For release on delivery
1:00 p.m. EST
January 13, 2021
Full Employment in the New Monetary Policy Framework
Remarks by
Lael Brainard
Member
Board of Governors of the Federal Reserve System
at
The Inaugural Mike McCracken Lecture on Full Employment
Sponsored by the Canadian Association for Business Economics
(via webcast)
January 13, 2021
I want to thank the Canadian Association for Business Economics for inviting me
to join you today, particularly president Bonnie Lemcke and past president Armine
Yalnizyan. It is a pleasure to be here with Carolyn Wilkins.
I am honored to deliver the inaugural Mike McCracken Lecture on Full
Employment.1 Widely known for his critical contributions in bringing computer
modeling to Canadian economic forecasting, Mike McCracken is perhaps best known for
his tireless advocacy that "lower unemployment remains the most important goal for the
economy," which is particularly resonant for me, along with his emphasis on thinking
critically and expansively about full employment.2 A similar theme was highlighted by
community and labor representatives as well as educators at our Fed Listens events, and
it is now reflected in the Federal Reserve's new monetary policy framework.3
Lifting the lives of working people is at the heart of economic policymaking. The
deep and disparate damage caused by the pandemic, coming just over a decade after the
financial crisis, underscores the vital importance of full employment, particularly for low-
and moderate-income workers and those facing systemic challenges in the labor market.
1
I am grateful to Kurt Lewis of the Federal Reserve Board for his assistance in preparing this text. These
remarks represent my own views, which do not necessarily represent those of the Federal Reserve Board or
the Federal Open Market Committee.
2
In his 2012 Galbraith Lecture, Mike McCracken noted, "By 'full employment,' I mean that everyone who
wants a job can find one that is acceptable in terms of compensation, safety, and other conditions of work."
See Mike McCracken (2015), "The Search for Full Employment" (Ottawa: Informetrica Limited, January),
paper originally presented at the John Kenneth Galbraith Prize in Economics Lecture, delivered in the
Progressive Economics Forum session at the Canadian Economics Association meetings, held in Calgary,
June 2012,
https://progressive-economics.ca/wp-content/uploads/2007/06/McCracken-GalbraithLecture.pdf.
3
See Board of Governors of the Federal Reserve System (2020), Fed Listens: Perspectives from the Public
(Washington: Board of Governors, June),
https://www.federalreserve.gov/publications/files/fedlistensreport-20200612.pdf.
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Monetary Policy Framework
Two years ago, the Federal Reserve began an in-depth review of its monetary
policy framework.4 The design of our review process incorporated features from the
Bank of Canada's quinquennial renewal of its inflation-control framework agreement,
such as input from stakeholders and the focused research undertaken by staff members,
academics, and outside experts.
Our review was prompted by changes in key long-run features of the economy:
The recognition that price inflation is much less sensitive to labor market tightness than
historically-that is, a flat Phillips curve; that the equilibrium interest rate is much lower
than in the past; and that trend underlying inflation has moved somewhat below
2 percent. These developments reduce the amount we can cut interest rates to buffer the
economy, weaken inflation expectations, and could lead to worse employment and
inflation outcomes over time if not addressed.
In response, we have made changes to monetary policy that can be expected to
support fuller and broader-based employment than in earlier recoveries, improving
opportunities for workers who have faced structural challenges in the labor market.5
Whereas our previous strategy had been to minimize deviations from maximum
4
See Jerome H. Powell (2020), "New Economic Challenges and the Fed's Monetary Policy Review,"
speech delivered at "Navigating the Decade Ahead: Implications for Monetary Policy," an economic
policy symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyo., August 27,
https://www.federalreserve.gov/newsevents/speech/powell20200827a.htm; and Richard H. Clarida (2020),
"The Federal Reserve's New Framework: Context and Consequences," speech delivered at the "Economy
and Monetary Policy" event hosted by the Hutchins Center on Fiscal and Monetary Policy at the Brookings
Institution, Washington, November 16,
https://www.federalreserve.gov/newsevents/speech/clarida20201116a.htm.
5
See Lael Brainard (2020), "Bringing the Statement on Longer-Run Goals and Monetary Policy Strategy
into Alignment with Longer-Run Changes in the Economy," speech delivered at "How the Fed Will
Respond to the COVID-19 Recession in an Era of Low Rates and Low Inflation," an event hosted by the
Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, Washington, September 1,
https://www.federalreserve.gov/newsevents/speech/brainard20200901a.htm.
