Fiscal support is ‘incredibly important’ for US recovery, top official says

Federal Reserve Bank of Chicago's president says additional fiscal support will help uphold public's confidence amid the pandemic

Chicago Federal Reserve Bank president Charles Evans says another round of fiscal support is important for the economic recovery in the US. Reuters    

It’s “incredibly important” the US deliver another round of fiscal policy measures to aid the economy as it weathers the coronavirus pandemic, said Federal Reserve Bank of Chicago president Charles Evans.

“Fiscal policy has been unbelievably important in supporting the economy during the downturn that we’ve been experiencing,” Mr Evans said in an interview Sunday on CBS’s Face the Nation.

“That continues to be important because we’ve not got control over the virus spread. I think that public confidence is really important, and another support package is really incredibly important,” he said.

President Donald Trump on Saturday took executive actions on relief, working around a Congressional impasse, though the measures fall well short of the aid that Democrats say is needed amid a stalling US economic recovery and with millions of Americans still out of work.

Democrats and Republicans are trillions of dollars apart on overall spending and on key issues, including on aid to state and local governments and the amount of supplementary unemployment benefits that expired at the end of last month.

Fed officials have cut interest rates to nearly zero and signalled they would keep them there at least through 2022 as they try to get the economy back on track. High frequency signals on activity show an economic rebound flattening out, though the latest monthly reading on the labour market was better than expected.

Asked to discuss the consequences of failing to renew robust fiscal aid - where one of the sticking points is how much money to set aside for state and local governments - Mr Evans noted that these entities employ about 10 per cent of the US workforce, and face a major budget crunch due to the virus.

“As you look at the economic outlook there are some negative scenarios and the ones that are most pessimistic involve not supporting state and local governments,” he said. “States have to balance their budgets. They are experiencing reduced tax revenues and so there will be employment reductions.”

Government data released on Friday showed US employers added 1.76 million jobs in July, about 300,000 more than economists expected. The unemployment rate fell by about 1 percentage point to 10.2 per cent, just above the peak following the 2008 financial crisis, though a marked decline from almost 15 per cent at the height of the pandemic.

But the report also showed that millions who lost their jobs in the early days of the pandemic remain unemployed, with the overall rate still almost triple the pre-crisis level.

Fed officials have repeatedly stressed that the path of the economy will hinge on the country’s success in curbing the virus.

Mr Evans repeated that point on Sunday and said that a hard lockdown of four to six weeks suggested by his Minneapolis Fed colleague Neel Kashkari might help get the pandemic under control. But he doubted the US government would do it.

“It would come at quite a lot of hardship for small businesses. It would require tremendous fiscal support. If the national US government were willing to do that I think we could knock down the virus spread,” Mr Evans said. “While that could work, I’m not optimistic that that would actually be adopted.”