Fed's Clarida says vaccines have buoyed economic outlook

WASHINGTON (Reuters) – The ongoing distribution of two coronavirus vaccines has lifted the U.S. economy’s prospects for 2021 and lowered the likelihood of a worsening downturn, Federal Reserve Vice Chair Richard Clarida said on Friday.

The new COVID-19 surge, with as many as 4,000 people in the United States dying daily and case loads growing by more than 200,000 each day, remains a near-term threat to the recovery, Clarida acknowledged on a day when the U.S. government reported the country lost 140,000 jobs in December.

But over the course of the last 10 months, “the economy has turned out to be more resilient in adapting to the virus and more responsive to monetary and fiscal policy support than many predicted,” Clarida said in remarks prepared for delivery to the Council on Foreign Relations. “The welcome news on the development of several effective vaccines indicates to me that the prospects for the economy in 2021 and beyond have brightened and the downside risk to the outlook has diminished.”

After rolling out unprecedented support for the economy last year, the U.S. central bank is now assessing a quick shift in expectations.

The ongoing distribution of vaccines means the pandemic may come under control faster than many thought, and the results of the Nov. 3 U.S. election and two U.S. Senate runoff races this week have given the Democratic Party control of the White House and Congress, paving the way for more government spending to bolster the economy.

Though the U.S. unemployment rate remains high at 6.7%, Clarida said he and his colleagues expect a “relatively rapid” return to targeted job and inflation levels compared with the eight or more years it took for the economy to climb back from the 2007-2009 financial crisis and recession.

That process could still take perhaps two years, according to the most recent Fed estimates, and Clarida reiterated that the central bank will use its “full range of tools” to keep the recovery on track.

While that means the Fed will keep its key overnight interest rate unchanged indefinitely, it will also have to decide how long to continue its $120 billion in monthly bond purchases.

Clarida did not elaborate on his views about that matter, or explain how he interprets the recent promise by the Fed to keep bond purchases underway until the economy has made “substantial further progress” towards its inflation and employment goals.

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