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employment in either direction, monetary policy will now seek to eliminate shortfalls
from maximum employment. In other words, the new framework calls for policy to
address employment when it falls short of its maximum level, whereas the previous
framework called for policy to react when employment was judged to be too high as well
as too low. The new monetary policy framework also eliminates the previous reference
to a numerical estimate of the longer-run normal unemployment rate and instead defines
the maximum level of employment as a broad-based and inclusive goal for which a wide
range of indicators are relevant.
Additional changes address the persistence of below-target inflation and the
decline in the equilibrium interest rate. Research and experience indicate that persistent
low equilibrium interest rates increase the frequency and duration of periods when the
policy rate is pinned close to zero, unemployment is elevated, and inflation is below
target.6 As a result, actual inflation and inflation expectations will tend to be biased
below the 2 percent target, further eroding policy space and exacerbating the effects of
the lower bound, risking a downward spiral for actual and expected inflation. From the
time of the Federal Open Market Committee's (FOMC) announcement of a 2 percent
inflation objective in January 2012 through the most recent data in November, monthly
readings of 12-month personal consumption expenditure (PCE) inflation have averaged
1.4 percent and have been below 2 percent in 95 out of the 107 months.
6
See Kathryn Holston, Thomas Laubach, and John C. Williams (2016), "Measuring the Natural Rate of
Interest: International Trends and Determinants," Working Paper Series 2016-11 (San Francisco: Federal
Reserve Bank of San Francisco, December),
http://www.frbsf.org/economicresearch/publications/working-papers/wp2016-11.pdf; and Lael Brainard (2015), "Normalizing Monetary
Policy When the Neutral Interest Rate Is Low," speech delivered at the Stanford Institute for Economic
Policy Research, Stanford, Calif., December 1,
https://www.federalreserve.gov/newsevents/speech/brainard20151201a.htm.
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To address the downward bias, the new framework adopts a flexible average
inflation-targeting strategy (FAIT) that seeks to achieve inflation that averages 2 percent
over time in order to ensure longer-term inflation expectations are well anchored at
2 percent. Under a FAIT strategy, appropriate monetary policy aims to achieve inflation
moderately above 2 percent for some time to make up for shortfalls during a period when
it has been running persistently below 2 percent.7
These changes could have a beneficial effect on the robustness of employment as
well as the economy's potential growth rate. In current circumstances, where a strong
labor market can be sustained without the emergence of high inflation, the conventional
practice of reducing policy accommodation preemptively when unemployment nears its
estimated longer-run normal rate is likely to lead to an unwarranted loss of opportunity
for many workers.8 For instance, the labor market healing that took place after the
unemployment rate reached the 5 percent median Summary of Economic Projections
estimate of the longer-run normal unemployment rate, from the fourth quarter of 2015
until the fourth quarter of 2019, included the entry of a further 3-1/2 million prime-age
Americans into the labor force, a movement of nearly 1 million people out of long-term
unemployment, and opportunities for 2 million involuntary part-time workers to secure
7
See Ben S. Bernanke, Michael T. Kiley, and John M. Roberts (2019), "Monetary Policy Strategies for a
Low-Rate Environment" Finance and Economics Discussion Series 2019-009 (Washington: Board of
Governors of the Federal Reserve System, February), https://doi.org/10.17016/FEDS.2019.009; and Lael
Brainard (2019), "Federal Reserve Review of Monetary Policy Strategy, Tools, and Communications:
Some Preliminary Views," speech delivered at the presentation of the 2019 William F. Butler Award, New
York Association for Business Economics, New York, November 26,
https://www.federalreserve.gov/newsevents/speech/brainard20191126a.htm.
8
Twelve-month PCE inflation was only 1.6 percent in December 2019, when the unemployment rate was
3.5 percent, racial gaps in employment were at historical lows, and labor force participation had increased.
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full-time jobs.9 The gains in employment may have come sooner and been greater if the
new monetary policy framework had been in place throughout the previous recovery.
The new policy approach, by avoiding the need to tighten preemptively, could
support labor market conditions that help to reduce persistent disparities. This could, in
turn, boost activity and increase potential growth by drawing individuals from groups
facing structural challenges into more productive employment.10 Research and
experience suggest the groups that face the greatest structural challenges in the labor
market are likely to be the first to experience layoffs during downturns and the last to
experience employment gains during recoveries.11 At the October 2019 Fed Listens
event, Amanda Cage, who now heads the National Fund for Workforce Solutions,
observed, "What we see is huge disparities in what unemployment looks like for
neighborhoods."12 She highlighted the challenges facing those communities where
unemployment remains at or above 15 percent even when unemployment falls below 4
percent at the national level.
