June 17, 2020 / 8:11 PM / 22 days ago

Fed's Mester sees U.S. economy facing 'long road back' from crisis

FILE PHOTO: Cleveland Federal Reserve Bank President Loretta Mester speaks in London, Britain, July 2, 2019. REUTERS/Marc Jones

(Reuters) - The U.S. economy could be slammed with a record decline in the second quarter and then face a long road to recovery, with the pace dependent largely on the success of efforts to limit the spread of the coronavirus, the president of the Cleveland Federal Reserve Bank, Loretta Mester, said on Wednesday.

Private-sector forecasts call for the gross domestic product in the second quarter to decline by an annual rate of 25% to 40%, which would likely be a record decline, Mester said during a virtual forum.

Mester said she expects the U.S. economy to contract by 6% in 2020 and for the unemployment rate to remain elevated, reaching around 9% at the end of the year. “This is going to be a long road back,” Mester told reporters after the event.

The Fed moved quickly to bolster the U.S. economy from the risks of the pandemic by cutting interest rates to near zero and establishing a suite of emergency lending facilities to keep credit flowing to businesses and households. Mester said Wednesday that it would be appropriate for rates to stay near zero through 2022.

When asked about yield curve control, a strategy in which the Fed would adopt targets for U.S. Treasury yields at specific maturities in order to keep interest rates near zero, Mester said she could see it potentially being used for short-term bonds along with forward guidance. Mester said she expects inflation to decline this year.

The strength of the economic recovery, as well as depending on the future spread of the coronavirus, will also be subject to whether consumers feel comfortable going out in public, she said.

“If the number of cases of the virus is not well controlled and the health-care system gets overwhelmed, then the economic outcomes I have discussed could turn out to be much more dire,” Mester said, adding that people may choose to stay home and limit their activity even if states do not put in place another wave of restrictions.

Reporting by Jonnelle Marte; Editing by Leslie Adler

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