May 1, 2020 / 1:02 PM / a month ago

U.S. rates to stay low, Fed will need to do more, Kaplan says

FILE PHOTO: Dallas Federal Reserve Bank President Robert Kaplan looks on during an interview in his office at the bank's headquarters in Dallas, Texas, U.S. January 9, 2020. REUTERS/ Ann Saphir

SAN FRANCISCO (Reuters) - With U.S. unemployment likely to go as high as 20% and end the year still at 8% to 10%, the Federal Reserve still has work ahead to help the U.S. economy weather the coronavirus crisis, Dallas Federal Reserve Bank President Robert Kaplan said Friday.

“Rates are going to stay lower for longer and the Fed is going to need to do more in terms of other actions to bridge this period,” Kaplan said in an interview on Fox Business Network. Fiscal authorities, he said, will also need to step up.

“We are going to need stimulus going into the rest of the year and into next year so we can grow faster, so we can work down this unemployment rate - the Fed’s role is to make sure we’ve got good market functioning and we’re a lender of last resort

The Fed in March slashed interest rates to near zero and has pledged to keep them there until it is confident the economy is on track to full employment and 2% inflation. It also rolled out a range of lending programs to backstop companies and local governments whose revenues have plunged as authorities across the country restrict movement and commerce to slow the spread of virus.

The U.S. economy could contract as much as 30% on an annualized basis this quarter, Kaplan said, before returning to growth in the second half, first at a gradual pace and then “hopefully” more strongly in the fourth quarter. For the year as a whole, the world’s biggest economy - which began 2020 with unemployment at a 50-year-low and was forecast to grow by more than 2% - will likely shrink by 4.5% to 5% this year, he said.

“This is a historic contraction ... induced by a healthcare situation, but some of the preexisting conditions in the economy that we were worried about ... probably made this a little bit worse,” Kaplan said, noting the high level of corporate debt and sluggish business spending. Meanwhile the U.S. consumer, who has driven U.S. economic growth in recent years, “has suffered a body blow through this.”

Testing for infections and contact tracing will be critical for people to feel safe to go out and the U.S. economy reopens, Kaplan said, echoing what most health authorities say.

“For the next several months (growth) will be phased in and it will be gradual,” he said.

Reporting by Ann Saphir; Editing by Chizu Nomiyama and Nick Zieminski

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