9
These numbers are based on the observed changes in various aggregate labor market statistics between the
fourth quarter of 2015 and the fourth quarter of 2019-the last quarter unaffected by the COVID-19
pandemic.
10
For a discussion of how structural disparities can lead to household underinvestment in areas such as
education and business endeavors, see Lael Brainard (2017), "Labor Market Disparities and Economic
Performance," remarks at "Banking and the Economy: A Forum for Minority Bankers," a conference
hosted by the Federal Reserve Bank of Kansas City, Kansas City, Mo., September 27,
https://www.federalreserve.gov/newsevents/speech/brainard20170927a.htm.
11
Research finds that both unemployment rates and patterns of labor force entry and exit for Black and
Hispanic workers are more cyclically sensitive than for White workers. See Tomaz Cajner, Tyler Radler,
David Ratner, and Ivan Vidangos (2017), "Racial Gaps in Labor Market Outcomes in the Last Four
Decades and over the Business Cycle," Finance and Economics Discussion Series 2017-071 (Washington:
Board of Governors of the Federal Reserve System, June), https://doi.org/10.17016/FEDS.2017.071.
12
See David Wessel, Amanda Cage, Victor Dickson, Russell Kavalhuna, and Robert Reiter (2019),
"Monetary Policy Impact on Disadvantaged Workers' Long-Term Labor Market Prospects," panel
discussion at "Monetary Policy's Impact on Workers and Their Communities," a Fed Listens event,
sponsored by the Federal Reserve Bank of Chicago, Chicago, October 17,
https://www.chicagofed.org/fedlistens/panel-1.
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Recent research indicates that additional labor market tightening is especially
beneficial to disadvantaged groups when it occurs in already tight labor markets,
compared with earlier in the labor market cycle.13 For example, the gap between the
Black and White unemployment rates fell to an all-time low of 2 percentage points in
August 2019-well below its average of 6.3 percentage points.14
Outlook and Policy
Late last year, the Committee integrated the framework changes into its monetary
policy. The September 2020 FOMC statement adopted outcome-based forward guidance
for the policy rate tied to shortfalls from maximum employment and 2 percent average
inflation, and the December 2020 FOMC statement adopted outcome-based forward
guidance for asset purchases. Our monetary policy approach should support a stronger,
broader-based recovery from the deep and disparate damage of COVID-19.
The guidance indicates that the Committee expects the policy rate to remain at the
lower bound until employment has reached levels consistent with the Committee's
assessments of maximum employment, and inflation has risen to 2 percent and is on track
to moderately exceed 2 percent for some time. The forward guidance reflects the
important lesson that, with a significantly smaller scope to cut the policy rate than in past
recessions, the Committee can provide needed accommodation by making forward
commitments on the policy rate that are credible to the public.15 The outcome-based
13
See Stephanie R. Aaronson, Mary C. Daly, William L. Wascher, and David W. Wilcox (2019), "Okun
Revisited: Who Benefits Most from a Strong Economy?" Brookings Papers on Economic Activity, Spring,
pp. 333-75, https://www.brookings.edu/wp-content/uploads/2019/03/aaronson_web.pdf.
14
These data are available from the Bureau of Labor Statistics Current Population Survey beginning in
1972. See Bureau of Labor Statistics (2019), "Labor Force Statistics from the Current Population Survey,"
https://data.bls.gov/PDQWeb/ln.
15
See Ben S. Bernanke, Michael T. Kiley, and John M. Roberts (2019), "Monetary Policy Strategies for a
Low-Rate Environment," Finance and Economics Discussion Series 2019-009 (Washington: Board of
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forward guidance communicates how the policy rate will react to the evolution of
inflation and employment. It makes clear that the timing of liftoff will depend on
realized progress toward maximum employment and 2 percent average inflation.
The FOMC statement notes that monetary policy will remain accommodative
after liftoff in order to achieve "inflation moderately above 2 percent for some time so
that inflation averages 2 percent over time."16 Even after economic conditions warrant
liftoff, changes in the policy rate are likely to be only gradual to support the inflation
makeup strategy and maximum employment.
