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Fed can help save lives by targeting GDP growth: Dallas Fed adviser

SAN FRANCISCO (Reuters) – The Federal Reserve could save lives in the current coronavirus outbreak it if pledges to use its tools to make up for economic growth lost as the nation limits activity to combat the virus’ spread, an adviser to one U.S. central banker said Thursday.

“The Fed’s monetary policy goal should be to limit the fall in nominal GDP due to COVID-19 and COVID-19 control efforts,” wrote Evan Koenig, advisor to Dallas Fed President Robert Kaplan, one of 17 policy-makers who set interest rates for the world’s largest economy. COVID-19 is the potentially lethal respiratory illness caused by the coronavirus.

The Fed has already cut rates to near zero, pledged unlimited bond buying, and rolled out a raft of programs aimed at cushioning the blow from the virus.

But with interest rates already at very low levels, further bond-buying is unlikely to provide much of a boost to spending, Koenig wrote.

What the Fed can do, he said, is “commit to offsetting near-term spending shortfalls so that when averaged over several years, nominal GDP growth does not disappoint.”

A pledge to aim for about 4% annual GDP growth over the next five years would help shore up confidence among households and businesses that, along with government help including unemployment insurance and emergency loans and grants to businesses, would set the stage “for a rapid economic recovery once COVID-19 has been brought under control,” he wrote.

Adopting such a framework could, he said, mitigate against the tradeoffs that some politicians see between guarding public health and promoting economic wellbeing.

“Consciously or not, political leaders weigh the costs of disease against the costs of disease prevention,” Koenig said.

“A monetary policy strategy that mitigates the economic damage caused by preventive measures might tilt this balance toward saving lives.”

(Reporting by Ann Saphir; editing by Jonathan Oatis)