The economy will take a long time to recover and the Federal Reserve will have to maintain very easy monetary policy into 2023 to assist the healing process, said Cleveland Fed President Loretta Mester on Wednesday.
“My view is, given what I know, and given what I’ve seen, and given when you talk to business contacts, this is going to be a long road back,” Mester told reporters after a virtual speech.
And because of that outook, Mester said she thought the Fed “is going to need to have a very accommodative monetary policy for quite some time.”
Surprisingly good news on job growth and retail sales has sparked some talk of a stronger-than-expected recovery. But Mester said the gains were deceiving as they came off low levels in March and April.
A more optimistic scenario could be built, but it would be based on the development of a vaccine for the coronavirus so that people feel comfortable re-engaging, she said. “That doesn’t seem to be one you can put a lot of weight on.”
In her speech to the Council for Economic Education in New York, Mester said her forecast was very similar to the median forecast of FOMC participants that was released last week, which showed most Fed officials think it will be appropriate for the central bank to keep its benchmark federal funds rate close to zero through 2022, the end of the projection horizon.
At the moment, Mester said she thinks the economy will improve after the end of this month.
“But after that, I believe it will take quite some time for economic activity and job levels to approach more normal levels,” she said.
Mester is a voting member of the Fed’s interest-rate setting committee this year.
“The shape of the recovery will depend on the path of the virus and our ability to handle its spread through testing, contact tracing, treatment and risk-focused restrictions on activity. It will also depend on the behavior of households and businesses and how comfortable they feel in re-engaging in economic activity,” Mester said.
A survey by the Cleveland Fed found a profound split among households about how they plan to behave in the pandemic. About 60% of respondents think the pandemic will last a year or less and they are likely to return to restaurants and other crowded attractions. The remaining 40% say they think the pandemic will last more than a year and said they won’t return to public activities even after it has ended.
Mester said she thought that the crisis would push inflation lower this year before it moves back up.
“I think it behooves us to make sure we do what we can to make sure that inflation moves in the right direction, not in the wrong direction,” she said.
That’s yet another reason to keep rates low for longer, she said.
U.S. stocks were mixed on Thursday, with the Dow Jones Industrial Average DJIA, -0.64% and the S&P 500 index SPX, -0.36% closing lower, while the Nasdaq COMP, +0.14% gained.
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