Market expectations appear to have adjusted in response to the changes in the
FOMC's approach. The Survey of Market Participants conducted by the Federal Reserve
Bank of New York indicates a shift in expectations following the release of the new
monetary policy framework.17 The median expected rate of unemployment at the time of
liftoff moved down from 4.5 percent in the July survey, before the release of the
framework, to 4.0 percent in the September and subsequent surveys, following the release
of the new framework. Similarly, the median level of 12-month PCE inflation
Governors of the Federal Reserve System, February), https://doi.org/10.17016/FEDS.2019.009. In
addition, see analytical work developed as part of the framework review, such as Jonas Arias, Martin
Bodenstein, Hess Chung, Thorsten Drautzburg, and Andrea Raffo (2020), "Alternative Strategies: How Do
They Work? How Might They Help?" Finance and Economics Discussion Series 2020-068 (Washington:
Board of Governors of the Federal Reserve System, August), https://doi.org/10.17016/FEDS.2020.068; and
James Hebden, Edward P. Herbst, Jenny Tang, Giorgio Topa, and Fabian Winkler (2020), "How Robust
Are Makeup Strategies to Key Alternative Assumptions?" Finance and Economics Discussion Series
2020069 (Washington: Board of Governors of the Federal Reserve System, August),
https://doi.org/10.17016/FEDS.2020.069.
16
See Board of Governors of the Federal System (2020), "Federal Reserve Issues FOMC Statement," press
release, December 16, https://www.federalreserve.gov/newsevents/pressreleases/monetary20201216a.htm.
17
See Ryan Bush, Haitham Jendoubi, Matthew Raskin, and Giorgio Topa (2020), "How Did Market
Perceptions of the FOMC's Reaction Function Change after the Fed's Framework Review?" Federal
Reserve Bank of New York, Liberty Street Economics (blog), December 18,
https://libertystreeteconomics.newyorkfed.org/2020/12/how-did-market-perceptions-of-the-fomcs-reactionfunction-change-after-the-feds-framework-review.html.
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anticipated at the time of liftoff rose from 2 percent in the July survey to 2.3 percent in
the September survey and beyond, following the introduction of FAIT.18
The forward guidance adopted in December expands the goals of the asset
purchases beyond market functioning by establishing qualitative outcome-based criteria
tied to realized progress on our employment and inflation goals. This approach integrates
the forward guidance on the policy rate and on asset purchases, rather than establishing
distinct criteria. The December guidance clarifies that the pandemic asset purchases will
continue at least at the current pace until substantial further progress is made on our
employment and inflation goals. In assessing substantial further progress, I will be
looking for sustained improvements in realized and expected inflation and will examine a
range of indicators to assess shortfalls from maximum employment.
If we look ahead, effective vaccines and additional fiscal support are important
positive developments, but the near-term outlook is challenging due to the resurgence of
the pandemic, and the economy remains far from our goals. The most recent spending
indicators point to a considerable loss of momentum late in the fourth quarter. Sales of
consumer durable goods-such as furniture, electronics, and appliances-declined in
November, after surging since the spring.19 The rise in cases in November and the
associated social distancing resulted in a decline in already low services consumption,
with sales at restaurants and bars falling by 4 percent, the largest drop since April.
Continued social distancing over the cold winter months is likely to generate a significant
18
The shift in the median appears to reflect an upward shift in the distribution: In the interquartile range of
values between the 25th and 75th percentiles, inflation of 2.2 percent moved from the top of the range in
July to the bottom of the range in September.
19
Through much of the recovery, spending on durable goods far exceeded the rates of growth that had been
observed before the COVID-19 crisis. As a result, households may curtail their purchases going forward in
order to bring the stock of consumer durables back in line with long-run levels of demand.
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drag for spending on services that require personal contact. Additionally, state and local
income and sales tax and gaming and energy-related revenues remain depressed, and the
most recent payrolls report indicates that state and local governments are having
difficulty sustaining employment levels as the virus persists.
Inflation remains very low; core PCE inflation ran at 1.4 percent over the 12
months ending in November. Even though some of the survey-based measures of
inflation expectations have picked up recently, they still remain close to the lower end of
their historical ranges. Market-based measures of inflation compensation have also
picked up. While disentangling inflation expectations from liquidity and term premiums
is imprecise, staff models attribute a significant portion of the movement in inflation
compensation to an increase in expectations, bringing them up from the lows seen in
March but still below their historical averages. Inflation may temporarily rise to or above
2 percent on a 12-month basis in a few months when the low March and April price
readings from last year fall out of the 12-month calculation, but it will be important to see
sustained improvement to meet our average inflation goal.
