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

forecasting model that takes relevant current data as inputs and projects estimated future values of aggregate dividends, real interest rates, and equity risk premiums as outputs. in principle, investors could use such a model to make forecasts of these key variables and hence to estimate what they are willing to pay for stocks. besides a number of standard variables that have been shown to be helpful in making forecasts of such financial variables, suppose we include in the forecasting model our measure of unanticipated changes in the federal funds rate. that is, we use the the existence of a large equity premium in the past is, of course, no guarantee of an equally large equity premium in the future. the fact that equities are more widely held today than in the past, implying that the risk of equities is more widely shared, is one reason that the equity premium may be lower in the future than it has been in the past. of course, a looming recession is likely also to lower expected dividends ( bad for stocks ) and lower interest rates ( good for stocks ). generally, stock prices are a leading indicator, falling ahead of recessions and rising in advance of recoveries ( although with many false signals ). variables used in our forecasting model, besides the excess return on stocks, the one - month real interest rate, and the unanticipated change in the funds rate, include the relative bill rate ( defined as the three - month treasury bill rate minus its information contained in these unanticipated changes in making our forecasts of future dividends, interest rates, and risk premiums. now we can consider the following thought experiment. suppose we have run our computer model, made our forecasts, and inferred the appropriate values for stocks. but then we receive news that the fed has unexpectedly raised the federal funds rate by 25 basis points. based on our forecasting model, by how much would that information change our previous forecasts of future dividends, interest rates, and risk premiums? the answer to this question clarifies the channel by which monetary policy affects stock prices. if we were to find, for example, that the news of an unexpected increase in the funds rate significantly changed the forecast of future dividends but did not much affect the forecasts of interest rates or risk premiums, then we could conclude that monetary policy affects stock prices primarily by affecting investor expectations of future dividends. by contrast, if news of