Fed’s Daly says U.S. needs longer bridge of support for economy

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The U.S. economy needs more support than originally thought as a resurgence in the coronavirus pandemic weighs on growth, said Federal Reserve Bank of San Francisco President Mary Daly.

“It’s becoming quite clear that the virus will be with us for longer and more vigorously than anyone had hoped for,” Daly said in an interview Tuesday. “The length of the support that the economy is going to need, before we can ever stimulate the economy, it just has to be longer.”

The economic recovery is stalling in parts of the country experiencing new peaks in virus cases while Congress debates its next round of fiscal stimulus. An extra $600 per week in benefits for the unemployed expired at the end of July, as did a federal eviction moratorium. Lawmakers and the White House are debating whether to continue both measures in some form.

Fed officials including Daly have noted that the path of the economic recovery will depend in large part on the course of the virus. They even included a phrase to that affect in their statement following the July Federal Open Market Committee meeting. Looking ahead to the central bank’s September gathering, Daly said she’ll be thinking about how to best communicate about the Fed’s ongoing support of the economy.

“As we get more information about how the virus will affect the economy, we will be thinking about how can we use forward guidance to telegraph to people, to signal to markets, households and businesses what our intentions are in terms of supporting the economy going forward,” Daly said, who votes on monetary policy next year.

Fed officials have been debating how they could reinforce so-called forward guidance to cement the public’s understanding of the conditions under which the central bank might lift interest rates which are currently near zero, or adjust its asset purchases.

During the last expansion, the Fed saw joblessness fall well below what it had estimated to be full employment. At the same time, inflation never consistently reached the central bank’s 2% goal. This lesson can guide policy makers in the recovery from the coronavirus crisis, Daly said.

“We have room to let the economy go well beyond what people think is its maximum level of employment and we can then pull in many, many individuals who people have traditionally thought were structurally unemployed, unable to get jobs,” Daly said.

The pandemic has disproportionately affected workers who already face higher-than-average levels of unemployment and lower levels of labor force participation. Women and Americans of color have seen job losses in greater numbers than men and White Americans.

Some economists have called on the Fed to specifically target the Black unemployment rate, which is often more than double that of White workers. Joe Biden, the presumptive Democratic nominee for president, last week outlined a plan that would require the central bank to report on such disparities and what it’s doing to close the gaps.

Daly said she favors looking at a broad dashboard of indicators rather than targeting one specific rate.

The racial disparities in other aspects of the pandemic economy, such as students’ ability and willingness to go to college this year, will have long-term ramifications for the labor force, she said.

“The long tail of the pandemic will be that we have many, many people who remain on the sidelines unless we take this opportunity to educate these people, get them the training they need,” Daly said.

The U.S. needs more equitable access to education and more investment in things like broadband Internet to ensure that more people can participate in remote learning.

The Fed and the economics profession as a whole have been undersome scrutiny when it comes to diversity. Among the central bank’s economists, who most directly influence policy, only a quarter are minorities and the same amount are female. Daly said the Fed has a lot of work to do on this front.

“If we don’t have an inclusive profession or organization, then we’ll end up with simply optical diversity and that’s not what we’re trying for because ultimately policy making is endogenous to those who make it,” she said.

Bloomberg News
Monetary policy Federal Reserve Bank of San Francisco Mary Daly Federal Reserve FOMC
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