Federal Reserve policymakers expressed concern last week on issues ranging from excessive risk-taking in a low interest rate environment to the towering requirements for funding the government as the federal deficit zooms upward. But Richard Clarida, Vice chairman of the Fed, was surprisingly upbeat about the economy.
In a virtual appearance for the membership meeting of the Institute of International Finance, Clarida said:
“This recession was by far the deepest one in postwar history, but it also may go into the record books as the briefest recession in US history.”
The fact that Clarida, unlike Fed Chairman Jerome Powell and two of the three other members of the board of governors, has a doctorate in economics lent considerable weight to this declaration.
“The flow of macrodata received since May has been surprisingly strong,” Clarida went on, “and GDP growth in the third quarter is estimated by many forecasters to have rebounded at perhaps a 25 to 30% annual rate.”
Coming after a sharp 32% drop in the annual rate in the second quarter, that would represent a recovery that looks a lot like a V.
The US economy has defied the skeptics, Clarida said, as American consumers upended conventional wisdom and responded to low interest rates and easy credit, along with fiscal support from the government. “They do build houses, buy cars, and order equipment and software,” he said.
Clarida acknowledged that spending on services is lagging, but even here he saw a silver lining. During the ensuing discussion, Clarida said “there is pent up demand” for services that will lift the economy as the Covid-19 pandemic fades. Moreover, he said, households have accumulated considerable savings that will provide a “tail wind” for the economy at that time.
The rosy forecast is dependent on the virus cooperating, Clarida acknowledged, and it could well take another year to get back to pre-pandemic levels. Both the Fed and the government will have to provide more help, he said.
Mary Daly, president of the San Francisco Fed, was also optimistic in a call with reporters, saying that interest rates near zero is the right policy for the economy now. More action by the Fed may be needed, she said, and policymakers will carefully monitor incoming data. She explained:
“We've got the economy and the policy in a good position right now. I see us as well positioned to weather this storm we are in, and it remains to be seen if more will be needed.”
All 17 members of the Federal Open Market Committee take part in the policy meetings every six weeks or so, but only 10 of them get a vote—the five members of the board, the head of the New York Fed, and four other regional bank presidents who rotate into voting positions every two or three years. Daly, who took up her post in October 2018, will have her first full year as a voting member in 2021.
Boston Fed Chief Eric Rosengren followed up his remarks from the previous week about how vulnerable the financial system is from a dozen years of low interest rates by saying the US needs stricter rules to curb leverage and risk-taking. He told the Financial Times:
“If you want to follow a monetary policy…that applies low interest rates for a long time, you want robust financial supervisory authority in order to be able to restrict the amount of excessive risk-taking occurring at the same time.”
Randal Quarles, Fed vice chairman for supervision, worries that the central bank may have to continue its asset purchases for a long time because the US Treasury Department is issuing so much new debt, it could overwhelm private markets. The national debt has grown to more than $27 trillion from $23 trillion at the beginning of the fiscal year. Quarles said:
“It may be that there is a simple macro fact that the Treasury market being so much larger than it was even a few years ago, that the sheer volume there may have outpaced the ability of the private market infrastructure to support stress of any sort there.”