Fed’s Clarida Sees Economic Recovery Starting in Second Half

(Bloomberg) -- Federal Reserve Vice Chairman Richard Clarida mixed a sobering acknowledgment of the damage inflicted on the U.S. economy by the coronavirus pandemic with an optimistic outlook for the second half of the year.

“We're living through the most severe contraction in activity and surge in unemployment that we've seen in our lifetimes,” Clarida said Tuesday in an interview on CNBC television. “But recovery could begin in the second half of the year, and that today is my forecast.”

Asked to clarify, Clarida said he expected positive economic growth in both the third and fourth quarters of 2020, though he emphasized that the recovery would be dictated by the virus and efforts to contain it.

“There is enormous uncertainty right now, and I'm an economist not an epidemiologist,” he said. “I think we have to be appropriately humble as we're navigating this period.”

Clarida's remarks come a week after Fed Chair Jerome Powell said policy makers of all stripes would have to do more to offset damage to the U.S. economy by the coronavirus pandemic.

Powell and colleagues last week left interest rates unchanged just above zero, but in recent days have continued to expand their already-historic response to the crisis by broadening some of the nine emergency lending programs the central bank has unveiled since March.

At zero for years

In separate remarks, James Bullard, president of the St. Louis Fed, also presented a cautiously optimistic view.

“We have a better chance of a swift recovery with this shock than with others in the past,” if the crisis is managed properly, Bullard said in a webinar with the National Association for Business Economics. “The main disruption in the U.S. economy will be in the second quarter.”

Nevertheless, Bullard said, there was no reason to doubt the assessment in financial markets that the Fed would be forced to keep interest rates near zero for years, not months.

In his interview, Clarida again pledged that the Fed would continue to use all its tools to help the economy.

“We're going to continue to be forceful, proactive and aggressive until we're confident that the economy is on the road to recovery, especially for Main Street,” he said. “We think we are building a bridge with these facilities until the economy can recover.”

Fiscal Policy

Clarida repeated Powell's recent pronouncements that fiscal policy is badly needed.

“Fiscal policy also plays an essential role,” he said, “because the Fed has lending authority but not spending authority. We can lend money but we can't transfer income to households and firms.”

The clampdown aimed at containing the deadly disease has slammed the U.S. economy, forcing more than 30 million people to claim unemployment benefits in six weeks as consumers sheltered in place and businesses shuttered.

In the Labor Department's April jobs report, due out Friday, the unemployment rate is projected to surge to 16%, the highest in monthly data back to 1948. It was 4.4% in March.

Clarida agreed that the unemployment figure coming Friday would probably be the worst since the 1940s, and that jobs will likely return only gradually.

“There can be a recovery in the economy once businesses re-open and people return to work, but I think realistically it's going to take time for the labor market to fully recover from this shock,” he said.