Fed official not hopeful of swift recovery

A likely absence of more federal aid for households and businesses this year and the extensive build up of corporate debt will weigh on the U. S. economic recovery from the recession triggered by the COVID-19 pandemic, the head of the Federal Reserve Bank of Boston said on Thursday.

Boston Fed President Eric Rosengren said his outlook was among the weakest ones offered by Fed policy-makers at their most recent meeting last month, in large part because he does not believe a new round of fiscal support will be delivered before next year.

“Most of my colleagues had an assumption that there was going to be additional fiscal stimulus. I had a somewhat different assumption,” Rosengren said in response to a question following an online presentation hosted by Marquette University.

“I assumed no fiscal stimulus until the beginning of next year. As a result my forecast was much weaker than many of my colleagues.”

At least two other Fed policy-makers — Chicago Fed President Charles Evans and Philadelphia Fed President Patrick Harker — said their estimates last month both hinged on US$ 1 trillion of additional federal spending.

Rosengren said his weaker outlook was also influenced by his concerns that a buildup of excessive leverage, especially in sectors like commercial real estate, and its potentially destabilizing effect would make any recovery more difficult.

At their latest meeting last month, Rosengren and his colleagues on the Federal Open Market Committee — the central bank’s policy-setting arm — offered up their latest quarterly forecasts for economic growth, unemployment, inflation and the appropriate level of short- term interest rates set by the Fed.

On balance, policy-makers marked up their estimates for U.S. gross domestic product for this year thanks to an early sharp recovery in activity fuelled by more than US$3 trillion in federal pandemic relief enacted by Congress in the spring.

Negotiations for more assistance have been hampered by partisan bickering ahead of the Nov. 3 presidential election.

The median estimate among Fed policy- makers now projects a contraction in GDP this year of 3.7 per cent versus an estimate from June of 6.5 per cent.

Rosengren’s remark Thursday that his near-term outlook was “much weaker” than most on the committee would appear to signal that his projection would rank outside the so- called “central tendency” among policy- makers, which excludes the three lowest and highest estimates.

That would place his estimate for GDP between negative 4 per cent and negative 5.5 per cent, which is the lowest of the 17 estimates offered.