View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

For release at
4:00 p.m. EDT
June 16, 2020

U.S. Economic Outlook and Monetary Policy

Remarks by
Richard H. Clarida
Vice Chair
Board of Governors of the Federal Reserve System
at the
Foreign Policy Association
New York, New York
(via prerecorded video)

June 16, 2020

It is my pleasure to meet virtually this evening with the members and invited
guests of the Foreign Policy Association (FPA).1 I am truly honored to receive the
Foreign Policy Association Medal. Past honorees have included Sheila Bair, Anne-Marie
Slaughter, Paul Volcker, Jean-Claude Trichet, and my Federal Open Market Committee
(FOMC) colleague John Williams—and so with this award, I am indeed in select
company. Although I have been very much looking forward to receiving this award in
person, that, of course, is not possible tonight, but I greatly look forward to attending a
future dinner to convey in person my genuine appreciation to the members of the FPA for
this special honor. Since mid-March, I, along with my FOMC colleagues, have been
working from home. Indeed, just last week, we held our scheduled June meeting via
secure teleconference. And while I certainly miss the opportunities for face-to-face
interactions along the corridors of the Board’s Eccles Building, I am grateful to have the
ability to work from home and want to convey my deep gratitude to all of those on the
frontlines of the crisis, who are working outside the comfort of their homes in grocery
stores, hospitals, and other businesses that provide essential services.
Current Economic Situation and Outlook
While the coronavirus (COVID-19) pandemic has taken a tragic human toll
measured in terms of lives lost and suffering inflicted, the pandemic has also inflicted a
heavy toll on the levels of activity and employment in the U.S. economy, as a direct
result of the necessary public health policies put in place to mitigate and control the
spread of the virus. Real gross domestic product (GDP) declined at a 5 percent annual

These remarks represent my own views, which do not necessarily represent those of the Federal Reserve
Board or the Federal Open Market Committee. I am grateful to Brian Doyle and Chiara Scotti of the
Federal Reserve Board staff for their assistance in preparing this text.


-2rate in the first quarter of the year and will almost surely continue to contract at an
unprecedented pace in the second quarter. The unemployment rate, which reached a 50year low of 3.5 percent as recently as February of this year, surged to 14.7 percent in
April, an 80-year high. In May, there was a notable rebound in employment and decline
in unemployment, and these developments are certainly welcome. Moreover, in recent
weeks, some other indicators suggest a stabilization or even a modest rebound in some
segments of the economy. But activity in many parts of the economy has yet to pick up,
and GDP is falling deeply below its recent peak. And, of course, despite the
improvements seen in the May jobs report, the unemployment rate, at 13.3 percent,
remains historically high.
After the extreme turbulence witnessed in March, financial markets across many
sectors have normalized and are again serving their essential role of intermediating flows
of savings and investment among borrowers and lenders. Bank credit lines are providing
liquidity to companies, and corporations with debt rated investment grade and high yield
are able to issue, and in size, in the corporate bond market. I believe—and most outside
observers agree—that this easing of financial conditions since March is, at least in part,
the direct consequence of economic policy responses to the crisis, including the actions
the Federal Reserve took at our March 15 meeting and the subsequent announcement and
sequential launch of 11 new facilities to support the flow of credit to households and
companies. While this easing of financial conditions is, of course, welcome to the extent
that it supports the flow of credit to households and firms during this challenging period,
it may not prove to be durable, depending on the course that the coronavirus contagion

