts of the yield curve. But she made clear such a shift wasn’t imminent, noting “such an approach would likely come into focus only after additional analysis and discussion.”

Full Employment

Like Chairman Jerome Powell, she downplayed the notion that there is a precise estimate of full employment that would trigger the need to tighten policy because the relationship between labor market slack and prices has loosened.

The coronavirus induced a deep recession in the U.S. with more than 22 million jobs lost. Both the economic and health crises have disproportionately hurt minorities, and a recent escalation of virus cases in some states is starting to worry some Fed officials because it could slow down the recovery.

Brainard recalled what the Fed learned in its listening sessions around the country. “What we heard repeatedly is that employment gains came to some communities exceptionally late, and that they face some persistent barriers,” she said. “Policy should seek to achieve employment outcomes with the kind of breadth and depth that were only achieved late in the previous recovery.”

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