Fed official says additional fiscal support needed to avoid labor market scarring

Additional fiscal support is needed to avoid labor market scarring and bankruptcies as the US economy struggles to recover from the Covid-19 pandemic, a senior US Federal Reserve official said on Tuesday.

“The Federal Reserve is committed to providing sustained accommodation through its forward rate guidance and continued asset purchases to achieve our maximum employment and 2 percent average inflation goals,” Fed board governor Lael Brainard said at an event held by The Chicago Community Trust, Xinhua news agency reported.

“In parallel, additional fiscal support is essential to bridge past Covid’s second wave in order to avoid labor market scarring, reductions in crucial state and local services, and bankruptcies,” Brainard said, adding such additional support is critical to “turn this K-shaped recovery into a broad-based and inclusive recovery that is stronger overall.”

Brainard noted that the pandemic has inflicted disproportionate economic pain on vulnerable businesses, sectors, and demographic groups.

“Many low- and moderate-income households are facing the exhaustion of unemployment benefits, the depletion of savings from CARES Act (Coronavirus Aid, Relief, and Economic Security Act) programs, and the fear that eviction moratoriums and forbearance for mortgages and student loans will soon end,” she said.

Brainard’s remarks came as Democratic and Republican lawmakers have been deadlocked for months over the size and scope of the next round of fiscal support.

During a congressional hearing on Tuesday, Fed Chairman Jerome Powell also said that more fiscal aid will be needed to support the rebound of the economy.

“Some fiscal support now would really help move the economy along,” Powell told the Senate Banking Committee. “The risk of overdoing it is less than the risk of under-doing it.”

While recent news on the vaccine front is very positive for the medium term, Powell said the rise in Covid-19 cases, both at home and abroad, could pose challenges to the economic recovery in the next few months.