For release on delivery
11:00 a.m. EST
January 8, 2021
U.S. Economic Outlook and Monetary Policy
Remarks by
Richard H. Clarida
Vice Chair
Board of Governors of the Federal Reserve System
at the
C. Peter McColough Series on International Economics
Council on Foreign Relations
New York, New York
(via webcast)
January 8, 2021
It is my pleasure to meet virtually with you today at the Council on Foreign
Relations.1 I regret that we are not doing this session in person, as we did last year, and I
hope the next time I am back, we will be gathering together in New York City again. I
look forward to my conversation with Steve Liesman and to your questions, but first,
please allow me to offer a few remarks on the economic outlook, Federal Reserve
monetary policy, and our new monetary policy framework.
Current Economic Situation and Outlook
In the second quarter of last year, the COVID-19 (coronavirus disease 2019)
pandemic and the mitigation efforts put in place to contain it delivered the most severe
blow to the U.S. economy since the Great Depression. Economic activity rebounded
robustly in the third quarter and has continued to recover in the fourth quarter from its
depressed second-quarter level, though the pace of improvement has moderated.
Household spending on goods, especially durable goods, has been strong and has moved
above its pre-pandemic level, supported in part by federal stimulus payments and
expanded unemployment benefits. In contrast, spending on services remains well below
pre-pandemic levels, particularly in sectors that typically require people to gather closely,
including travel and hospitality. In the labor market, more than half of the 22 million
jobs that were lost in March and April have been regained, as many people were able to
return to work. Inflation, following large declines in the spring of 2020, picked up over
the summer but has leveled out more recently; for those sectors that have been most
adversely affected by the pandemic, price increases remain subdued.
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While gross domestic product growth in the fourth quarter downshifted from the
once-in-a-century 33 percent annualized rate of growth reported in the third quarter, it is
clear that since the spring of 2020, the economy has turned out to be more resilient in
adapting to the virus, and more responsive to monetary and fiscal policy support, than
many predicted. Indeed, it is worth highlighting that in the baseline projections of the
Federal Open Market Committee (FOMC) summarized in the latest Summary of
Economic Projections (SEP), most of my colleagues and I revised up our outlook for the
economy over the medium term, projecting a relatively rapid return to levels of
employment and inflation consistent with the Federal Reserve's statutory mandate as
compared with the recovery from the Global Financial Crisis (GFC).2 In particular, the
median FOMC participant projects that by the end of 2023-a little less than three years
from now-the unemployment rate will have fallen below 4 percent, and PCE (personal
consumption expenditures) inflation will have returned to 2 percent. Following the GFC,
it took more than eight years for employment and inflation to return to similar mandate-
consistent levels.
While the recent surge in new COVID cases and hospitalizations is cause for
concern and a source of downside risk to the very near-term outlook, the welcome news
on the development of several effective vaccines indicates to me that the prospects for the
economy in 2021 and beyond have brightened and the downside risk to the outlook has
diminished. The two new SEP charts that we released for the first time following the
December FOMC meeting speak to these issues by providing information on how the
risks and uncertainties that surround the modal or baseline projections have evolved over
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time. While nearly all participants continued to judge that the level of uncertainty about
the economic outlook remains elevated, fewer participants saw the balance of risks as
weighted to the downside than in September. Although a little more than half of
participants judged risks to be broadly balanced for economic activity, a similar number
continued to see risks weighted to the downside for inflation.
The Latest FOMC Decision and the New Monetary Policy Framework
At our most recent FOMC meetings, the Committee made important changes to
our policy statement that upgraded our forward guidance about the future path of the
federal funds rate and asset purchases, and that also provided unprecedented information
about our policy reaction function. As announced in the September statement and
reiterated in November and December, with inflation running persistently below
2 percent, our policy will aim to achieve inflation outcomes that keep inflation
expectations well anchored at our 2 percent longer-run goal.3 We expect to maintain an
accommodative stance of monetary policy until these outcomes-as well as our
maximum-employment mandate-are achieved. We also expect it will be appropriate to
maintain the current target range for the federal funds rate at 0 to 1/4 percent until labor
market conditions have reached levels consistent with the Committee's assessments of
maximum employment, until inflation has risen to 2 percent, and until inflation is on
track to moderately exceed 2 percent for some time.
In addition, in the December statement, we combined our forward guidance for
the federal fund rate with enhanced, outcome-based guidance about our asset purchases.
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We indicated that we will continue to increase our holdings of Treasury securities by at
least $80 billion per month and our holdings of agency mortgage-backed securities by at
least $40 billion per month until substantial further progress has been made toward our
maximum-employment and price-stability goals.
The changes to the policy statement that we made over the fall bring our policy
guidance in line with the new framework outlined in the revised Statement on Longer-
Run Goals and Monetary Policy Strategy that the Committee approved last August.4 In
our new framework, we acknowledge that policy decisions going forward will be based
on the FOMC's estimates of "shortfalls [emphasis added] of employment from its
maximum level"-not "deviations." This language means that going forward, a low
unemployment rate, in and of itself, will not be sufficient to trigger a tightening of
monetary policy absent any evidence from other indicators that inflation is at risk of
moving above mandate-consistent levels. With regard to our price-stability mandate,
while the new statement maintains our definition that the longer-run goal for inflation is
2 percent, it elevates the importance-and the challenge-of keeping inflation
expectations well anchored at 2 percent in a world in which an effective-lower-bound
constraint is, in downturns, binding on the federal funds rate. To this end, the new
statement conveys the Committee's judgment that, in order to anchor expectations at the
2 percent level consistent with price stability, it "seeks to achieve inflation that averages
2 percent over time," and-in the same sentence-that therefore "following periods when
inflation has been running persistently below 2 percent, appropriate monetary policy will
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likely aim to achieve inflation moderately above 2 percent for some time." As Chair
Powell indicated in his Jackson Hole remarks, we think of our new framework as an
evolution from "flexible inflation targeting" to "flexible average inflation targeting."5
While this new framework represents a robust evolution in our monetary policy strategy,
this strategy is in service to the dual-mandate goals of monetary policy assigned to the
Federal Reserve by the Congress-maximum employment and price stability-which
remain unchanged.6
Concluding Remarks
While our interest rate and balance sheet tools are providing powerful support to
the economy and will continue to do so as the recovery progresses, it will take some time
for economic activity and employment to return to levels that prevailed at the business
cycle peak reached last February. We are committed to using our full range of tools to
support the economy and to help ensure that the recovery from this difficult period will
be as robust as possible.
5
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," a symposium
sponsored by the Federal Reserve Bank of Kansas City, held in Jackson Hole, Wyo. (via webcast),
August 27, https://www.federalreserve.gov/newsevents/speech/powell20200827a.htm.
6
See Richard H. Clarida (2020), "The Federal Reserve's New Monetary Policy Framework: A Robust
Evolution," speech delivered at the Peterson Institute for International Economics, Washington (via
webcast), August 31, https://www.federalreserve.gov/newsevents/speech/clarida20200831a.htm; and
Richard H. Clarida (2020), "The Federal Reserve's New Framework: Context and Consequences," speech
delivered at "The Economy and Monetary Policy," an event hosted by the Hutchins Center on Fiscal and
Monetary Policy at the Brookings Institution, Washington (via webcast), November 16,
https://www.federalreserve.gov/newsevents/speech/clarida20201116a.htm.