(Reuters) – The Federal Reserve will need to roll out new efforts “in coming months” to help the economy overcome the impact of the coronavirus pandemic and live up to the U.S. central bank’s new promise of stronger job growth and higher inflation, Fed Governor Lael Brainard said on Tuesday.
“It will be important to provide the requisite accommodation to achieve maximum employment and average inflation of 2% over time,” Brainard said in an online discussion organized by the Brookings Institution.
Brainard, among the architects of the new long-term strategy the central bank adopted last week, is the first Fed official to tie that new approach directly to the need for further monetary stimulus, likely in the form of more aggressive bond-buying or more ambitious promises about returning the country to low unemployment.
Bond-buying and so-called forward guidance “remain at the core of our response,” Brainard said. “We have a robust set of monetary policy tools and … the statement does make a strong commitment to use all available tools.”
With the new framework now set, it “would be natural to turn back” at coming meetings to how monetary policy and forward guidance should change, she added.
Some analysts have argued the Fed’s new “framework” is incomplete without more details on what it intends to do to implement it, and Brainard suggested that needs to be addressed, particularly given the risks that high unemployment may last longer than expected and small businesses begin to fail in the absence of additional government pandemic-related support.
“With the recovery likely to face COVID-19-related headwinds for some time, in coming months, it will be important for monetary policy to pivot from stabilization to accommodation,” Brainard said. That decision “will be guided” by the new strategy which trades risks of higher inflation with efforts to promote further job growth.
The timetable Brainard outlined puts any Fed decision on further economic stimulus beyond the Nov. 3 presidential election, while acknowledging that the framework released last week will now start shaping concrete decisions.
Brainard gave some scope of the potential gains for workers, noting that prior decisions to raise interest rates when unemployment fell, even as inflation remained low, represented “an unwarranted loss of opportunity for many Americans.”
That included the initially slow pace of rate increases begun under former Fed chief Janet Yellen in 2015. Though the glacial pace of those hikes, Brainard noted, allowed Black and Hispanic unemployment to continue falling and drew millions into the labor force, it is likely “the gains would have been greater,” under the new approach.
Noting that employment growth may have slowed even with the U.S. economy roughly 13 million jobs short of the February, pre-pandemic level, the new framework “will put us in a stronger position to support a full and timely recovery.”