(Bloomberg) -- Federal Reserve Vice Chairman Richard Clarida said the economic damage wrought by the coronavirus pandemic may threaten the stability of long-term inflation expectations, a force economists believe is crucial to anchoring price pressures at their optimum level.
Disruptions caused by the virus are putting downward pressure on prices generally, Clarida said Tuesday in the text of a speech he’s set to deliver online to the Foreign Policy Association.
“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% inflation objective and, given the likely depth of this downturn, are at risk of falling below that range,” he said.
The Fed’s preferred gauge of inflation, after stripping out food and energy components, fell to 1.04% in April, its lowest reading since December 2010. Some economists have raised fears of a deflationary spiral if downward price pressures cause households and businesses to begin anticipating further price declines.
Clarida stopped short of such a warning, but said he’d place a “high priority” on advocating policies that sought to anchor inflation expectations at a level consistent with the Fed’s the 2% inflation target.
The Fed vice chairman also expressed some of the same views as delivered earlier on Tuesday by Chairman Jerome Powell, taking a cautious view of recent positive economic data.
“In recent weeks, some other indicators suggest a stabilization or even a modest rebound in some segments of the economy,” Clarida said. “But activity in many parts of the economy has yet to pick up, and GDP is falling deeply below its recent peak.”
He added that even after a surprisingly strong May jobs report that unemployment, at 13.3%, remained “historically high.”
Clarida also approached gingerly the question of whether Congress should provide additional fiscal support after already approving around $3 trillion in Covid relief.
“The fiscal policy response in the United States to the coronavirus shock has been both robust and timely,” he said. “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.”
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