For release on delivery
10:10 a.m. EDT
March 25, 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
2021 Institute of International Finance Washington Policy Summit
Washington, D.C.
(via webcast)
March 25, 2021
It is my pleasure to meet virtually with you today at the 2021 Institute of
International Finance (IIF) Washington Policy Summit.1 I regret that we are not doing
this session in person, but I do hope next time we will be gathering together in
Washington. I look forward, as always, to a conversation with my good friend and one-
time colleague Tim Adams, 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 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. Gross domestic product (GDP) collapsed at a roughly 31.5 percent
annual rate in the second quarter of 2020, more than 22 million jobs were lost in March
and April, and the unemployment rate rose from a 50-year low of 3.5 percent in February
to almost 15 percent in April. Since then, economic activity has rebounded, and it is
clear that the economy has proven to be much more resilient than many forecast or feared
one year ago. GDP grew by almost 8 percent at an annual rate in the second half of last
year, and private forecasters project that GDP will grow roughly 6 percent-and possibly
7 percent-this year. As shown in the latest Summary of Economic Projections (SEP),
the median of Federal Open Market Committee (FOMC) participants' projections for
2021 GDP growth is 6.5 percent.2 If these projections are realized, GDP will grow at the
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fastest four-quarter pace since 1984. And, as this is a virtual meeting of the IIF, I would
be remiss if I did not highlight that if these projections for U.S. economic activity are
realized, rising U.S. imports will serve as an important source of external demand to the
rest of the world this year and beyond.
As with overall economic activity, conditions in the labor market have recently
improved. Employment rose by 379,000 in February, as the leisure and hospitality sector
recouped about two-thirds of the jobs that were lost in December and January.
Nonetheless, employment is still 9.5 million below its pre-pandemic level for the
economy as a whole. The unemployment rate remains elevated at 6.2 percent in
February, and once one factors in the decline in the labor force since the onset of the
pandemic and the misclassification of some workers on temporary layoff as employed,
the true unemployment rate is closer to 10 percent.
It is worth highlighting that in the baseline projections of the FOMC presented in
the latest SEP released last week, my colleagues and I substantially revised up our
outlook for the economy, 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. In particular, the median FOMC participant
now projects the unemployment rate to reach 4.5 percent at the end of this year and
3.5 percent by the end of 2023.
With regards to inflation, the median inflation projection of FOMC participants is
2.4 percent this year and declines to 2 percent next year before moving back up to
2.1 percent in 2023. Over the next few months, 12-month measures of inflation are
expected to move temporarily above our 2 percent longer-run goal, owing to a run of
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year-over-year comparisons with depressed service-sector prices recorded in the spring of
2020 and supply bottlenecks limiting how quickly production can respond in the near
term. However, I expect most of this increase to be transitory and for inflation to return
to-or perhaps run somewhat above-our 2 percent longer-run goal in 2022 and 2023.
This outcome would be entirely consistent with the new framework we adopted in
August 2020 and began to implement at our September 2020 FOMC meeting.3 In our
new framework, we aim for inflation outcomes that keep inflation expectations well
anchored at 2 percent. This means that following periods when inflation has been
running below 2 percent-as has been the case for most of the past decade-monetary
policy will aim for inflation to moderately exceed 2 percent for some time. And this
brings me to the next topic.
Recent FOMC Decisions 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 the following statements, 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.4 We expect to maintain an accommodative
stance of monetary policy until these outcomes-as well as our maximum-employment
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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 our December FOMC statement, the Committee combined our
forward guidance for the federal funds rate with enhanced, outcome-based guidance
about our asset purchases. 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 past few FOMC
meetings 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. 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."5 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
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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 will conduct
policy to achieve inflation outcomes that keep long-run inflation expectations anchored at
our 2 percent longer-run goal. 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."6 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-that remain unchanged.7
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 until the job is well and truly done to help ensure that the economic
recovery will be as robust and rapid as possible.
6
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.
7
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.