By Nick Timiraos 

A top official at the Federal Reserve said the U.S. economy still faces substantial risks from the shock caused by the coronavirus pandemic as well as a long, slow recovery.

Fed governor Lael Brainard said in remarks delivered online that the broad recovery seen in recent months was due largely to "rapid and sizable fiscal support," such as one-time relief payments and unemployment insurance benefits that are set to expire in the coming weeks.

"Fiscal support will remain vital," she said.

Moreover, data tracked by Fed economists suggested that strong gains in hiring in May and June may not be sustained, she said. Coronavirus infections have accelerated in several large states since mid-June, when the Labor Department conducted its most recent survey of payroll growth.

The economy added 7.5 million jobs in May and June but still has 14.7 million fewer jobs than before the pandemic hit the U.S.

"The recent resurgence in Covid cases is a sober reminder that the pandemic remains the key driver of the economy's course," she said. "A thick fog of uncertainty still surrounds us, and downside risks predominate."

Ms. Brainard cited a number of risks that could result in worse-than-expected economic growth, and she said she expected the recovery to face headwinds even if those downside risks don't materialize. A second wave of infections, she added, would only "magnify that challenge."

Ms. Brainard is one of five members of the Fed's board of governors and has become an ally to Fed Chairman Jerome Powell. Her speeches on the economy are infrequent and her comments tend to carry weight within the Fed. Her remarks Tuesday reflected a pessimistic outlook that many of her colleagues are likely to share.

Ms. Brainard said with interest rates now pinned near zero, the most effective way for the Fed to provide further stimulus would be to deliver more concrete guidance about its plans to keep rates near zero.

To do that, Ms. Brainard said the Fed should commit now to abandoning a policy that for decades has led the central bank to pre-emptively withdraw support to avoid rising inflation.

She approvingly cited research that would have the Fed refrain from raising interest rates until inflation reaches 2%, which would allow for a modest, temporary overshoot of the central bank's formal target and would offset weak inflation readings.

Because the historical connection between declining labor slack and rising inflation appears to have broken down, the Fed should seek policies that focus primarily on boosting employment "with the kind of breadth and depth that were only achieved late in the previous recovery, " she said.

The Fed governor also echoed her support for capping Treasury yields, something that many of her colleagues have said they believe requires more careful analysis. Her comments indicated the Fed isn't likely to implement such caps this year, but neither did they suggest officials would rule out the tool.

"Given the downside risks to the outlook, there may come a time when it is helpful to reinforce the credibility of forward guidance and lessen the burden on the balance sheet with the addition of targets on the short-to-medium end of the yield curve," she said.

On the economy, Ms. Brainard said there were signs that some sectors, such as manufacturing and construction, had weathered the onset of the pandemic better than others, including consumer services, which she said "are more likely to remain hostage to social distancing."

Other areas of the economy likely to suffer from the inability to suppress the virus include commercial real estate and equipment investment, she said.

While the pandemic has hurt demand for goods and especially services, Ms. Brainard said she was also concerned about long-term damage to the economy's capacity to produce goods and services due to depressed investment, the loss of employer-employee relationships and the destruction of businesses.

"A wave of insolvencies is possible," she said.

Write to Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

July 14, 2020 14:54 ET (18:54 GMT)

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