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Chief economist update: We're not there yet

"Curb your enthusiasm"  was the overriding message from the world's top three central bankers at the annual ECB Forum on Central Banking 2020, held online on November 11-12.

The head honchos of the US Federal Reserve, European Central Bank and the Bank of England's collective and cautionary missive comes amid a backdrop of recent COVID-19 vaccine optimism and the rising cases of infections and deaths in their respective domains.

Fed chair Jerome Powell thinks that while the US recovery had been better than expected and continues to progress, it remains uneven and incomplete while at the same time cautioning that the next few months would be challenging.

"The vaccine is certainly good and welcome news for the medium term, although significant challenges and uncertainties remain about timing, production, distribution and the efficacy for different groups," he said.

"From our standpoint it's just too soon to assess with any confidence the implications of the news for the path of the economy, especially in the near term."

Powell's correct to be concerned. Worldometer figures show the US tops the COVID-19 list in terms of total cases of infections, new cases, total deaths, new deaths and total active cases to date.

"We've got new new cases at a record level, we've seen a number of states begin to reimpose limited activity restrictions, and people may begin to lose confidence that it's safe to go out," Powell said.

"We've said from the beginning that the economy will not fully recover until people are confident that it's safe to resume activities involving crowds of people."

ECB president Christine Lagarde echoed the Fed's concern: "I don't want to be exuberant about this vaccination."

In her introductory speech, Lagarde stated that:

"The nature of the pandemic also affects the transmission of monetary policy. In normal times, normally, an easing of financial conditions boost demand by encouraging firms to borrow and invest and encouraging households to bring forward future income and consume more. In turbulent times, monetary interventions also removes excess risk pricing in the markets. But these are not normal times. When interest rates are already low, and private demand is constrained by design as is the case today, the transmission from financing conditions to private spending might be attenuated. This is especially true when firms and households face very high levels of uncertainty, leading to higher precautionary saving and deferred investment."

BOE governor Andrew Bailey also acknowledged the uncertainty surrounding the UK central bank's forecasts and therefore, the appropriateness of policy responses.

"Gradually as we get more news on the vaccine situation I hope that not only will it give it encouragement and hope, it will also start to begin to reduce the level of uncertainty over the outlook for the future," Bailey said.

"We're not really there yet, but that is important for monetary policy because we are having to make monetary policy in conditions of extreme uncertainty."

All agree that, in Lagarde's words: "These are the times when fiscal policy has the greatest impact."

Lagarde nominated two reasons:

"First, fiscal policy can respond in a much more targeted way to the parts of the economy affected by health restrictions ... Fiscal policy can directly respond where help is most needed.

"Second, fiscal policy can break paradox of thrift dynamics in the private sector when uncertainty is present ... people who consider government support to be more adequately [sic] displayed less precautionary behaviour".

Read our full COVID-19 news coverage and analysis here.

Read more: ECBEuropean Central BankMadam LagardeUS Federal ReserveBOE GovernorAndrew BaileyChristine LagardeJerome Powell
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