Jerome H Powell: Recent economic developments and the
challenges ahead
Speech by Mr Jerome H Powell, Chair of the Board of Governors of the Federal Reserve
System, at the National Association for Business Economics Virtual Annual Meeting, 6 October
2020.
* * *
Good morning. It has been just eight months since the pandemic first gained a foothold on our
shores, bringing with it the sharpest downturn on record, as well as the most forceful policy
response in living memory. Although it is too early for definitive conclusions, today I will offer a
current assessment of the response to the economic fallout of this historic event and discuss the
path ahead.
The Pre-COVID Economy
As the coronavirus spread across the globe, the U.S. economy was in its 128th month of
expansion-the longest in our recorded history-and was generally in a strong position.
Moderate growth continued at a slightly above-trend pace. Labor market conditions were strong
across a range of measures. The unemployment rate was running at 50-year lows. PCE
(personal consumption expenditures) inflation was running just below our 2 percent target.
The economy did face longer-term challenges, as all economies do. Labor force participation
among people in their prime working years had been trending down since the turn of the
millennium, and productivity gains during the expansion were disappointing. Income and wealth
disparities had been growing for several decades. As the expansion continued its long run,
however, productivity started to pick up, the labor market strengthened, and the benefits of
growth began to be more widely shared. In particular, improved labor market conditions during
the past few years encouraged more prime-age workers to rejoin or remain in the labor force.
Meanwhile, real wage gains for all workers picked up, especially for those in lower paying jobs.
Most economic forecasters expected the expansion and its benefits to continue, and with good
reason. There was no economy-threatening asset bubble to pop and no unsustainable boom to
bust. While nonfinancial business leverage appeared to be elevated, leverage in the household
sector was moderate. The banking system was strong, with robust levels of capital and liquidity.
The COVID-19 recession was unusual in that it was not triggered by a buildup of financial or
economic imbalances. Instead, the pandemic shock was essentially a case of a natural disaster
hitting a healthy economy.
Given the condition of the economy, in the early stages of the crisis it seemed plausible that, with
a rapid, forceful, and sustained policy response, many sectors of the economy would be able to
bounce back strongly once the virus was under control. That response would need to come from
actions across all levels of government, from health and fiscal authorities, and from the Federal
Reserve.
It also seemed likely that the sectors most affected by the pandemic-those relying on extensive
in-person contact-would face a long and difficult path to recovery. These sectors and people
working in them would likely need targeted and sustained policy support.
Some asked what the Fed could do to address what was essentially a medical emergency. We
identified three ways that our tools could help limit the economic damage from the pandemic:
providing stability and relief during the acute phase of the crisis when much of the economy was
shut down; vigorously supporting the expansion when it came; and doing what we could to limit
longer-run damage to the productive capacity of the economy.
The Recession and Nascent Recovery
When it became clear in late February that the disease was spreading worldwide, financial
markets were roiled by a global flight to cash. By the end of the month, many important markets
were faltering, raising the threat of a financial crisis that could exacerbate the economic fallout of
the pandemic. Widespread economic shutdowns began in March, and in the United States, with
many sectors shut down or operating well below capacity, real GDP fell 31 percent in the second
quarter on an annualized basis. Employers slashed payrolls by 22 million, with those on
temporary layoff rising by 17 million. Broader measures of labor market conditions, such as labor
force participation and those working part time for economic reasons, showed further damage.
In response, we deployed the full range of tools at our disposal, cutting rates to their effective
lower bound; conducting unprecedented quantities of asset purchases; and establishing a range
of emergency lending facilities to restore market function and support the flow of credit to
households, businesses, and state and local governments. We also implemented targeted and
temporary measures to allow banks to better support their customers.
The fiscal response was truly extraordinary. The unanimous passage of the CARES Act and
three other bills passed with broad support in March and April established wide-ranging programs
that are expected to provide roughly $3 trillion in economic support overall-by far the largest and
most innovative fiscal response to an economic crisis since the Great Depression.
What have these policies managed to accomplish so far?
First, the substantial fiscal aid has given vital support to households. The rise in transfers
supported necessary spending and contributed to a sharp increase in household saving. Goods
consumption is now above its pre-pandemic level. Services consumption remains low, although
it seems likely that much of this weakness is the byproduct of health concerns and social
distancing, rather than reductions in income and wealth. Consumption held up well through
August after the expiration of expanded unemployment insurance benefits, indicating that savings
from transfer payments continue to support economic activity. A recent Fed survey showed that
households in July had surprisingly upbeat views of their current financial well-being, with 77
percent of adults either "doing okay" or "living comfortably," an improvement even over the
1
reading immediately preceding the pandemic. Still, since it appears that many will undergo
extended periods of unemployment, there is likely to be a need for further support.
Second, aid to firms-in particular, the Paycheck Protection Program-and the general boost to
aggregate demand have so far partly forestalled an expected wave of bankruptcies and lessened
permanent layoffs. Business investment appears to be on a renewed upward trajectory and new
business formation similarly appears to be rebounding, pointing to some confidence in the path
ahead.
Third, after briefly seizing up in March, financial markets have largely returned to normal
functioning, albeit in the context of extensive ongoing policy support. Financial conditions are
highly accommodative, and credit is available on reasonable terms for many-though not all-
households and businesses. Interest-sensitive spending has been relatively strong, as shown in
the housing and auto sectors.
