Integrated as a risk, the new COVID cycle could jeopardize the economic recovery


Five weeks after dropping its reference to the coronavirus as a drag on the economy, the US Federal Reserve faces yet another difficult spike in cases that has fueled doubts about the global recovery and is already forcing other central banks to consider to reorganize their policies.

The daily rate of new infections has more than doubled since the Fed’s June 16 policy meeting, when President Jerome Powell said that while it was “premature to declare victory” given the appearance of the plus variant. infectious disease of the Delta coronavirus, a drop in infections, hospitalizations and deaths “are expected to continue.”

This is not the case, and although the current worst epidemics have been localized, news of the increase in the number of cases again straining the capacity of hospitals has spread in the financial markets with a sharp decline. Monday.

U.S. Treasury yields have fallen, a sign that investors may lose confidence in both the U.S. growth prospects and the Fed’s ability to navigate the shoals of a resurgent pandemic that may require more. aid from the central bank and high inflation which may require a more restrictive policy to approach.

Analysts still expect economic growth in 2021 to be the strongest since 1984, but they are now mining real-time data again to detect signs that the Delta variant is changing its behavior.

“Do people who have been vaccinated stay off planes? That’s the downside risk, ”said Jay Bryson, chief economist at Wells Fargo Corporate and Investment Bank, which so far maintains a forecast for economic growth of 7% this year. “I don’t think any of us expect blockages like we saw a year ago. The people will not tolerate this. But you don’t have to have blockages. It is enough for people to say, “I am staying at home”.

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No clear evidence has yet emerged of what is happening. Air travel has remained stable at around 80% of its pre-pandemic level, according to statistics from the Transportation Security Administration, and there has been no decline in the number of diners returning to restaurants, data shows. from the OpenTable catering site.

Attendance at Major League Baseball games in the seven days to Monday had returned to the 2019 average for the first time this year, with stadiums now open to crowds

Still, the Fed’s scheduled meeting next week will be newly complicated, overshadowed by something epidemiologists have warned even as vaccinations roll out: the coronavirus will not fade easily and will likely remain a cyclical risk to people’s health. people and the economy for years to come.

The Fed reported in June that it had started planning a shift to post-pandemic monetary policy, with the risk of rising inflation seen as paramount and some policymakers willing to cut the $ 120 billion in monthly Fed bond purchases and accelerate any interest rate hikes.

The Reserve Bank of Australia can offer a note of caution. The bank has started its own bond “taper”, only to see the country impose new lockdown measures that economists say will force the RBA to back down.

Meanwhile, the Delta variant “could dampen” the US recovery, Minneapolis Federal Reserve Chairman Neel Kashkari told National Public Radio this weekend, “which would be a very big setback for us.” .

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The response of health policy to the spread of the Delta variant has been modest. Los Angeles has reinstated an indoor mask mandate. On Monday, the American Academy of Pediatrics said schools should open in person in the fall, but recommended universal masking for staff and children over 2 years old.

Infections and deaths remain well below the trauma of last winter. The daily new cases of around 37,000 are only a fraction of a quarter of a million a day in January.

The daily deaths of around 200 are “tragic … but not out of proportion to other major health problems” such as car accidents, said Dr David Dowdy, associate professor of epidemiology at the Johns Hopkins Bloomberg School of Public Health.

With about 60% of American adults fully vaccinated and some of the rest probably resistant to a previous infection, “We shouldn’t panic,” he said.

Yet with many adults still susceptible, a nationwide vaccination campaign stalled, and children under 12 not yet approved for vaccination, recent weeks suggest the shift to post-pandemic policy may remain bumpy.

One of the main assumptions underlying current Fed thinking, for example, is that a full reopening of in-person schooling this fall will allow parents to return to work – a process that could now falter and slow down. expected recovery of nearly 6.8 million missing jobs.

“There will certainly be parents who object to attending in person. These same parents may be reluctant to return to their offices, ”wrote Carl Tannenbaum, Northern Trust chief economist. “Even if formal restrictions are not reintroduced, an increased sense of risk among populations will create complications for the trade.”

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A collection of major epidemiological models from the Centers for Disease Control shows forecasts by early August ranging from a few thousand cases per day to a massive epidemic rivaling last winter.

Bryson of Wells Fargo said he is monitoring the UK, with vaccination rates similar to the US and a sharp rise in recent infections, looking for signs of what may be happening.

There remains a large pool of household savings to keep bills paid, withdrawn during the pandemic from an array of federal programs. Meanwhile, businesses have adapted to operate more securely against the virus, with contactless QR code menus now ubiquitous in restaurants and online ordering systems further reducing staff interactions with customers.

But the ebb and flow of the disease will still have to be managed, and by the fall, most of the pandemic support programs put in place to help with this process will have ended, including additional federal payments to unemployment insurance and a moratorium on rental evictions.

“It’s not going to go away. It’s going to be rampant, ”with possible implications for policy if, for example, the food service or other industries end up with cyclical coronavirus downturns and a new seasonal pattern of employment, said Tim Duy, an economist in American chief at SGH Macro Advisors. “The public health objective is now to make it a non-event. “

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