You are here: Home » International » News » Economy
Business Standard

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

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

Topics
US Federal Reserve | Coronavirus Vaccine | Economic stimulus

Reuters  |  WASHINGTON 

The Federal Reserve building in Washington DC. Photo: Reuters
The Federal Reserve building in Washington DC. Photo: Reuters

By Howard Schneider

WASHINGTON (Reuters) - 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 outgoing Trump administration officials may move as soon as today to recommend on its own that age limits be lowered and other rules be loosened so more people can get shots now.

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 even suggesting the strength of the ensuing recovery may even accelerate their plans to pull on some of the steps taken this year to battle the coronavirus recession [L1N2JM2XH].

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 $900 billion re-topping of aid approved just before year end.

"We have a trillion (dollars) in excess savings. We have checks 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 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 midyear.

'DIRECTLY LINKED'

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 Donald 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 policymakers in recent days is based on the incoming administration of Democratic President-elect Joe Biden's 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 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 labor 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 instills in consumers," Atlanta Fed President Raphael Bostic said on Monday. A disappointing rollout "could push us back several quarters" in returning the to its pre-pandemic level.

EVEN MODEST DELAYS MATTER

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% in August if things go fast versus 68% if they go slow. For the economy, that's the difference between growth of 5.2% for the year versus just 3%, a gap of about $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.

SOUTH DAKOTA VS CALIFORNIA

As of Monday the Centers for Disease Control and Prevention said about 2.7% 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 5.5% of its population, is South Dakota, a state that ranks near the bottom in terms of economic output.

California, accounting for about 10% of gross domestic product, lags the national average in terms of vaccinations, with under 2% of its population immunized so far. Georgia, a top 10 economy, has the lowest current vaccination rate at 1.1%.

To maximize growth "you need homogenous 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 multi-speed economy."

 

(Reporting by Howard Schneider; Additional reporting by Ann Saphir; Editing by Dan Burns, Leslie Adler and Chizu Nomiyama)

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

Dear Reader,


Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

First Published: Tue, January 12 2021. 20:33 IST
RECOMMENDED FOR YOU
.