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Fed Considers Policy Shift as Second Wave of COVID-19 Rocks Parts of the U.S.

July 15, 2020, 08:59 AM
Filed Under: Federal Reserve

The economic recovery from the COVID-19 pandemic is likely to face headwinds even if the downside risks do not materialize, and a second wave would magnify that challenge, said Federal Reserve Board Member Lael Brainard, in a recent speech hosted by the National Association for Business Economics, Washington, D.C.

Brainard said that fiscal support will remain vital, and that looking ahead, it likely will be appropriate to shift the focus of monetary policy from stabilization to accommodation by supporting a full recovery in employment and a sustained return of inflation to its 2 percent objective.

"A variety of data suggest the economy bottomed out in April and rebounded in May and June. Payroll employment rebounded strongly in May and June," said Brainard. However, the earlier-than-anticipated resumption in activity has been accompanied by a sharp increase in the virus spread in many areas.

"Uncertainty will remain elevated as long as the pandemic hangs over the economy. Even if the virus spread flattens, the recovery is likely to face headwinds from diminished activity and costly adjustments in some sectors, along with impaired incomes among many consumers and businesses. On top of that, rolling flare-ups or a broad second wave of the virus may lead to widespread social distancing—whether mandatory or voluntary—which could weigh on the pace of the recovery and could even presage a second dip in activity. A broad second wave could re-ignite financial market volatility and market disruptions at a time of greater vulnerability. Nonbank financial institutions could again come under pressure, as they did in March, and some banks might pull back on lending if they face rising losses or weaker capital positions."

Click here to read the speech in its entirety.







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