Relief measures should soon prioritize long-term employment, inflation goals over stabilization, Fed official says

• The Federal Reserve will soon need to pivot from its immediate relief measures to long-term efforts to reach unemployment and inflation goals, central bank governor Lael Brainard said Tuesday.
• Soaring coronavirus case counts present significant downside risks, she said in a videoconference with the National Association for Business Economics, and "it will likely be appropriate to shift the focus of monetary policy from stabilization to accommodation."
• Brainard suggested using detailed forward guidance and new asset-purchase strategies to defend against a longer-than-expected downturn.
• Separately, Richmond Fed President Thomas Barkin said the fears of rising unemployment could become reality if measures such as the Paycheck Protection Program expire.

A second wave of coronavirus infections will likely force the Federal Reserve to prioritize long-term recovery over immediate stabilization, central bank governor Lael Brainard said Tuesday.

The Fed's widespread monetary easing measures have largely worked their magic on markets, easing credit pressures and restoring liquidity through the second quarter. Positive economic data followed, with consumer spending and hiring slowly trending back to pre-virus levels. Yet fresh spikes in COVID-19 cases throughout the US stand to erase much of past months' progress, the Fed governor warned.

While fiscal spending will "remain vital" to pulling the economy out of its slump, the Fed will probably need to pivot away from its near-term relief policies, Brainard said during a videoconference with the National Association for Business Economics.

"A thick fog of uncertainty still surrounds us, and downside risks predominate," she said. "Looking ahead, it likely will be appropriate to shift the focus of monetary policy from stabilization to accommodation by supporting a full recovery in employment and a sustained return of inflation to its 2% objective."

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Brainard suggested the Fed implement more detailed forward guidance to set a path for future interest rate changes. The central bank pushed its benchmark rate close to zero in March to pad against the pandemic's toll and has since maintained the historically low levels. Policymakers expect near-zero rates to last through 2022.

"There may come a time when" the Fed should adjust forward guidance and "lessen the burden on the balance sheet" to defend against downside risks and a prolonged recession, Brainard said. Such unburdening could come in the form of yield curve targets, she added, a policy the Fed has considered but so far turned away from.

Other central bank officials have raised new concerns amid soaring case counts. Richmond Fed President Thomas Barkin cautioned on Tuesday that unemployment could turn higher if key fiscal efforts aren't given additional support. Congress at the start of July extended the Paycheck Protection Program until August 8, but hasn't yet extended the deadline for additional unemployment benefits.

If businesses pause rehiring amid the virus wave and unemployment worsens, the US could be in for a second economic plunge, Barkin said.

"There is a complicated brew of what's happening on unemployment," he said at an online event with the Charlotte Rotary Club, according to Reuters. "A bunch of companies large and small are realizing this is not a two-month issue and recasting their business."

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