© Reuters. Brainard speaks at the John F. Kennedy School of Government at Harvard University in Cambridge
WASHINGTON (Reuters) – The U.S. economic outlook has improved markedly given the impact of coronavirus vaccines and fiscal spending, but the Federal Reserve “will need to be patient” and ensure that its employment and inflation goals are on track before considering policy changes, Fed Governor Lael Brainard said on Tuesday.
In remarks prepared for delivery to the Council on Foreign Relations, Brainard laid out the compelling case for an economic rebound this year, the same scenario that has prompted forecasters to steadily raise projections for U.S. growth.
“Vaccinations, along with enacted and expected fiscal measures and accommodative monetary policy, point to a strong modal outlook for 2021,” Brainard said. “Various measures of financial conditions are broadly accommodative relative to historical levels and should remain so. The labor market should strengthen, perhaps significantly, as the virus recedes, social distancing comes to an end, and the service sector springs back to life.”
Nevertheless, she emphasized the Fed’s commitment to keep monetary policy loose until it is clear that inflation has risen, and the U.S. jobs lost during the pandemic have been restored.
An expected jump in prices this spring will likely prove temporary, Brainard said, and not enough to warrant action by the U.S. central bank. For that, she said, it will take “a sustained improvement in actual inflation … The past decade of underperformance on our inflation target highlights that reaching 2% inflation will require patience.”
That could mean years before the Fed’s target overnight lending rate is lifted about its current near-zero level.
Similarly, Brainard said the labor market has a long way to go, given not just the gap of some 10 million lost jobs, but a decline in labor force participation that needs to be reversed as well.
“I will be looking for realized progress,” Brainard said, and in particular for evidence that “the progress on employment is broad-based and inclusive,” helping the women and lower-paid workers disproportionately affected by the pandemic. Those subtleties of the labor market are not captured in the headline unemployment rate.
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