Clarida: Recovery will take time and fiscal, monetary support will be needed

Although the economy has taken big steps in its recovery, it will take “some time” to return to February levels and monetary and fiscal stimulus will be needed, said Federal Reserve Vice Chair Richard Clarida.

"While recovery since the spring collapse in economic activity has been robust, let us not forget that the full economic recovery from the COVID-19 recession has a long way to go, with the unemployment rate still elevated at 7.9% as of September and inflation still running below our 2% longer-run objective," Clarida said, according to prepared text released by the Fed. "It will take some time to return to the levels of economic activity and employment that prevailed at the business cycle peak in February, and additional support from monetary — and likely fiscal — policy will be needed."

He reiterated the Fed will use any tool necessary "to support the economy and to help ensure that the recovery from this difficult period will be as robust and rapid as possible."

Clarida reminded the audience that back in the spring, many people “questioned what good rate cuts, forwards guidance, asset purchases and lending programs could do” when people aren't leaving their homes or making big-ticket purchases.

“Well, the data indicate that with rates low, credit available, and incomes supported by fiscal transfers, the answer is — at least so far —that they do build houses, buy cars, and order equipment and software,” he said. “That said, the COVID-19 recession threw the economy into a very deep hole, and it will take some time, perhaps another year, for the level of GDP to fully recover to its previous 2019 peak. It will likely take even longer than that for the unemployment rate to return to a level consistent with our maximum-employment mandate.”

Builder confidence remained strong, with the National Association of Home Builders’ housing market index climbing to 85 in October from 83 in September and “further surpassing the previous all-time high of 83 recorded in September,” NAHB reported on Monday.

Economists polled by IFR Markets predicted the index to come in at 83.

Scott Anderson, chief economist at Bank of the West, said the index “unexpectedly reached another all-time high” in October.

“The 85 reading was above the consensus forecast and a new record high in a series that dates back to 1985,” he said. “Persistently low interest rates and solid demand are supporting homebuilder confidence. Homebuilders are feeling the challenge of lean inventories and high lumber prices as home sales continue to outpace starts on sustained strong homebuyer demand.”

According to the NAHB, the past two months are the “first two months the index has ever been higher than 80.

“Traffic remains high and record-low interest rates are keeping demand strong as the concept of ‘home’ has taken on renewed importance for work, study and other purposes in the COVID-19 era,” said NAHB Chairman Chuck Fowke. “However, it is becoming increasingly challenging to build affordable homes as shortages of lots, labor, lumber and other key building materials are lengthening construction times.”

All indices hit or tied their record levels.

The current sales conditions index gained to 90 in October from 88 a month earlier, the future sales expectations index grew to 85 from 85, while the index measuring traffic of prospective buyers remained at 74.

“The housing market continues to be a bright spot for the economy, supported by increased buyer interest in the suburbs, exurbs and small towns,” said Robert Dietz, the builder group’s chief economist. “NAHB analysis published last week showed that new single-family home sales are outpacing starts by a historic margin. Bridging this gap will require either a gain in construction volume or reductions in available inventory, which is already at a historic low in terms of month’s supply.”

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