Fed’s Clarida Says Fiscal Aid Should Help Economy Rebound

(Bloomberg) -- The U.S. economy should rebound in the third quarter despite renewed coronavirus outbreaks, and another fiscal package from Congress will help, Federal Reserve Vice Chair Richard Clarida said.

“I do think economic activity did begin to pick up in May and in June, and my personal forecast is that will continue into the second half of the year,” Clarida said Wednesday in an interview on CNBC.

“It does look like that we're going to get another fiscal package from the Congress, and also that will provide some important support as well,” he said.

Deal Possible

Treasury Secretary Steven Mnuchin said Tuesday that the White House and congressional Democrats aim to strike a deal on another round of fiscal relief by the end of this week, though the two sides weren't yet close to an agreement.

Lawmakers have authorized roughly $3 trillion in aid since March, but a key program -- enhanced unemployment insurance benefits that added $600 per week to regular payouts -- expired at the end of July. As many as 30 million Americans were collecting unemployment insurance as of July 11, according to the latest available data.

Clarida said the U.S. economy could return to producing the levels of output that prevailed before the pandemic by the end of next year, though there is “enormous” uncertainty around that projection.

“The longer this drags on, the greater risk there is to longer-term damage to the economy,” he said. “I don't think we're at that point yet.”

Fed officials slashed their benchmark interest rate to nearly zero in March at the onset of the pandemic and are currently considering strengthening the guidance they've offered to the public on how long they plan to keep it there. The question is tied to a review of the central bank's broader policy-making framework that began in 2019 and is expected to conclude later this year.

Framework Review

Clarida said he was “optimistic that we're going to wrap up deliberations in the near future,” though he declined to comment on what the outcome might be.

Former Fed Chair Janet Yellen, speaking at a virtual event Wednesday, said she expected policy makers to adopt a more aggressive stance toward boosting inflation upon concluding the review.

“Instead of saying that it's always aiming for 2% inflation, regardless of how inflation has actually behaved and evolved in the past, I anticipate that it will indicate a desire for inflation to average roughly 2% over time,” Yellen said.

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