(Bloomberg) The U.S. economy will likely need more fiscal stimulus as it weathers a “severe” contraction from the effects of coronavirus-prompted shut downs, according to Federal Reserve Bank of Dallas President Robert Kaplan.
“This is a historic contraction, very severe,” Kaplan said in an interview Friday on Fox Business Network. “There’s going to be a need for stimulus in the future. That’s likely to have to come from the fiscal authorities.”
His comment echoed the argument made by Fed Chairman Jerome Powell on Wednesday that U.S. lawmakers deliver more support to the economy to help it through the pandemic.
U.S. gross domestic product could contract as much as 30% on an annualized basis this quarter and unemployment could reach 20%, Kaplan said.
The Fed has launched nine emergency lending programs to bolster liquidity in markets and help small and mid-size businesses that have lost customers as stay-at-home orders in most U.S. states brought the economy to an abrupt halt. Kaplan emphasized that these are mainly bridge loans to help businesses survive the crisis, not direct stimulus, which can only be provided by Congress.
Lower for Longer
“Rates are going to stay lower for longer and the Fed is going to need to do more in terms of other actions to bridge this period,” he added.
While the economy will return to growth in the third and fourth quarters, it’ll still shrink 4.5% to 5% for the year overall, he said. Unemployment will end the year at around 8% to 10%. Gross domestic product contracted 4.8% in the first quarter, on an annualized basis, Commerce Department data showed this week.
“We’re going to need stimulus going into the rest of the year and into next year so we can grow faster, so we can work down this unemployment rate,” Kaplan said. “But that’s actually not so much the Fed’s role. The Fed’s role is to make sure we’ve got good market functioning and we’re a lender of last resort.”
Disinflation
Pre-existing conditions such as high levels of corporate debt and sluggish business investment are making the downturn “a little bit” worse, Kaplan said. He cautioned that disinflation -- or a slowdown in the pace of price rises -- was more likely in the U.S. over the next year or two than the threat of unwelcome inflation, though that could be an issue down the road.
“I do worry about -- as we get back over the next few years to full capacity, with some of this stimulus and size of the Fed balance sheet -– do we start creating inflationary pressures. But that’s not going to be for two or three years,” he said.
Oil prices, which are integral to the operation of the many energy businesses in Kaplan’s district, crashed in April as a drop in demand led to a global glut of inventory. Excess supply won’t be worked off until the end of 2021 or into 2022, he said.
Global production may drop by 11 million barrels a day, and by 2 million barrels a day in the U.S. as oil companies, with no place to store crude shut in wells, he said. The U.S. is the largest producer of oil and home to the world’s biggest shale field.
“Rates are going to stay lower for longer and the Fed is going to need to do more in terms of other actions to bridge this period,” Kaplan said in an interview on Fox Business Network.
This article originally appeared on Reuters.
