Central Banks

Thursday, July 9, 2020 - 12:00

MNI POLICY: US Needs Fiscal Push, Fed May Need Guidance: OECD


By Greg Quinn and Brooke Migdon

WASHINGTON (MNI) - Congress should extend fiscal stimulus as damage from Covid-19 lingers while the Federal Reserve should be ready with forward guidance and expanded QE if the economy weakens further, the OECD said Thursday.

The banking system also faces risks if stimulus is withdrawn and there is a surge in bankruptcies from highly leveraged companies, the Paris-based group said in an annual review of the world's largest economy.

"A sharp fiscal retrenchment would be counter-productive and as such the temporary provisions in the recent tax reform should not be allowed to expire. Furthermore, automatic stabilizers and additional measures implemented as part of the crisis reaction should be allowed to play out," the OECD report said.

The OECD said the deficit that could reach 15%-17% of GDP this year has been easily financed so far and doesn't go much further in adding to the longer-term challenges of the government's debt burden. Some lawmakers want to curb relief checks to encourage people to return to jobs as the economy re-opens, even with a recent surge in new cases in states like Texas and Florida.

--STATE SUPPORT

"In addition, fiscal support for state and local governments during a period when their revenues have dried up would counter an unwelcome fiscal contraction just as the economy is beginning to regain its footing," the OECD wrote in its 2020 Economic Survey of the United States.

The Fed must likely rely on tools besides negative interest rates given the trouble they would pose to the nation's banking system, the OECD said.

"Given potentially limited room for manoeuvre, drawing up contingency plans for forward guidance and large scale asset purchases, including the possibilities for expanding the range of eligible assets in case of an even more severe downturn would be advisable," the OECD said.

The Fed should also consider average inflation targeting that allows for an overshoot following this prolonged period of weak prices, though the implementation is "complicated," the OECD said.

U.S. unemployment should reach 12.9% by year-end if the Covid-19 pandemic is not controlled before the end of the summer, the OECD said, or 11.3% in a "single-hit scenario." GDP will fall 7.3% this year under a single-hit and 8.5% under a second wave.

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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