Fed’s Kaplan concerned about next six months as virus surges

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Dallas Federal Reserve Bank President Robert Kaplan speaks at the Commonwealth Club in San Francisco

By Ann Saphir

(Reuters) – Dallas Federal Reserve President Robert Kaplan said on Tuesday he was “cautious and concerned” about downside economic risks in the short run because of the resurgence of the coronavirus, but more optimistic in the longer term.

“The next two quarters are going to be very challenging, very difficult,” Kaplan told Bloomberg’s Future of Finance virtual conference. “Downside risks are growing with this resurgence.”

Still, he said, the U.S. economy will likely rebound strongly in the second half of next year, after a vaccine is widely available, adding that his business contacts have told him they are gearing up for exactly that.

The United States is experiencing a rise in cases, hospitalizations and deaths from COVID-19, with some state and local governments reimposing restrictions to slow the spread.

With millions of out-of-work Americans dipping into savings built with government aid distributed earlier this year, Kaplan said, household income and spending will drop off “at some point” unless more fiscal aid is forthcoming.

Aid to small businesses in the form of a renewed Paycheck Protection Program would be particularly helpful, he said, because while financial conditions are broadly fairly loose, that is not the case for smaller businesses that rely on banks for credit.

“While we are in the teeth of the pandemic I believe we need to do what we need to do to fight the pandemic,” Kaplan said in a separate event sponsored by UT Dallas.

As long as the pandemic is ongoing, the U.S. central bank should not back away from its programs supporting economic growth, which include bond purchases totaling $120 billion a month and lending programs to corporate America, he said.

Once it subsides, he said, the U.S. will need to moderate government debt.

(Reporting by Ann Saphir; Editing by Paul Simao and Chizu Nomiyama)

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