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“Depending on the course the virus takes and the depth and duration of the downturn it causes, additional support from both monetary and fiscal policies may be called for,” he said in the text of a speech to be delivered via webcast to New York Association for Business Economics.
While pledging that the Fed will continue to act aggressively to counteract the economic blow from the coronavirus crisis, Clarida also stressed the limit of central bank’s support — it can only lend out money, not spend it — and said budgetary action was essential.
“Direct fiscal support can make a critical difference, not just in helping families and businesses stay afloat in a time of need, but also in sustaining the productive capacity of the economy after we emerge from this downturn,” he said.
Congressional Debate
Clarida’s comments echo those made over the past week by Fed Chairman Jerome Powell and come ahead of expected negotiations between Republican and Democratic lawmakers and the White House over another fiscal package. Lawmakers have already passed nearly $3 trillion of measures to cushion the economy from what Clarida called the “severe” blow from the coronavirus crisis.
The Fed vice chairman said he expects the economy to begin to pick up and unemployment to start to fall in the second half of the year, though he added it will take some time for the economy to fully recover. He also cautioned that the outlook remained highly uncertain and subject to the course of the virus.
The jobless rate more than tripled in April to 14.7% as employers cut an unprecedented 20.5 million jobs. A further rise is expected this month.
Clarida called the virus crisis a “disinflationary shock” and suggested that the drag on prices may last for a while.
“While the COVID-19 shock is disrupting both aggregate demand and supply, the net effect, I believe, will be for aggregate demand to decline relative to aggregate supply, both in the near term and over the medium term,” he said.
(Updates with more comments from Clarida from fifth paragraph.)
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