Yesterday, Lael Brainard, a Federal Reserve Board Governor, gave a webinar titled “Navigating Monetary Policy through the Fog of COVID” at an event organised by the National Association of Business Economics. She struck a cautious tone noting: “the recent resurgence in COVID cases is a sober reminder that the pandemic remains the key driver of the economy's course. A thick fog of uncertainty still surrounds us, and downside risks predominate.” Reflecting this, she emphasised “Fiscal support will remain vital.”
She cautioned that the earlier-than-expected resumption in economic activity since April has been accompanied by an increase in the Covid infections in many areas. The economy is likely to face headwinds as lower activity levels, social distancing and costly adjustments take their toll while a “broad second wave could re-ignite financial market volatility and market disruptions at a time of greater vulnerability”. Importantly, while 7.5m jobs have been added in the past 2 months there are still 14.7m jobs that have not yet been restored since the pandemic hit.
In terms of Fed policy, she noted: “With the restoration of smooth market functioning and credit flows, our emergency facilities are appropriately moving into the background,” but are retained as an “insurance policy”. Brainard opined “Looking ahead, it will be important for monetary policy to pivot from stabilization to accommodation.” On policy tools, she emphasised forward guidance is important as the policy rate is constrained by the effective lower bound but “there may come a time when it is helpful to reinforce the credibility of forward guidance and lessen the burden on the balance sheet with the addition of targets on the short-to-medium end of the yield curve.” But further analysis and discussion of this approach were likely required.
In contrast to Brainard’s cautious tone on the economy, US equities instead looked to the supportive policy backdrop, the positives in corporate results, and the encouraging news of Moderna Inc.’s trial for a vaccine for Covid-19 which showed antibodies to coronavirus were raised in all patients in the initial safety trial. Clearly, it is early days in terms of finding a vaccine, but a successful and viable vaccine would be a gamechanger in terms of driving an economic recovery forward.