It’s time to pivot from fiscal support, researchers tell Fed conference

FILE PHOTO: The Federal Reserve in Washington

(Reuters) – Massive fiscal spending in advanced economies sped healing from the pandemic’s punch without setting the stage for a coming wave of business failures, researchers told an influential group of central bankers on Friday, but it delivered little boost to emerging markets and could do outright damage if not reduced.

“Continued fiscal support in AEs (advanced economies) in the context of a normalization of private demand would result in a rapid increase in global interest rates and possible price inflation,” University of California Berkeley’s Pierre Olivier Gourinchas and co-authors wrote in a paper presented at the Kansas City Fed’s annual economic symposium, held online for the second year in a row due to COVID-19.

If advanced economies tighten monetary policy earlier than otherwise, they wrote, emerging markets — already vulnerable because of their own limited fiscal options and lack of access to vaccines to keep the pandemic at bay — could face “strong adverse consequences.”

“The global policy mix should pivot away from fiscal support to careful macroprudential and monetary/financial policies,” Gourinchas wrote.

(Reporting by Ann Saphir; Editing by Chizu Nomiyama)