Remaining Steady as the Economy Reopens
Remarks by
Lael Brainard
Member
Board of Governors of the Federal Reserve System
at
The Economic Club of New York
New York, New York
(via webcast)
June 1, 2021
It is a pleasure to join the Economic Club of New York for this discussion.1
Consumer demand is strong, vaccine coverage is expanding, and pandemic-affected
sectors are reopening in fits and starts. As was the pandemic shutdown with its ebbs and
flows, the reopening is without precedent, and it is generating supply-demand
mismatches at the sectoral level that are temporary in nature. Separating signal from
noise in the high-frequency data may be challenging for a stretch. The supply-demand
mismatches at the sectoral level are making it difficult to precisely assess inflationary
developments and the amount of resource slack from month to month.
Looking through the noise, I expect we will see further progress in coming
months, but the economy is far from our goals, and there are risks on both sides. The
best way to achieve our maximum-employment and average-inflation goals is to be
steady and transparent in our outcome-based approach to monetary policy while
remaining attentive to the evolution of the data and prepared to adjust as needed.
Pent-Up Demand and Supply Constraints
Last week's updated estimate of first-quarter real gross domestic product
continued to show strong annualized growth of 6.4 percent. I expect a further
acceleration in output growth driven by consumer demand during the current quarter as
the reopening of the economy broadens.2
1
I am grateful to Kurt Lewis of the Federal Reserve Board for his assistance in preparing this text. These
views are my own and do not necessarily reflect those of the Federal Reserve Board or the Federal Open
Market Committee.
2
For example, the median forecast for annualized real gross domestic product (GDP) growth in the second
quarter is 7.9 percent in the most recent Survey of Professional Forecasters; see Federal Reserve Bank of
Philadelphia (2021), Second Quarter 2021 Survey of Professional Forecasters (Philadelphia: Federal
Reserve Bank of Philadelphia, May),
https://www.philadelphiafed.org/surveys-and-data/real-time-dataresearch/spf-q2-2021. The most recent estimate of annualized second-quarter real GDP growth from the
GDPNow model at the Federal Reserve Bank of Atlanta was 9.3 percent; see
https://www.atlantafed.org/cqer/research/gdpnow (accessed May 28, 2021). The Blue Chip consensus
forecast for the second quarter was 9.2 percent in May.
Looking through the month-to-month variation, the data suggest that very strong
underlying spending growth is continuing this quarter, fueled by recent fiscal support and
continued reopening. Real personal consumption expenditures (PCE) stepped down
slightly in April after surging 4.1 percent month over month in March due to a strong
spend-out that month of fiscal support from the American Rescue Plan. A similar pattern
of moderation in April following outsized strength in March is also evident at the level of
individual goods categories, including clothing and general merchandise, as well as
spending at sporting goods, hobby, books, and music stores. Spending growth is strong
in the pandemic-affected services sectors that are reopening, with spending at restaurants
and bars increasing 3 percent in April after surging 13.5 percent in March.
The shift in the spending data from March to April provides a useful reminder to
exercise caution in extrapolating from individual data points in the current environment.
Growth this year is expected to be the strongest in decades as the economy bounces back
from the depressed level associated with the pandemic. The supplemental savings
accumulated over the course of the pandemic from fiscal support and constrained services
consumption hold the potential for a substantial amount of additional spending, but there
is uncertainty about how much of it is likely to be spent out this year as opposed to being
spent out more slowly over time.
While the early spend-out from fiscal support in the first quarter of this year was
exceptionally strong, whether that strength will be maintained depends in part on the
distribution of the remaining additional savings. Spending could moderate, for instance,
if the additional savings is concentrated among higher-income households that may have
already completed many of their durable goods purchases and may return to pre-
pandemic consumption of discretionary services rather than making up for the
underconsumption during the shutdown.3 The timing of household consumption out of
the accumulated savings will be very important for the strength of demand not just this
year, but also next. Today's fiscal tailwinds are projected to shift to headwinds next year.
So an important question is how much household spending will continue to support
growth into next year as opposed to settling back to pre-pandemic trends, which would be
an additional headwind relative to the strong makeup consumption we have seen so far
this year.
During the current reopening phase, the surge in demand is hitting some sectors
before the supply side has had a chance to catch up. Many businesses shrank in order to
survive the pandemic and now may be struggling or moving cautiously to expand
capacity. These mismatches are exacerbated in some sectors by idiosyncratic supply
disruptions, such as in semiconductors, steel, and lumber. Importantly, the reopening
pains associated with mismatches between demand and supply in most sectors are
temporary in nature and are likely to be resolved as pent-up demand moderates and
businesses hire and expand. These temporary reopening mismatches are evident in recent
data on both the employment and inflation sides of our mandate.
