Fed Officials Talk Up Urgency of Fiscal Aid as Lawmakers Bicker

Federal Reserve officials warned Monday that another round of fiscal relief would be critical for the U.S. economy as lawmakers continued to negotiate the contours of additional aid.

Tens of millions of Americans who lost their jobs as a result of the coronavirus pandemic have in recent months relied on the enhanced unemployment insurance payments authorized by Congress in March to pay their bills and put food on the table, while temporary moratoriums on evictions have kept roofs over their heads.

“It’s very important that something be done,” Chicago Fed President Charles Evans told reporters Monday. “If we go very long without somehow addressing the reduction and evaporation of that support, I think it’s going to show up in lower aggregate demand, and that would be very costly for the economy.”

Fed Officials Talk Up Urgency of Fiscal Aid as Lawmakers Bicker

Lawmakers allowed the enhanced payments of $600 a week to expire on July 31 and have yet to agree on an extension. The lapse comes as high-frequency indicators suggest the economic recovery is at risk of stalling out due to renewed outbreaks across the country.

Democrats in Congress want to extend the $600 payments -- which were added to regular unemployment insurance benefits as part of the package passed in March -- through January. Republicans argue the payments should be reduced because they are too generous and discourage people from returning to work.

Dallas Fed President Robert Kaplan said earlier Monday that the enhanced benefits would need to be extended in some form and added that the extra spending power they’ve been providing to households have probably kept more people employed than would otherwise be the case.

“The increased incomes, while it may have made it harder for certain individual businesses to hire, it’s helped create jobs because it’s helped bolster consumer spending, so the net effect still has probably been positive for the economy and for employment,” Kaplan told Michael McKee in a Bloomberg Television interview.

His Richmond Fed colleague Thomas Barkin made a similar point.

“Quickly pulling away the support that consumers and businesses are receiving would be a pretty traumatic move for what’s happening in the economy,” he said during a separate event Monday

Forward Guidance

Central bankers are underscoring the need for lawmakers to take action in part because the Fed has already slashed its benchmark interest rate to nearly zero. Evans said monetary policy would have a bigger impact once the economy began to rebound again because low rates would help encourage businesses and households to borrow and invest more.

Fed officials are currently debating whether to enhance their public guidance about the future path of rates by tying it to specific thresholds for unemployment and inflation, a move Fed watchers expect to come after the central bank’s next policy meeting in September.

“Unless inflation starts heading up to like 2.5%, I’m not going to really see a need for the funds rate to be increasing as long as we can still drive unemployment lower, that we can get more people into the workforce, we can recover from some of what we’ve just sort of experienced, and get everybody back on their feet,” Evans said. “So, I think that’s the kind of forward guidance I know I would be arguing for.”

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