US Fed not in a hurry to close money taps: Powel
30 August 2021
The US economy is on track for a strong labour market as it bounces back from the pandemic caused by the Wuhan virus Federal Reserve chief Jerome H Powel said on Friday. He also hinted that the central bank is in no hurry to end its massive purchases of bonds - there is no rush in doing so.
Powel’s remarks that the Fed could slow its massive asset purchase programme by the end of the year boosted market sentiment with Wall Street gaining in early morning trade. The broad-based S&P 500 rose 0.7 per cent to 4,502.07, and the tech-rich Nasdaq Composite Index rose 0.9 per cent to 15,080.20.
Investors were keenly awaiting the comments at the Jackson Hole central banking symposium, as the central bank's easy money policies have played a role in indices' climb during the pandemic.
Powel noted that while strong policy support helped fuel a vigorous recovery, growth has been uneven, in many respects and historically anomalous.
Also, in a reversal of typical patterns in a downturn, aggregate personal income rose rather than fell, and households massively shifted their spending from services to manufactured goods, he pointed out.
Booming demand for goods and the strength and speed of the reopening have led to shortages and bottlenecks, leaving the Covid-constrained supply side unable to keep up. The result has been elevated inflation in durable goods — a sector that has experienced an annual inflation rate well below zero over the past quarter century, Powel said.
Labour market conditions are improving but turbulent, and the pandemic continues to threaten not only health and life, but also economic activity; he said.
The pandemic-led recession, the briefest and deepest on record, has displaced roughly 30 million workers in the United States in the space of two months. The decline in output in the second quarter of 2020 was twice the full decline during the Great Recession of 2007–09. But the pace of the recovery has exceeded expectations, with output surpassing its previous peak after only four quarters, less than half the time required following the Great Recession, Powel, governor of the US Federal Reserve remarked in a state of the economy speech.
While both output and employment recovered, Powel said, the pace of recovery in employment has lagged that in output.
Also, he said, the effects of the economic downturn has not fallen equally on all Americans - the burden has fallen more on lower-wage workers in the service sector and on African Americans and Hispanics in particular.
The unevenness of the recovery can further be seen through the lens of the sectoral shift of spending into goods—particularly durable goods such as appliances, furniture, and cars—and away from services, particularly in-person services in areas such as travel and leisure. As the pandemic struck, restaurant meals fell 45 per cent, air travel 95 per cent, and dentist visits 65 per cent, he pointed out.
Even today, with overall gross domestic product and consumption spending more than fully recovered, services spending remains about 7 per cent below trend. Total employment is now 6 million below its February 2020 level, and 5 million of that shortfall is in the still-depressed service sector.
In contrast, spending on durable goods has boomed since the start of the recovery and is now running about 20 per cent above the pre-pandemic level. With demand outstripping pandemic-afflicted supply, rising durables prices are a principal factor lifting inflation well above our 2 per cent objective.
Given the ongoing upheaval in the economy, some strains and surprises are inevitable. The job of monetary policy is to promote maximum employment and price stability as the economy works through this challenging period, Powel said
However, he said the outlook for the labor market has brightened considerably in recent months. Job gains have risen steadily over the course of this year and now average 832,000 over the past three months, of which almost 800,000 have been in services. The pace of total hiring is faster than at any time in the recorded data before the pandemic. The levels of job openings and quits are at record highs, and employers report that they cannot fill jobs fast enough to meet returning demand.
These favorable conditions for job seekers should help the economy cover the considerable remaining ground to reach maximum employment. The unemployment rate has declined to 5.4 per cent, a post-pandemic low, but is still much too high, and the reported rate understates the amount of labor market slack. Long-term unemployment remains elevated, and the recovery in labor force participation has lagged well behind the rest of the labor market, as it has in past recoveries.
With vaccinations rising, schools reopening, and enhanced unemployment benefits ending, some factors that may be holding back job seekers are likely fading. While the Delta variant presents a near-term risk, the prospects are good for continued progress toward maximum employment.
The rapid reopening of the economy has brought a sharp run-up in inflation. Over the 12 months through July, measures of headline and core personal consumption expenditures inflation have run at 4.2 per cent and 3.6 per cent, respectively — well above our 2 per cent longer-run objective.
He said the present leve of upward pressure on prices and wages is a cause for concern, there are a number of factors that suggest that these elevated readings are likely to prove temporary.
The dynamics of inflation are complex, and we assess the inflation outlook from a number of different perspectives. The spike in inflation is so far largely the product of a relatively narrow group of goods and services that have been directly affected by the pandemic and the reopening of the economy, Powel emphasised.
The Fed, he said, is directly monitoring the prices of particular goods and services most affected by the pandemic and the reopening, and has noted a moderation in some cases as shortages ease.
The central bank also assesses whether wage increases are consistent with 2 per cent inflation over time. While wage increases are essential to support a rising standard of living and are generally, a persistent, material wage increases above the levels of productivity gains could lead to "wage–price spiral."
As long as longer-term inflation expectations remain anchored, policy can and should look through temporary swings in inflation, he said, adding at the Fed’s monetary policy framework emphasises that anchoring longer-term expectations at 2 per cent is important for both maximum employment and price stability.