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The Fed Must Step Up Again

Extraordinary times call for extraordinary measures, which in the context of the COVID-19 pandemic means additional fiscal stimulus of the kind promised by US President Joe Biden. To alleviate sustainability fears, the Federal Reserve must prepare to expand its balance sheet and monetize the deficit.

NEW YORK – The unprecedented fiscal stimulus unleashed in the United States since the start of the COVID-19 pandemic calls for commensurate additional monetary stimulus. The restrictions imposed to control the spread of the coronavirus have caused the deepest global recession since World War II.

Government-imposed lockdowns have varied in duration and intensity, and this is likely to continue as the medical threats posed by the pandemic evolve. But there have also been wide variations in the degree to which privately imposed and enforced behavioral restrictions have complemented and reinforced the publicly mandated ones. In any case, the fact that the current recession is largely self-inflicted provides grounds for optimism about the speed of the recovery that we can expect once the public-health disaster is under control.

Recall that, although the virus was identified in January 2020, the scale and scope of the coming economic damage did not become clear until March. In the first quarter of 2020, real (inflation-adjusted) GDP in the US decreased at an annualized rate of 5%, but then plummeted by 31.4% in the second quarter. In the third quarter, after lockdowns had been relaxed and the private sector had learned to cope better with the new realities, US real GDP bounced back at a respectable 33.4% annualized rate, though it remained far short of the level expected at the start of the year. The last quarter is likely to have produced further weaknesses (official data are not yet available), as will the first quarter of 2021, owing to the recent mutations of the virus and the attendant return of restrictions.

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