Fed’s Evans Says Substantial Additional Fiscal Aid Critical

The course of the economic recovery in the U.S. will “critically depend on receiving substantial additional support from fiscal policy,” Federal Reserve Bank of Chicago President Charles Evans said.

“Partisan politics threatens to endanger additional fiscal relief,” Evans said Thursday in remarks prepared for a virtual event hosted by the Lakeshore Chamber of Commerce in northwest Indiana. “A lack of action or an inadequate one presents a very significant downside risk to the economy today.”

Senate Majority Leader Mitch McConnell expressed doubts Wednesday as to whether lawmakers would be able to reach a deal on additional pandemic relief in the next few weeks. The Chicago Fed chief gave a downbeat view of the road ahead for the economy even assuming a deal, suggesting that periodic coronavirus outbreaks around the country would damp consumer spending until a vaccine becomes available.

“Even with steady progress in controlling the virus and additional fiscal support, I expect it will be some time before the economy recovers from the hit it took,” he said, predicting the unemployment rate would still be somewhere in the range of 5% to 5.5% at the end of 2022.

Framework Review

Fed Chair Jerome Powell unveiled a new strategy for setting interest rates during an annual economic symposium on Aug. 27.

Going forward, the U.S. central bank will allow the inflation rate to rise above its 2% target following periods of below-target inflation with an aim toward averaging 2% over time. That means waiting longer to tighten monetary policy as inflation rises than in the past.

Officials slashed their benchmark interest rate to nearly zero at the onset of the coronavirus pandemic in March and said they wouldn’t begin raising it again until the economy was “on track” to achieving maximum employment and 2% inflation.

Investors are on the lookout to see whether or not Powell and his colleagues will update that guidance to reflect the new strategy at their upcoming Sept. 15-16 policy meeting.

In his remarks, Evans said the principles underlying the new strategy “are consistent with the type of outcome-based forward guidance that I advocated and that the Committee used to speed the recovery after the Great Financial Crisis.”

“We are in a similar position today,” he said. “And I expect that articulating outcome-based forward guidance for the rate path and asset purchases could be beneficial in the not-too-distant future.”

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