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Jabs equal jobs? Fed sees possible economic boom if vaccine gets on track.

U.s. Fed sees possible economic boom if vaccine gets on track

- Howard Schneider

One u.s. Federal reserve official says there is now a “clearer focus” about the economy’s path forward and a horizon for a fuller recovery. Another says the pandemic’s “endgame” is here. A third predicts 2021 will prove “impressive.”

After a catastroph­ic spell when economic conditions were so confounded by the coronaviru­s that the Fed stopped making projection­s altogether, u.s. central bankers now like what they see.

Even as they concede the riots by supporters of President donald Trump that shut down Congress last week and concerns about continued violence pose a risk, officials say the transition to a new administra­tion on Jan. 20 and a likely accelerati­ng vaccine rollout have left them optimistic.

The incoming administra­tion of president-elect Joe Biden has said it plans to speed vaccine distributi­on, and the outgoing Trump administra­tion urged states to loosen rules and offer vaccines to all Americans over age 65 or with chronic health conditions.

For the Fed, even though the country’s short-term political and health risks seem great, they have focused on the more positive prospects of the medium term — with some suggesting the strength of the ensuing recovery may accelerate their plans to pull on some of the steps taken this year to battle the coronaviru­s recession.

Even those arguing policy will likely remain on hold point to consumers’ still-amply-stuffed war chests from last year’s federal relief efforts, including a us$900-billion re-topping of aid approved just before year-end.

“We have a trillion (dollars) in excess savings. We have cheques coming in the mailbox. There will be enough demand” from consumers to keep the recovery on track, Fed vice-chair richard Clarida said last week in forecastin­g an “impressive” 2021.

If 2020 was when shutdowns and disease took the economy to “new and unfamiliar places,” richmond Fed president Thomas Barkin said, “the future has finally come into clearer focus,” with vaccines likely leading to a fuller reopening by mid-year.

Since the Fed last met in mid-december, there has been a whipsaw sequence of events around both the pandemic and u.s. governance, matters both critical to the economy’s performanc­e.

A massive surge in coronaviru­s cases has been offset by optimism over the initial distributi­on of two vaccines. Confirmati­on of the democratic Party’s control of both the executive and legislativ­e branches was offset by outgoing President Trump’s effort to subvert the electoral outcome, reaching a crescendo in last Wednesday’s assault on the Capitol.

Part of the upside scenario seen by Fed policy-makers in recent days is based on the incoming Biden administra­tion working more smoothly with a Congress controlled by his party to put additional fiscal support in place and fix what has been a rocky start to the vaccine’s distributi­on.

It is a unique challenge — managing the national security, legal and political fallout from last week’s events alongside the health and economic policy concerns looming over the country.

But the more the vaccine agenda slips, the worse the economy will fare, say economists who agree that when it comes to the immunizati­on program, speed matters.

While they believe the initial slow vaccine distributi­on will accelerate and eventually end the health crisis, a faster versus slower vaccinatio­n rate translates directly into a faster or slower job recovery. It means the difference between less labour market “scarring” or more long-term harm for unemployed workers; between fewer defaulted loans and failed businesses or more bankruptci­es and shuttered businesses; and between greater overall accelerati­on in output or a notably shallower rebound.

“The recovery is directly linked to the pace of vaccinatio­ns and its effectiven­ess both in terms of numbers, but also in terms of the confidence it instils in consumers,” Atlanta Fed president raphael Bostic said on Monday. A disappoint­ing rollout “could push us back several quarters” in returning the economy to its pre-pandemic level.

In a real-time reminder of how that dynamic works, as a new surge in the virus took hold in december, consumer confidence plunged, small businesses and restaurant­s appeared to cut back, and the economy lost 140,000 jobs.

Oxford Economics economist Gregory daco said both his optimistic and pessimisti­c projection­s see the country fully vaccinated this year. But the vaccinated share of the population hits 92 per cent in August if things go fast versus 68 per cent if they go slow. For the economy, that’s the difference between growth of 5.2 per cent for the year versus just three per cent, a gap of about us$800 billion.

“you gain two months,” daco said. “If the speed of improvemen­t in the health situation is increased then you are going to see people spend more freely much earlier and it’d be a story of much stronger growth.”

Goldman Sachs economists estimated the initial stumble with inoculatio­ns has already cost developed nations more than half a percentage point of growth for the year.

As of Tuesday, the Centers for disease Control and Prevention said about 2.8 per cent of the u.s. population had received at least one vaccine dose, with the two formulatio­ns approved so far in the u.s. both requiring a second shot.

But that obscures a broad divergence among states that could pose an economic challenge of its own if economical­ly more important parts of the country are slower to immunize. The current national leader in terms of vaccinatio­n rates, at 5.8 per cent of its population, is West Virginia, a state that ranks near the bottom in terms of economic output.

California, accounting for about 10 per cent of gross domestic product, lags the national average in terms of vaccinatio­ns, with 2.1 per cent of its population immunized so far. Arkansas has the lowest current vaccinatio­n rate at 1.4 per cent.

To maximize growth “you need homogeneou­s response and diffusion,” Oxford’s daco said. Otherwise, “you are going to see people be much more cautious going to some regions, travel is still impacted, and generally you see a multispeed economy.”

 ?? Dado RUVIC / ILLUSTRATI­ON / REUTERS ?? The more the vaccine agenda slips, the worse the economy will fare, say economists, who agree speed matters when it comes to immunizati­on.
Dado RUVIC / ILLUSTRATI­ON / REUTERS The more the vaccine agenda slips, the worse the economy will fare, say economists, who agree speed matters when it comes to immunizati­on.

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