The Federal Reserve will need to roll out new efforts “in coming months” to help the economy overcome the impact of the coronavirus pandemic and live up to the US central bank’s new promise of stronger job growth and higher inflation, Fed Governor Lael Brainard said on Tuesday.
“With the recovery likely to face Covid-19-related headwinds for some time, in coming months, it will be important for monetary policy to pivot from stabilisation to accommodation,” Brainard said, and do what’s appropriate to hit the new goals of “maximum employment and average inflation of 2% over time.”
That decision “will be guided” by the new strategy which trades risks of higher inflation with efforts to promote further job growth, she said during a webcast discussion set up by the Brookings Institution.
Brainard, among the architects of the new long-term strategy the central bank adopted last week, is the first Fed official to tie that new approach directly to the need for further monetary stimulus, likely in the form of more aggressive bond-buying or more ambitious promises about returning the country to low unemployment.
The change in strategy is being billed by Fed officials as a “milestone” shift that puts its emphasis squarely on encouraging more employment and, in the process, helping low-income and minority communities benefit more from periods of growth.
The Fed has been pushed in recent years to take closer account of persistent economic disparities between Blacks and whites for example. In its prior approach, unemployment rates below a certain level were seen as raising the risk of inflation and requiring interest rate hikes that slowed growth just as minority communities were beginning to benefit.
With some Democratic officials calling for a more extensive focus by the US central bank on things like the Black unemployment rate, Brainard said she felt the new framework is responsive to those concerns about inequality.
The new approach “will enable the labor market to heal for a much more sustained period … That is the single most important factor to bring some of these structurally challenged groups back into the labor force,” she said.
But some analysts have argued the Fed’s new framework is incomplete without more details on what it intends to do to implement it, and during a panel discussion on Tuesday former Fed chiefs Ben Bernanke and Janet Yellen agreed.
“I need to see some action,” Bernanke said, grading the new framework as “incomplete” and “aspirational.”
‘UNWARRANTED LOSS OF OPPORTUNITY’
In recent days, as the new framework was announced, Fed officials largely steered clear of promising further action, but Brainard appeared to agree that the central bank now needs to follow through.
With the new framework now set, it “would be natural to turn back” at coming meetings to how “core tools” like bond-buying and forward guidance should change as a result, she added.
The timetable Brainard outlined puts any Fed decision on further economic stimulus beyond the November 3 presidential election.
Brainard also detailed how she sees the new framework benefiting workers.
Prior decisions to raise interest rates when unemployment fell, even as inflation remained low, represented “an unwarranted loss of opportunity for many Americans,” she said.
That included the initially slow pace of rate increases begun under the Yellen-led Fed in 2015. Though the glacial pace of those hikes, Brainard noted, allowed Black and Hispanic unemployment to continue falling and drew millions into the labor force, it is likely “the gains would have been greater,” under the new approach.
Yellen, who guided the Fed to that initial “liftoff” of interest rates, said those increases in borrowing costs responded to forecasts at the time that joblessness was moving beyond its sustainable “natural” rate – a concept itself that has been done away with in the new framework in favour of a more open-ended view of maximum employment.
If that new approach had been in place in 2015, “it would have made a small difference. I don’t think it would have made a huge difference,” Yellen said.
(Reporting by Howard Schneider and Ann Saphir; Editing by Paul Simao)