Supply-Demand Mismatches in Inflation
The reopening dynamics are evident in the April inflation readings. I had been
anticipating a notable move up in inflation beginning in April and lasting several months
due to a combination of base effects and temporary reopening supply and demand
mismatches.4 Core PCE inflation moved up to 3.1 percent on a 12-month basis in April,
while 12-month total PCE inflation rose to 3.6 percent amid high energy prices. A
significant portion of these 12-month readings reflect contributions from base effects that
resulted from the pandemic-related price declines in March 2020 dropping out of the 12-
month calculation.
Core PCE inflation is estimated to be 2.4 percent in April after adjusting for base
effects. Apart from base effects, the underlying factors driving the increase in inflation
are consistent with my expectations that we would see temporary price increases
associated with sectoral supply-demand imbalances, and that the timing and sectoral
incidence of these increases would be difficult to predict. While the level of inflation in
my near-term outlook has moved somewhat higher, my expectation for the contour of
inflation moving back towards its underlying trend in the period beyond the reopening
remains broadly unchanged.
The increases in a few categories that were prominent contributors to the month-
over-month April core PCE reading of 0.66 percent illustrate the role of temporary
frictions associated with the economy's unprecedented reopening. Used vehicles,
airfares, and accommodations together contributed nearly one-third of month-over-month
core PCE inflation in April even though the cumulative weight of all three components in
the core PCE basket is only 3 percent. The major contributors to the April core PCE
inflation increase are not significant drivers of core inflation historically.
The used vehicles category contributed just over 0.1 percentage point to the April
core PCE reading. On the demand side, stimulus payments and low borrowing rates have
given households additional capability to purchase vehicles, and the pandemic appears to
have increased the relative value of private transportation. On the supply side, with the
limited production of new cars due to the semiconductor shortage, rental car companies
have become buyers in the used vehicles market in order to restore the capacity they had
shuttered during the pandemic, whereas they would normally be net sellers in this market.
As a result, used car prices, which had followed a slight downward trend in the years
leading up to the pandemic, jumped a record 10 percent in April. While these pressures
may persist over the summer months, I expect them to fade and likely reverse somewhat
in subsequent quarters.
Similarly, the travel-related accommodations and airfare sectors also contributed
nearly 0.1 percentage point to month-over-month core PCE inflation. Prices in these
categories are recovering from depressed values well below their pre-COVID levels.
Prices are expected to continue to rise amid renewed summer travel, but the natural
limitations to making up spending on foregone travel are likely to result in a
normalization of demand growth after a few quarters, and the capacity in these sectors
will likewise increase from their depressed pandemic levels as hiring proceeds.
In assessing the risk that such transitory pricing pressures get embedded in
persistently high inflation, it is critical to remember that inflation averaged less than
2 percent over the past quarter-century, and that statistical measures of trend inflation ran
consistently below 2 percent for decades before the pandemic.5 Relative to the
entrenched inflation dynamics that existed before the pandemic, the sharp temporary
increases in some categories of goods and services seem unlikely to leave an imprint on
longer-run inflation behavior.
To be sure, I will keep a close watch on a range of indicators for any signs of an
unwelcome change in longer-term inflation expectations. The measure of breakeven
inflation compensation based on Treasury Inflation-Protected Securities (TIPS) suggests
that the recent inflation data have not disturbed longer-run inflation expectations. Indeed,
since the April consumer price index data were released, TIPS-based breakeven inflation
compensation for the next five years, as well as those for the five-year, five-year-forward,
have moved down, not up. The TIPS measures suggest that market participants are
demanding less compensation for expected longer-term inflation than they were before
the April inflation data were released, rather than more.
Survey-based measures of inflation expectations are mixed. The most recent
Survey of Professional Forecasters showed an increase in median PCE inflation
expectations over the next five years from 2 percent to 2.2 percent, and a smaller increase
for inflation expectations over the next 10 years, from 2 percent to 2.1 percent.6 Similar
to the market-based measures, this survey measure implies a slight decline in the forward
inflation measure used to proxy for longer-term inflation expectations relative to
medium-term expectations. In contrast, the median response in May to the University of
Michigan Survey of Consumers regarding inflation over the next 5 to 10 years moved up
to a level last reached in 2013.7 The Board staff's Index of Common Inflation
Expectations, which combines the most recent signals from both market- and survey-
based indicators, edged up a few basis points, reaching the bottom end of its range of
values before the 2014 decline.8
The inflation dynamics seen over the past few decades have led to inflation that is
somewhat below target and relatively stable. Inflation dynamics have generally evolved
very gradually. Longer-term inflation expectations have been well anchored, so when
some developments have pushed inflation above or below target, the rise has not been
embedded in the ongoing inflation rate.
