Fed’s Mester Says U.S. Economy ‘Fragile’ as Pandemic Lingers

(Bloomberg) -- Federal Reserve Bank of Cleveland President Loretta Mester says the U.S. economic recovery remains “fragile,” requiring more government action to prevent long-term scars.

“It seems clear that further fiscal support is needed to provide a bridge for households, small businesses and state and local municipalities that have borne the brunt of the pandemic until the recovery is sustainably in place,” Mester said in the text of remarks she’s scheduled to deliver Wednesday during an online conference hosted by the National Association for Business Economics.

Mester, who is a voter this year on the policy making Federal Open Market Committee, said she expects economic output in 2020 to be “somewhat below” its level last year, that unemployment will be in the high single digits by year end, and inflation will continue to run well below the Fed’s 2% objective.

She didn’t comment on whether the FOMC should alter its guidance on the future path of interest rates when it meets Sept. 15-16.

Mester said the Cleveland Fed’s surveys of firms and consumers show changing attitudes toward the pandemic that has deeply damaged the economy. Both groups see the impact of the virus lasting longer.

In a June survey, half of businesses said it will take at least a year for activity to return to pre-pandemic levels, she said.

Mester also commented on the Fed’s recently unveiled new strategy for conducting monetary policy. The FOMC agreed last week it will sometimes allow inflation to run above its 2% objective to make up for prior undershoots, and tolerate lower unemployment than previously. The shift is aimed at boosting inflation after years of falling short of the Fed’s target, an outcome that hurts the central bank’s ability to fight recessions.

The shift “will help anchor inflation expectations, a main determinant of actual inflation, at levels consistent with 2% inflation,” she said.

The new strategy, she added, “clarifies that in the absence of inflationary pressures or risks to financial stability, strong employment is not a concern and monetary policy will not react to it.”

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