-3takes and the duration of the recession that it causes. At minimum, the easing of financial
conditions is buying some time until the economy begins to recover.
As I speak to you today, there is extraordinary uncertainty about both the depth
and the duration of the economic downturn. Because the course of the economy will
depend on the course of the virus and the public health policies put in place to mitigate
and contain it, there is an unusually wide range of scenarios for the evolution of the
economy that could plausibly play out over the next several years. In my baseline view,
while I do believe it will likely take some time for economic activity and the labor market
to fully recover from the pandemic shock, I do project right now that the economy will
resume growth starting in the third quarter. In terms of inflation, my projection is for the
COVID-19 contagion shock to be disinflationary, not inflationary, and the data we are
seeing so far are consistent with this projection. For example, core CPI (consumer price
inflation) prices fell 0.4 percent in April, the largest monthly decrease since the beginning
of the series in 1957. Although the decline in core CPI was smaller in May, on a yearover-year basis, core CPI is running at 1.2 percent, the slowest pace in nine years. While
the COVID-19 shock is disrupting both aggregate demand and supply, the net effect, I
believe, will be for aggregate demand to decline relative to aggregate supply, both in the
near term and over the medium term. If so, downward pressure on PCE (personal
consumption expenditures) inflation, which was already running somewhat below our 2
percent objective when the downturn began in March, will continue. Moreover, I judge
that measures of longer-term inflation expectations were, when the downturn began, at
the low end of a range that I consider consistent with our 2 percent inflation objective
and, given the likely depth of this downturn, are at risk of falling below that range. The

-4Federal Reserve has a dual mandate from the Congress to pursue policies that aim to
achieve and sustain maximum employment and price stability. To me, price stability
requires that inflation expectations remain well anchored at our 2 percent objective, and I
will place a high priority on advocating policies that will be directed at achieving not
only maximum employment, but also well-anchored inflation expectations consistent
with our 2 percent objective.
The Policy Response
At the Federal Reserve, we take our dual-mandate obligations of maximum
employment and price stability very seriously, and, since March 3, we have deployed our
entire toolkit to provide critical support to the economy during this challenging time. In
two unscheduled meetings, we voted on March 3 and March 15 to cut the target range for
the federal funds rate by a total of 150 basis points to its current range of 0 to 25 basis
points.2 In our FOMC statements, we have indicated we expect to maintain the target
range at this level until we are confident that the economy has weathered recent events
and is on track to achieve our maximum-employment and price-stability goals.
On March 16, we launched a program to purchase Treasury securities and agency
mortgage-backed securities in whatever amounts needed to support smooth market
functioning, thereby fostering effective transmission of monetary policy to broader
financial conditions. To date, these purchases have totaled more than $2.3 trillion, and,
as we indicated at our June meeting, they will continue in coming months at least at the

See the FOMC statements issued after the March 3 and March 15 FOMC meetings, which are available
(along with other postmeeting statements) on the Board’s website at


-5current pace, which should sustain smooth market functioning, thereby fostering effective
transmission of monetary policy to broader financial conditions.
Since March 17, the Board has announced the establishment of no fewer than 11
new facilities to support the flow of credit to households and businesses. These programs
are authorized under emergency lending powers granted to the Fed under section 13(3) of
the Federal Reserve Act and are available only in “unusual and exigent” circumstances
and with the consent of the Secretary of Treasury.3 These facilities are supported with
money invested by the Department of the Treasury, drawing on appropriations of more
than $450 billion authorized by the Congress in the CARES Act (Coronavirus Aid,
Relief, and Economic Security Act) for the specific purpose of investing in Fed programs
to sustain the flow of credit to households, firms, and communities during the
coronavirus pandemic. With these facilities, we are providing a bridge by stepping in and
supporting lending throughout the economy until the recovery takes hold. These
programs are designed to offer backstop sources of funding to the private sector, and just
the announcement that these backstop facilities would soon be launched appears to have
bolstered confidence in capital markets, allowing many companies to finance themselves
privately even before the facilities were up and running. But importantly, these are, after
all, emergency facilities, and someday—hopefully soon—the emergency will pass.
When that day comes and we are confident the economy is solidly on the road to
recovery, we will wind down these lending facilities at such time as we determine the
circumstances we confront are no longer unusual or exigent.

See Federal Reserve Act, 12 U.S.C. § 343 (1932), quoted text in paragraph 3.A,


-6The Federal Reserve has played a leading role in the global economic policy
response to the coronavirus pandemic. Foreign financial institutions borrow and lend in
U.S. dollars, and these dollar funding markets seized up when COVID-19 emerged. In
globally integrated financial markets such as ours, these strains in dollar funding markets
outside the United States affect the flow of credit to U.S. households and businesses. As
such, during the week of March 15, the Federal Reserve coordinated with five foreign
central banks to enhance its standing dollar liquidity swap lines.4 In addition, temporary
swap lines were reestablished with the nine central banks that had temporary agreements
during the Global Financial Crisis.5 Moreover, to support dollar liquidity to a broad
range of countries, the Federal Reserve announced a new program on March 31, the
temporary FIMA (Foreign and International Monetary Authorities) Repo Facility. Under
this facility, FIMA account holders at the Federal Reserve Bank of New York (which
include central banks and other monetary authorities) can enter into overnight repos
(repurchase agreements) with the Federal Reserve, temporarily exchanging U.S. Treasury
securities in their accounts for U.S. dollars, which can then be provided to institutions in
their respective jurisdictions. All of these facilities have had a very constructive effect in