Supply-Demand Mismatches in Employment
A temporary mismatch between the surge in demand and a fitful supply response
at the sectoral level is also evident in recent employment data. While job openings are at
the top of their range, the payroll data in April were surprisingly weak. In part, the weak
payrolls reflected some sectors where supply chain disruptions are limiting production
despite strong demand. While motor vehicle sales were robust through April, a
semiconductor shortage has resulted in production limits and the idling of a number of
U.S. auto plants.9 These plant closings were evident in a decline of 27,000 jobs in the
manufacturing of motor vehicles and parts in April, more than accounting for the 18,000
decline in manufacturing employment overall. Similarly, employment in construction
was flat in April after increasing notably in March, as single-family housing starts
dropped 13 percent over the month amid shortages of lumber that constrained
contractors' activity.10
The lackluster 218,000 increase in private payrolls in April also reflects post-
pandemic sectoral reallocation. Sectors that expanded employment substantially in
response to COVID-related demand appear to be shedding jobs in preparation for a post-
pandemic world, with delivery services jobs declining by 77,000 and grocery store jobs
declining by 50,000.
With the most recent Job Openings and Labor Turnover Survey data showing a
record 8.1 million job openings at the end of March, it appears that labor supply is
lagging behind labor demand in several sectors, in part reflecting ongoing concerns about
the virus and caregiving responsibilities.11 At the time of the April survey, 2.8 million
9
According to media reports, a number of U.S. auto plants have been idled by the shortage of
semiconductors. See, for example, Mike Colias (2021), "GM to Halt Production at Several North
American Plants Due to Chip Shortage," Wall Street Journal, April 8,
https://www.wsj.com/articles/gm-tohalt-production-at-several-north-american-plants-due-to-chip-shortage-11617893417; and Nora Naughton
(2021), "Ford Prolongs Shutdowns at Several U.S. Plants Due to Chip Shortage," Wall Street Journal,
April 21,
https://www.wsj.com/articles/ford-prolongs-shutdowns-at-several-u-s-plants-due-to-chipshortage-11619031751.
10
According to an April survey by the National Association of Home Builders, price spikes in lumber have
led 19 percent of respondents to delay building or selling homes and another 15 percent to pour the
foundation and then pause building until framing was possible; see Paul Emrath (2021), "How Builders Try
to Deal with Rising Lumber Prices," Eye On Housing (blog), April 21,
https://eyeonhousing.org/2021/04/how-builders-try-to-deal-with-rising-lumber-prices.
11
The labor force participation rate (LFPR) of women ages 25 to 34 stepped up 0.7 percentage point in
March to 76 percent but was unchanged in April at that level. Likewise, the LFPR for women ages 35 to
44 moved up 0.4 percentage point to 74.5 percent in March and was unchanged in April. Research has
shown that mothers are bearing the majority of pandemic-related childcare responsibilities. Labor force
participation fell much less for fathers compared with other men and all women at the onset of the
people reported being out of the labor force because of the pandemic, and only 23 percent
of the 18-to-64-year-old population were fully vaccinated. The vaccinated fraction of the
working-age population had increased to 40 percent by mid-May.12 Constraints related
to schooling and childcare are ongoing, and these have disproportionately affected Black
and Hispanic mothers and mothers in lower-income households.13 While it is now rare
for a school district to be fully remote, recent estimates indicate that just over one-half of
U.S. students are in school districts that continue to operate in a hybrid learning
environment rather than fully in person.14
pandemic; the recovery has also been more pronounced for men and women without children. See Olivia
Lofton, Nicolas Petrosky-Nadeau, and Lily Seitelman (2021), "Parental Participation in a Pandemic Labor
Market," FRBSF Economic Letter 2021-10 (San Francisco: Federal Reserve Bank of San Francisco, April
5),
https://www.frbsf.org/economic-research/publications/economic-letter/2021/april/parental-participationin-pandemic-labor-market.
12
The share of people ages 18 to 64 years old who are fully vaccinated is calculated using the percentage of
people fully vaccinated on April 17 by age group according to the CDC's COVID Data Tracker (available
at https://covid.cdc.gov/covid-data-tracker) and then weighting each age group based on the U.S. Census
Bureau's 2019 population estimates (available at
https://www2.census.gov/programssurveys/popest/technical-documentation/file-layouts/2010-2019/nc-est2019-agesex-res.csv) for the
corresponding age group.
13
In the most recent Survey of Household Economics and Decisionmaking, 36 percent of Black mothers
and 30 percent of Hispanic mothers reported not working or working less at some point in 2020 because of
disruptions to childcare or in-person K-12 schooling. Similarly, 33 percent of unmarried mothers and
nearly one-third of mothers with family income less than $50,000 reported not working or working less.
