Fed’s Mester: Rising Covid-19 Case Numbers Increase Downside Risks

5 August 2020

By David Barwick – FRANKFURT (EconoStream) – The resurgence of Covid-19 in the U.S. increases the downside risks to the economy, Loretta Mester, President and Chief Executive Officer of the Federal Reserve Bank of Cleveland, said Wednesday.

Speaking via video at the 2020 Liberal Arts Macroeconomics Conference of Pomona College, Mester, according to a text provided by the Cleveland Fed, said that the economic reopening phase could be more protracted than expected.

Predicting that by end-2020 GDP would be some 6% below the level of end-2019, unemployment about 9% and inflation ‘well below our 2% goal’, Mester noted that her forecasts were subject to ‘extremely high’ uncertainty.

‘The increase in virus cases that we’ve seen in recent weeks has raised the downside risks to the outlook and is a stark reminder that there are several different scenarios that could play out,’ she said. The ‘one thing you can be certain of’ is that the Fed ‘is committed to using all of its policy tools’, she said.

With the Fed’s policy rate having reached its effective lower bound, additional accommodation can be achieved via tools such as ‘forward guidance about the future path of policy and purchases of longer-term Treasuries and agency mortgage-backed securities’, she said. Maintaining a sufficient degree of accommodation will be the Fed’s focus during the recovery phase, she said.

Only when the virus is back under control and households and companies feel safe will the economic recovery phase begin, she said. ‘I anticipate that the recovery will take some time because significant sectoral reallocations are going to need to occur’, she said, citing changes in consumer behavior, working conditions and supply chains.

With many companies bankrupt and many workers still unemployed, ‘[i]t will take continued fiscal and monetary policy support to limit lasting damage to the economy and achieve a sustainable recovery’, she said.

Mester struck a very guarded tone with respect to incoming data. Like the Cleveland Fed’s ‘discussions with regional contacts’, the message of a host of higher-frequency indicators is that ‘activity has begun to decelerate with the rise in virus cases’ and the consequent pause in some areas’ economic reopening, she said.

‘These recent developments add uncertainty to what was already an uncertain outlook’, she said.

‘Whether the rise in cases and the deceleration in activity prove to be temporary or more persistent remains to be seen’, she said. ‘At the very least, they suggest that the economy will be in the reopening phase for a while longer’ and that this phase ‘may be more protracted than many had anticipated when it started.’

The upward price pressure stemming from supply disruptions caused by the pandemic ‘has been more than offset by the downward pressure driven by the pullback in demand’, according to Mester. ‘And I expect inflation to remain low for some time to come.’

Jobs added in May and June amounted to only about a third of the 22 million jobs lost the previous two months, she observed, leaving payroll jobs at the level of 2014. But the reality is even worse, she said, as many people dropped out of the labor force or had their work hours reduced.

The Cleveland Fed’s survey data shows companies reinstituting workers more slowly than they had planned, she said.