U.S. economy may need more fiscal stimulus, Fed’s Kaplan says

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More pervasive virus testing and further fiscal stimulus is likely needed to revive consumer confidence and foster growth in the U.S. economy, according to Robert Kaplan, president of the Federal Reserve Bank of Dallas.

“Whatever the government says, until the consumer is willing to resume some of their previous activities, this recovery is not going to be as strong as it could be,” Kaplan said Wednesday in an interview on CNBC. “Until they feel more comfortable they’re not going to fully engage in previous activities, and that you can’t legislate, you can’t stimulate with money. That’s behavioral.”

Robert Kaplan, president of the Federal Reserve Bank of Dallas
Robert Kaplan, president of the Federal Reserve Bank of Dallas

Consumer spending, which accounts for 70% of the U.S. economy, won’t fully come back until people feel comfortable, and that will require more testing and contact tracing, Kaplan said. The Fed may need to do more in terms of monetary policy, but the economy may also need more fiscal stimulus.

“My guess is we are going to need to do more, but my guess is also you’re going to need to do more fiscal action, whether it’s aid to governments or other fiscal action as we go through this,” said Kaplan, a voter on this year’s rate-setting Federal Open Market Committee.

Congress has passed $3 trillion in stimulus measures and the Fed has announced nine emergency-lending programs to bolster liquidity in key markets and provide loans to states, municipalities and businesses. The House backed an additional $3 trillion Democratic economic stimulus bill Friday, but calls for more stimulus from Democrats contrast sharply with the view of Republican lawmakers and President Donald Trump that the best way to revive the economy is to end state lockdowns aimed at containing the pandemic.

Fed Chairman Jerome Powell appeared before lawmakers along with Treasury Secretary Steven Mnuchin Wednesday for a virtual hearing on the progress of stimulus programs already in place. Powell sought to maintain neutrality in the debate over whether Congress should build on the record stimulus but reiterated his stance that more fiscal aid may be needed, while Mnuchin warned of significant harm to the economy if shutdowns are prolonged.

Bloomberg News