The swap fee was reduced from 50 basis points to 25 basis points over the U.S. dollar overnight index
swap rate. To better target stresses in funding markets for longer-term dollar borrowing, swap operations
with a maturity of 84 days were added to the usual 7-day operations by the four central banks that
traditionally hold regular auctions—the Bank of England, the Bank of Japan, the European Central Bank,
and the Swiss National Bank. Finally, these four central banks announced that they would begin daily
auctions. See Board of Governors of the Federal Reserve System (2020), “Coordinated Central Bank
Action to Enhance the Provision of U.S. Dollar Liquidity,” press release, March 15,; and Board of
Governors of the Federal Reserve System (2020), “Coordinated Central Bank Action to Further Enhance
the Provision of U.S. Dollar Liquidity,” press release, March 20,
See Board of Governors of the Federal Reserve System (2020), “Federal Reserve Announces the
Establishment of Temporary U.S. Dollar Liquidity Arrangements with Other Central Banks,” press release,
March 19,

-7calming down dollar funding markets and supporting a return to more normal conditions
in global financial markets more generally.
Of course, as members of the FPA, you are well aware that developments in the
U.S. economy do not happen in isolation from the rest of the world. We live in a globally
integrated economy. With COVID-19, all countries have been hit by a global common
shock, not only directly by the virus and the measures necessary to combat it, but also by
the economic spillovers from those actions around the world. As in the United States,
many foreign authorities have taken swift and forceful actions in response. My
colleagues and I have worked closely with others—bilaterally and in international forums
like the Group of Seven, Group of Twenty, Bank for International Settlements, and
Organisation for Economic Co-operation and Development—to monitor and address the
effects of the pandemic. The forcefulness and synchronized timing of actions by fiscal
authorities, central banks, and regulators have helped support the incomes of households
and firms and reduce market stresses that could have amplified the shock.
Not only is the Federal Reserve using its full range of tools to support the
economy through this challenging time, but our policies will also help ensure that the
rebound in activity when it commences will be as robust as possible. That said, it is
important to note that the Fed’s statutory authority grants us lending powers, not
spending powers. The Fed is not authorized to grant money to particular beneficiaries, to
meet the payroll expenses of small businesses, or to underwrite the unemployment
benefits of displaced workers. Programs to support such worthy goals reside squarely in
the domain of fiscal policy. The Fed can only make loans to solvent entities with the
expectation the loans will be paid back. Direct fiscal support for the economy is thus also

-8essential to sustain economic activity and complement what monetary policy cannot
accomplish on its own. Direct fiscal support can make a critical difference, not just in
helping families and businesses stay afloat in a time of need, but also in sustaining the
productive capacity of the economy after we emerge from this downturn.
Fortunately, the fiscal policy response in the United States to the coronavirus
shock has been both robust and timely. In four pieces of legislation passed in just over
two months, the Congress voted $2.9 trillion in coronavirus relief, about 14 percent of
GDP. Depending on the course of the virus and the course of the economy, more support
from both fiscal and monetary policy may be called for.
Concluding Remarks
The coronavirus pandemic poses the most serious threat to maximum employment
and, potentially, to price stability that the United States has faced in our lifetimes. There
is much that policymakers—and epidemiologists—simply do not know right now about
the potential course that the virus, and thus the economy, will take. But there is one thing
that I am certain about: The Federal Reserve will continue to act forcefully, proactively,
and aggressively as we deploy our toolkit—including our balance sheet, forward
guidance, and lending facilities—to provide critical support to the economy during this
challenging time and to do all we can to make sure that the recovery from this downturn,
once it commences, is as robust as possible.