The COVID-19 pandemic is exacerbating disparities, and employment remains
far from our goals. Last Friday's payroll report highlighted the effects of the resurgence
of the virus, with the first overall decline in payrolls since April and a stark 498,000
decline in leisure and hospitality jobs. Overall, payroll employment is still nearly 10
million jobs below its February level. If we adjust the 6.7 percent headline
unemployment rate for the decline in participation since February and the Bureau of
Labor Statistics estimate of misclassification, the unemployment rate would be 10
percent, similar to the peak following the Global Financial Crisis.
The damage from COVID-19 is concentrated among already challenged groups.
Federal Reserve staff analysis indicates that unemployment is likely above 20 percent for
workers in the bottom wage quartile, while it has fallen below 5 percent for the top wage
quartile.20 Black and Hispanic unemployment stood at 9.9 percent and 9.3 percent,
respectively, in December, while White unemployment was 6.0 percent. Labor force
participation for prime-age workers has declined, particularly for parents of school-aged
children, where the declines have been greater for women than for men, and greater for
Black and Hispanic mothers than for White mothers.
The K-shaped recovery remains highly uneven, with certain sectors and groups
experiencing substantial hardship. All told, real gross domestic product likely declined
by about 2-1/2 percent in 2020, with the damage concentrated disproportionately among
some groups of workers and sectors as well as smaller businesses. Fortunately, fiscal
support looks set to resume playing a vital role in the form of stimulus payments and
extended unemployment benefits, particularly for the cash-constrained households that
make up a significant fraction of the population. The additional Paycheck Protection
Program financing will be a vital support for the many hard-hit small businesses facing
continued revenue shortfalls and declining cash balances.
The damage would have been much greater in the absence of substantial fiscal
and monetary support. The unprecedented scale and composition of fiscal support made
a vital difference in replacing lost income and supporting demand in the middle of last
year and is expected to do so again in the months ahead. The unprecedented speed and
20
For more information on this analysis, see the box "Disparities in Job Loss during the Pandemic" in
Board of Governors of the Federal Reserve System (2020), Monetary Policy Report (Washington: Board
of Governors, June), pp. 8-9,
https://www.federalreserve.gov/monetarypolicy/files/20200612_mprfullreport.pdf.
breadth of the monetary policy response through an expanded set of tools is supporting
lower borrowing costs along the yield curve for households and businesses as well as
better inflation and employment outcomes.
The outlook will depend on the path of the virus and vaccinations. While the
number of new cases is high and rising, the distribution of multiple effective vaccines is
under way.21 Spending on in-person services is likely to return to pre-pandemic levels
only as conditions around the virus improve substantially. Most forecasts predict a
significant rebound in aggregate spending this year. And there is some risk to the upside
if the efficient delivery of vaccines across many jurisdictions ultimately results in a
globally synchronized expansion.
We are strongly committed to achieving our maximum-employment and average-
inflation goals. It is too early to say how long it will take. The Committee has stated
clearly that it needs to see substantial further progress toward our goals before adjusting
purchases. The economy is far away from our goals in terms of both employment and
inflation, and even under an optimistic outlook, it will take time to achieve substantial
further progress. Given my baseline outlook, I expect that the current pace of purchases
will remain appropriate for quite some time. Of course, the outlook is highly uncertain,
and forecasts are subject to revisions-a key reason why our forward guidance is
outcome based and tied to realized progress on our goals.
The recovery thus far has been uneven, and the path ahead is uncertain. We
remain far from our goals, with core PCE inflation only at 1.4 percent and payroll
employment nearly 10 million below its pre-pandemic level. The Committee's forward
21
See the Centers for Disease Control and Prevention COVID Data Tracker, available at
https://covid.cdc.gov/covid-data-tracker/#vaccinations.
guidance will help keep borrowing costs low along the yield curve for households and
businesses, improve inflation outcomes, and enable the labor market to heal, leading to a
broader-based and stronger recovery. The strong support from monetary policy, together
with fiscal stimulus, should turn the K-shaped recovery into a broad-based and inclusive
recovery that delivers full employment, as Mike McCracken would have wished. Thank
you.