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Home » Fed Vice Chair Clarida says economy needs ‘perhaps another year’ to return to pre-pandemic level

Fed Vice Chair Clarida says economy needs ‘perhaps another year’ to return to pre-pandemic level

by FWNews
October 14, 2020 11:13
in News
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The U.S. economy needs another year or maybe more until it gets back to its pre-pandemic levels of activity, Federal Reserve Vice Chairman Richard Clarida said Wednesday.

Clarida noted that policy moves by the Fed and Congress have helped stimulate activity like buying houses and cars and investing in software and equipment, all measure that help boost growth.

“That said, the Covid-19 recession threw the economy into a very deep hole, and it will take some time, perhaps another year, for the level of GDP to fully recover to its previous 2019 peak,” the central bank official told the Institute of International Finance. “It will likely take even longer than that for the unemployment rate to return to a level consistent with our maximum-employment mandate.”

His remarks come ahead of a third-quarter GDP report expected to show annualized growth of more than 30%. UBS estimated this week that activity is at about 80% of where it was a year ago.

Even though 11.4 million jobs have been brought back since the virus-induced shutdown in March and April, the U.S. unemployment rate remained at 7.9% in September. Clarida that the actual rate probably would be 3 percentage points higher if labor force participation returned to its February level.

“”The global economy is going to look a lot like the U.S. It’s going to take some time to recover from this shock,” he said. “So far so good in terms of the recovery, but a ways to go not only in the U.S. but globally.”

However, he expects the Fed’s new approach to inflation to help the jobs picture.

In a move adopted after a year of public hearings, officials said they no longer will raise interest rates pre-emptively when unemployment falls. In the past, the Fed considered a declining jobless rate to be a harbinger for inflation, but the new approach allows inflation to run above the traditional 2% goal for a period as long as it averages around that level over a period of time.

The change “means that going forward, a low unemployment rate, in and of itself, will not be sufficient to trigger a tightening of monetary policy absent any evidence from other indicators that inflation is at risk of moving above mandate-consistent levels,” Clarida said.

“While this new framework represents a robust evolution in our monetary policy strategy, this strategy is in service to the dual-mandate goals of monetary policy assigned to the Federal Reserve by the Congress — maximum employment and price stability — which remain unchanged,” he added.

While Clarida said the Fed sees activity continuing to improve gradually after a sharp third-quarter recovery, he cautioned that the outlook ahead is “highly uncertain” and subject to the path of the virus.

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