Taken together, fiscal and monetary policy actions have so far supported a strong but incomplete
recovery in demand and have-for now-substantially muted the normal recessionary dynamics
that occur in a downturn. In a typical recession, there is a downward spiral in which layoffs lead
to still lower demand, and subsequent additional layoffs. This dynamic was disrupted by the
infusion of funds to households and businesses. Prompt and forceful policy actions were also
likely responsible for reducing risk aversion in financial markets and business decisions more
broadly.
While the combined effects of fiscal and monetary policy have aided the solid recovery of the
labor market so far, there is still a long way to go. Payrolls have now recovered roughly half of the
22 million decline. After rising to 14.7 percent in April, the unemployment rate is back to 7.9
percent, clearly a significant and rapid rebound. A broader measure that better captures current
labor market conditions-by adjusting for mistaken characterizations of job status, and for the
decline in labor force participation since February-is running around 11 percent.
The burdens of the downturn have not been evenly shared. The initial job losses fell most heavily
on lower-wage workers in service industries facing the public-job categories in which minorities
and women are overrepresented. In August, employment of those in the bottom quartile of the
wage distribution was still 21 percent below its February level, while it was only 4 percent lower
2
for other workers. Combined with the disproportionate effects of COVID on communities of
color, and the overwhelming burden of childcare during quarantine and distance learning, which
has fallen mostly on women, the pandemic is further widening divides in wealth and economic
mobility.
The Road Ahead
I will now turn to the outlook. The recovery has progressed more quickly than generally expected.
The most recent projections by FOMC (Federal Open Market Committee) participants at our
September meeting show the recovery continuing at a solid pace. The median participant saw
unemployment declining to 4 percent and inflation reaching 2 percent by the end of 2023. Of
course, the economy may perform better or worse than expected. The outlook remains highly
uncertain, in part because it depends on controlling the spread and effects of the virus. There is a
risk that the rapid initial gains from reopening may transition to a longer than expected slog back
to full recovery as some segments struggle with the pandemic's continued fallout. The pace of
economic improvement has moderated since the outsize gains of May and June, as is evident in
employment, income, and spending data. The increase in permanent job loss, as well as recent
layoffs, are also notable.
We should continue do what we can to manage downside risks to the outlook. One such risk is
that COVID-19 cases might again rise to levels that more significantly limit economic activity, not
to mention the tragic effects on lives and well-being. Managing this risk as the expansion
continues will require following medical experts' guidance, including using masks and
socialdistancing measures.
A second risk is that a prolonged slowing in the pace of improvement over time could trigger
typical recessionary dynamics, as weakness feeds on weakness. A long period of unnecessarily
slow progress could continue to exacerbate existing disparities in our economy. That would be
tragic, especially in light of our country's progress on these issues in the years leading up to the
pandemic.
The expansion is still far from complete. At this early stage, I would argue that the risks of policy
intervention are still asymmetric. Too little support would lead to a weak recovery, creating
unnecessary hardship for households and businesses. Over time, household insolvencies and
business bankruptcies would rise, harming the productive capacity of the economy, and holding
back wage growth. By contrast, the risks of overdoing it seem, for now, to be smaller. Even if
policy actions ultimately prove to be greater than needed, they will not go to waste. The recovery
will be stronger and move faster if monetary policy and fiscal policy continue to work side by side
to provide support to the economy until it is clearly out of the woods.
Given this audience, I would be remiss were I not to mention our review of our monetary policy
strategy, tools, and communications, which concluded recently with our adoption of a flexible
average inflation-targeting regime. My colleagues and I have discussed this new framework in
detail in recent remarks. Today I will just note that the underlying structure of the economy
changes over time, and that the FOMC's framework for conducting monetary policy must keep
pace. The recent changes to our consensus statement reflect our evolving understanding of
several important developments. There has been a decline in estimates of the potential or
longerrun growth rate of the economy and in the general level of interest rates, presenting challenges
for the ability of monetary policy to respond to a downturn. On a more positive note, we have
seen that the economy can sustain historically high levels of employment, bringing significant
societal benefits and without causing a troubling rise in inflation. The new consensus statement
acknowledges these developments and makes appropriate changes in our monetary policy
framework to position the FOMC to best achieve its statutory goals.
The forward rate guidance adopted at our September meeting reflects our new consensus
statement. The new guidance says that, with inflation running persistently below our longer-run 2
percent goal, the Committee will aim to achieve inflation moderately above 2 percent for some
time so that inflation averages 2 percent over time and longer-term inflation expectations remain
well anchored at 2 percent. The Committee expects to maintain an accommodative stance of
policy until these outcomes are achieved. The Committee also left the target range for the federal
funds rate unchanged at 0 to 1/4 percent, and it expects it will be appropriate to maintain this
target range until labor market conditions have reached levels that are 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.
We expect that the new framework and guidance will support our efforts in pursuit of a strong
economic recovery.
Thank you. I look forward to our discussion.
1
See Update on the Economic Well-Being of U.S. Households: July 2020 Results, or SHED, issued in September
2020 and available on the Board's website at
www.federalreserve.gov/publications/files/2019-report-economicwell-being-us-households-update-202009.pdf. Return to text
2
Using data from ADP, the Board staff estimate that at the end of April, 41 percent of the workers in the bottom
quartile (based on their previous wage) had lost their jobs, compared with only 13 percent for the other three
quartiles. See the Board's June 2020 Monetary Policy Report, available
at www.federalreserve.gov/monetarypolicy/files/20200612_mprfullreport.pdf, for more details.