Vice chair gives Fed credit for easing financial conditions – but notes pandemic’s effects not yet over

The “unremittingly awful” financial conditions have eased since the middle of March – when the economic impact of the coronavirus crisis became clear – due in part to actions taken by the Federal Reserve, the vice chair of the agency’s board said Thursday.

However, whether improving conditions continue, Vice Chair Richard Clarida said, depends on the course that the pandemic takes and the duration of the economic downturn that it causes.

The Fed leader asserted that the nine new credit facilities set up by the Fed in mid-March – including various lending facilities to shore up financial markets, money market funds, the Small Business Administration’s (SBA) Paycheck Protection Program (PPP), and more – helped, “at least in part,” a slowing in the nation’s economic decline.

“At a minimum, the easing of financial conditions is buying some time until the economy can begin to recover, growth resumes, and unemployment begins to fall,” Clarida told the New York Association for Business Economics via webcast.

“Because the course of the economy will depend on the course of the virus and the public health policies put in place to mitigate and contain it, there is an unusually wide range of scenarios for the evolution of the economy that could plausibly play out over the next several years,” Clarida said. “In my baseline view, while I do believe it will likely take some time for economic activity and the labor market to fully recover from the pandemic shock, I do project right now that the economy will begin to grow and that the unemployment rate will begin to decline starting in the second half of this year.”

Clarida projected that the COVID-19 contagion shock will be disinflationary, not inflationary. He projected aggregate demand to decline relative to aggregate supply, both in the near term and over the medium term. “If so, this decrease will put downward pressure on core inflation, which was already running somewhat below our 2% objective when the downturn began in March.

“Moreover, as I have indicated previously, I judge that measures of longer-term inflation expectations were, when the downturn began, at the low end of a range that I consider consistent with our 2 percent inflation objective,” he said.

In closing remarks, Clarida called the pandemic “the most serious threat to maximum employment and, potentially, to price stability that the United States has faced in our lifetimes.” He said policymakers – and epidemiologists – simply do not know right now about the potential course that the virus, and thus the economy, will take.

“But there is one thing that I am certain about: The Federal Reserve will continue to act forcefully, proactively, and aggressively as we deploy our toolkit – including our balance sheet, forward guidance, and lending facilities – to provide critical support to the economy during this challenging time and to do all we can to make sure that the recovery from this downturn, once it commences, is as robust as possible,” he said.

Fed Vice Chair Richard H. Clarida: U.S. Economic Outlook and Monetary Policy