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The Federal Reserve’s second in command said the economy is primed to show big improvement this year owing to more Americans getting vaccinated and Congress approving more stimulus.
“The development of several effective vaccines and the passage by the Congress in late December of a package of fiscal relief measures indicate to me that the prospects for the economy in 2021 and beyond have brightened and the downside risk to the outlook has diminished,” Fed Vice Chairman Richard Clarida said in a speech to the U.S. Chamber of Commerce on Wednesday.
Read: Fed’s Powell says economy could improve later this year but sees no change in strategy
The Biden administration is set to up the ante with another relief package of almost $2 trillion. The pending bill would extend and expand emergency federal unemployment benefits to $400 a week from $300 and provide up to $1,400 in additional stimulus checks for eligible families.
Clarida gave no indication on whether he would prefer the Fed to slow asset purchases before the end of the year. The central bank has been buying $80 billion in Treasurys and $40 billion in mortgage-backed securities each month to keep interest rates low and goose the economy.
Low mortgage rates have help fostered the biggest boom in the housing market in more than a decade.
Clarida said the economy would need to make “substantial further progress” before the Fed began to reduce purchases. Earlier this year he said he expected the Fed to keep buying $120 billion a month in bonds at least until the end of 2021.
Clarida also emphasized the Fed’s new strategy on controlling inflation will be more flexible and less tied to old rules. Inflation has been low for years and he expects it to stay that way.
No longer will the central bank raise rates, for example, if the unemployment rate falls to a very low level, as it used to do in the past.
“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” signficantly higher, Clarida said.
The unemployment rate fell to a 50-year low of 3.5% before the pandemic struck last spring, but inflation never showed any sign of getting out of hand. That experience is part of what has informed the Fed’s new thinking on inflation.
The central bank’s new aim is to keep inflation around an average of 2%. That means it’s now willing to let inflation rise above 2% for awhile after a prolonged period of running below 2%.
Clarida said he doubted that low rates and massive federal spending were fueling a big bubble in stocks or other assets. Some critics contend government policies are creating bubbles.