See Board of Governors of the Federal Reserve System (2021), Economic Well-Being of U.S. Households
in 2020 (Washington: Board of Governors, May),
https://www.federalreserve.gov/publications/files/2020report-economic-well-being-us-households-202105.pdf. Research also indicates that participation for
mothers in households with an annual income below $50,000 per year declined nearly 9 percent relative to
pre-pandemic levels, while participation for mothers in households with incomes above $100,000 fell a
little under 2 percent. For more information, see Olivia Lofton, Nicolas Petrosky-Nadeau, and Lily
Seitelman (2021), "Parents in a Pandemic Labor Market," Working Paper Series 2021-04 (San Francisco:
Federal Reserve Bank of San Francisco, February), https://doi.org/10.24148/wp2021-04.
14
Staff calculations using data from the week of May 10, 2021, indicate that the fraction of students in a
school district utilizing a hybrid of remote and in-person learning is 56 percent, whereas 42 percent of
students have returned to fully in-person education and about 2 percent are in districts that remain in a fully
remote-learning posture. These shares of students are calculated using school districts' operating statuses
from the AEI's Return to Learn Tracker, where each school district is weighted based on the number of
students enrolled in 2019 according to the National Center for Education Statistics. See
https://www.returntolearntracker.net.
There is some debate about whether the supplemental funds provided by
unemployment insurance (UI) benefits are leading workers to stay on the sidelines.15 The
high level of employment gains in the lowest-wage sector and the reduction in continued
claims seem inconsistent with supplemental UI benefits playing a large role in the April
employment report. The largest employment gains in the otherwise tepid April
employment report were in the low-wage leisure and hospitality sector, where UI
replacement rates are among the highest. In addition, between the March and April
reference weeks, continued UI claims, inclusive of Pandemic Emergency Unemployment
Compensation and Extended Benefits, fell by about 1.3 million-indicating that many
workers returned to work despite previously receiving UI benefits.
It is difficult to disentangle the effects of concerns about contracting the virus or
caregiving responsibilities brought on by the pandemic from those of UI benefits. All of
these factors are likely to diminish by autumn with the return to fully in-person school,
continued progress on vaccinations, and the expiration of supplemental UI benefits in
early September-or earlier, in many states.
For all these reasons, the supply-demand mismatches in the labor market are
likely to be temporary, and I expect to see further progress on employment in coming
months. That said, today employment remains far from our goal. Jobs are down by over
8 million relative to their pre-pandemic level, and the shortfall is over 10 million jobs if
we take into account the secular job growth that would have occurred over the past year
in normal circumstances. As of April, the overall prime-age employment-to-population
(EPOP) ratio is 76.9 percent, more than 3 percentage points below its pre-pandemic level.
The shortfall in the prime-age EPOP ratio is around 5 percentage points for Black and
Hispanic workers relative to their October 2019 peaks.
Policy
Although continued vigilance is warranted, the inflation and employment data
thus far appear to reflect a temporary misalignment of supply and demand that should
fade over time as the demand surge normalizes, reopening is completed, and supply
adapts to the post-pandemic new normal. Under our guidance, adjustments in the path of
monetary policy are transparently tied to realized progress on our maximum-employment
and 2 percent average-inflation goals. Jobs are down by between 8 and 10 million
compared with the level we would have seen in the absence of the pandemic. And it will
be important to see sustained progress on inflation given the preceding multiple year
trend of inflation below 2 percent. While we are far from our goals, we are seeing
welcome progress, and I expect to see further progress in coming months.
I am attentive to the risks on both sides of this expected path. I will carefully
monitor inflation and indicators of inflation expectations for any signs that longer-term
inflation expectations are evolving in unwelcome ways. Should inflation move
materially and persistently above 2 percent, we have the tools and experience to gently
guide inflation back down to target, and no one should doubt our commitment to do so.
Just as it is important to be attentive to upside risks, it is also important to be
attentive to the risks of pulling back too soon. In the previous monetary policy
framework, the customary preemptive tightening based on the outlook to head off
concerns about future high inflation likely curtailed critical employment opportunities for
many Americans and embedded persistently below-target inflation. The entrenched pre-
pandemic combination of low equilibrium interest rates, low underlying trend inflation,
and a flat Phillips curve is likely to reassert itself after reopening is complete. This type
of environment creates asymmetric risks, since the lower bound constraint means that
policy can respond more readily when inflation surprises to the upside than to the
downside.
Remaining steady in our outcomes-based approach during the transitory
reopening surge will help ensure the economic momentum that will be needed as current
tailwinds shift to headwinds is not curtailed by a premature tightening of financial
conditions. The best way to achieve and sustain our maximum-employment and average-
inflation goals is by remaining steady and clear in our approach while also being attentive
to changing conditions.