The U.S. economy currently faces a truly extraordinary degree of uncertainty as a consequence of the COVID-19 pandemic. In these circumstances, the Federal Reserve could begin highlighting alternative scenarios to illustrate key risks to the economic outlook, and such scenarios could inform the Fed’s policy strategy and public communications. In this paper, we present a set of illustrative scenarios, including a baseline scenario with a rapid but incomplete recovery this year (an upward-tilting checkmark), a benign scenario in which an effective cure or vaccine becomes available and facilitates a nearly complete recovery by mid-2021, and a severely adverse scenario involving persistently high unemployment and disinflationary pressures. Insights into these scenarios can be drawn from key historical episodes, including the Spanish flu, the Great Depression, the end of World War II, and the global financial crisis. We conclude by identifying key challenges that the Federal Reserve might face in adjusting its monetary policy and emergency credit facilities under each of these alternative scenarios.

Concluding Remarks
In light of historical experience, it is evident that dealing with “black swan” events requires a type of planning that is very different from the approaches the FOMC takes to policymaking in normal times. Today we are in the midst of an extraordinary crisis that has elements of several extreme events that have occurred over the past century. The Federal Reserve has responded to this crisis with an unprecedented array of emergency actions. Looking forward, the Fed will face crucial decisions in adjusting its monetary policy tools and its lender-of-last-resort facilities. Consequently, scenario analysis and contingency planning could be very helpful for sustaining public confidence, fostering the Federal Reserve’s mandated goals of maximum employment and price stability, and ensuring that the Federal Reserve retains its operational independence over time.

NBER Working Paper No. 27369
Issued in June 2020