US Economy Moves from Recovery to Expansion, Focusing on Full Employment

November 8, 2021 by Victoria Turner
US Economy Moves from Recovery to Expansion, Focusing on Full Employment
Richard Clarisa (US Federal Reserve)

WASHINGTON — The U.S. economy has transitioned ”from recovery to expansion” as of the second fiscal quarter of this year, said Richard Calida, vice-chair of the board of governors of the Federal Reserve, Monday. 

This rapid recovery from the pandemic-induced economic crisis has been the fastest in the last five decades, he said at Monday’s Brookings Institution event discussing the Fed’s new monetary framework adopted last year, which targets an inflation rate just over 2% for the upcoming years. But the inflation rate is still higher than the central bank wants, he said, projected at 4% for 2021. By 2022, however, it’s expected to drop to an average of 2.5% to reach the long-term target of 2%. 

Nevertheless, this rapid recovery pace points out that “timely and targeted monetary and fiscal policy actions provided essential and significant support,” he said. 

The targeted inflation approach is meant to steer the economy from falling wages and prices by also incorporating a “broad-based and inclusive” mandate that focuses on the labor market, particularly maximum employment and restoring price stability. 

Despite the positive trends, he said, “it is still taking longer to fully reopen a $20 trillion U.S. economy, and really a global economy, than it did to shut it down.” Complicating the achievement of the 2% target is the “breadth and enormity” of the supply chain challenges. Once these supply chain issues are under control the inflation rate will start coming back closer to the target, Calida said.

But projections point to a 4% increase in Gross Domestic Product next year, he noted, an upward trend that he expects to continue and that “translates into continuing declines” for the unemployment rate. If the unemployment rate drops to 4%, Clarida expects they can meet the goal of full employment by not raising the interest rates on bond purchases from close to 0%. 

Nevertheless, it should be noted that the Fed will be tapering down the aid it’s been providing markets by $15 billion each month starting this month. This tapering down has been left open to revision depending on how the economy continues to fare. 

“The overshooting strategy is flexible,” said Ben Bernanke, distinguished senior fellow at Brookings and former chair of the Federal Reserve, but there is still a lot of uncertainty as to how the Fed will determine maximum employment and address any drawbacks “in this very unusual environment.” 

“Monetary policy has had to contend with the fact that many key variables are not directly observable, including natural unemployment rate and inflation expectations,” he explained. 

These inflation expectations may be “unobservable,” Clarida countered, “but they’re mission-critical to central banks and our focus is really on having a robust assessment of them” by not only looking at labor market indicators like quantities produced, but at prices and wages – like productivity-based adjusted wage growth. 

And the “full” and “maximum employment” definitions are not well-defined yet, said Aysegul Sahin, Richard J. Gonzalez regents chair in economics at the University of Texas at Austin. A former adviser to the Federal Reserve Bank of Dallas, Sahin pointed out “broad-based and inclusive [directive]…is not directly measurable” as something like payroll growth, which creates a dispersion of measures at “unspecified levels” across a “wide range of indicators” that also can “[vary] largely due to non-monetary factors.” Some factors are cyclical, which she explained cannot be influenced by the Fed, but others are trends. 

Current labor market indicators reflect levels found in 2017 and 2018, Sahin said, except the U.S. is not seeing the workforce entry desired. And her guess is that “we’re never going to see this big entry into the labor market.” After taking time off from the workforce, some people just have a different work-life balance and will choose to reenter at their own pace, she explained. 

Despite moving in the right direction, the Fed still needs to incorporate more measures and the rest of its available toolkit as it revises its framework, said Julia Coronado, president and founder of Macropolicy Perspectives. They need to be able to look at what real wages are actually doing by factoring in productivity and inflation, she said, “‘but also unit labor costs, the labor share of GDP, the prime-age employment population ratio” and the like need to be brought into the mix in “future iterations” of this framework while integrating supervisory guidance tools the Fed already has. 

Victoria can be reached at [email protected].

A+
a-
  • Federal Reserve
  • Richard Calida
  • US Economy
  • In The News

    Health

    Voting

    Economy

    Inflation Slowed Further in December as Economic 'Soft Landing' Moves Into Sharper Focus

    WASHINGTON (AP) — The Federal Reserve’s preferred inflation gauge cooled further last month even as the economy kept growing briskly, a... Read More

    WASHINGTON (AP) — The Federal Reserve’s preferred inflation gauge cooled further last month even as the economy kept growing briskly, a trend sure to be welcomed at the White House as President Joe Biden seeks re-election in a race that could pivot on his economic stewardship. Friday’s... Read More

    Americans' Economic Outlook Brightens as Inflation Slows and Wages Outpace Prices

    WASHINGTON (AP) — After an extended period of gloom, Americans are starting to feel better about inflation and the economy —... Read More

    WASHINGTON (AP) — After an extended period of gloom, Americans are starting to feel better about inflation and the economy — a trend that could sustain consumer spending, fuel economic growth and potentially affect President Joe Biden's political fortunes. A measure of consumer sentiment by the University of Michigan has... Read More

    Some Americans Will Get Their Student Loans Canceled in February as Biden Accelerates New Plan

    WASHINGTON (AP) — The Biden administration will start canceling student loans for some borrowers in February as part of a new... Read More

    WASHINGTON (AP) — The Biden administration will start canceling student loans for some borrowers in February as part of a new repayment plan that's taking effect nearly six months ahead of schedule. Loan forgiveness was originally set to begin in July under the new SAVE repayment plan, but... Read More

    In Milwaukee, Biden Looks to Highlight Progress for Black-Owned Small Businesses

    WASHINGTON (AP) — President Joe Biden is aiming to use a visit to the battleground state of Wisconsin on Wednesday... Read More

    WASHINGTON (AP) — President Joe Biden is aiming to use a visit to the battleground state of Wisconsin on Wednesday to spotlight a surge in federal government support for Black-owned small businesses during his White House tenure and to highlight his administration's efforts to ramp up... Read More

    Wall Street Rises on Hopes for Rate Cuts, as Dow Ticks Toward Another Record

    NEW YORK (AP) — Wall Street is ticking higher Thursday following its big rally the day before on excitement that... Read More

    NEW YORK (AP) — Wall Street is ticking higher Thursday following its big rally the day before on excitement that several cuts to interest rates may indeed be coming next year. The S&P 500 was 0.3% higher in morning trading and within 1.5% of its all-time... Read More

    Biden to Convene New Supply Chain Council, Announce 30 Steps to Strengthen US Logistics

    WASHINGTON (AP) — President Joe Biden on Monday will convene the first meeting of his supply chain resilience council, using the event... Read More

    WASHINGTON (AP) — President Joe Biden on Monday will convene the first meeting of his supply chain resilience council, using the event to announce 30 actions to improve access to medicine and needed economic data and other programs tied to the production and shipment of goods. “We’re determined... Read More

    News From The Well
    scroll top