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The Pandemic Endgame Continues James Bullard President and CEO CFA Society St. Louis Feb. 3, 2021 Any opinions expressed here are my own and do not necessarily reflect those of the Federal Open Market Committee. 1 Introduction 2 Key themes • The pandemic remains intense in the U.S. and Europe, but the early • • • arrival of vaccines suggests the health crisis will wane in the months ahead. U.S. monetary and fiscal policies continue to be exceptionally effective in mitigating macroeconomic damage. Macroeconomic forecasts suggest very strong U.S. real GDP growth for all of 2021. Downside risk remains, and continued execution of a granular, riskbased health policy will be critical to maintain economic momentum. 3 Health Crisis Is Expected to Wane 4 Fatality rates and economic activity • The global health crisis requires continued daily management. • Daily fatalities per 100,000 population remain near the highest levels of • • the pandemic in both Europe and the U.S. East Asia and Pacific countries continue to report daily fatalities per 100,000 population that are an order of magnitude lower than those of the U.S. and Europe. Key areas of global production must maintain safety protocols but are poised to bring the pandemic under control. 5 Pandemic remains intense in the U.S. and Europe Sources: Center for Systems Science and Engineering at Johns Hopkins University, Centers for Disease Control and Prevention and author’s calculations. Last observation: Feb. 1, 2021. For this chart, the East Asia and Pacific region consists of Australia, China, Indonesia, Japan, Malaysia, Myanmar, New Zealand, Philippines, Singapore, South Korea, Taiwan and Thailand. 6 But U.S. fatalities expected to fall Source: Institute for Health Metrics and Evaluation, University of Washington. Last observation: Jan. 22, 2021. 7 Fatalities skew toward older citizens Sources: Centers for Disease Control and Prevention and author’s calculations. Last observation: Week of Jan. 23, 2021. 8 Vaccines will help bring the crisis to a close • Vaccine distribution is being directed toward those most vulnerable to • • COVID-19. This suggests declining fatalities in the months ahead, even before the pandemic comes under more complete control. Virus mutation that renders current vaccines ineffective poses a tangible risk to this scenario. 9 Effective Monetary and Fiscal Policies 10 A policy rate cut and increased liquidity • U.S. monetary and fiscal policies have been exceptionally effective • • during the crisis. Monetary policy included lowering the policy rate to the effective lower bound and providing liquidity to financial markets through a variety of programs supported by the U.S. Treasury. The backstop programs stemmed an incipient financial crisis during the March-April time frame, to the point where current levels of financial stress are at pre-pandemic levels. 11 Financial stress has abated Source: Federal Reserve Bank of St. Louis. Last observation: Week of Jan. 22, 2021. 12 Fiscal policy response to the pandemic • In the first 11 months of 2020, U.S. fiscal policy included the CARES Act • • along with additional legislation. In total, this fiscal policy response was valued at about $3.148 trillion.* The fiscal response drove personal income up to an all-time high in the second quarter, the opposite of normal recession dynamics. In addition, the Consolidated Appropriations Act of 2021 signed into law on Dec. 27, 2020, includes an additional $900 billion in pandemic relief. * See the International Monetary Fund’s Policy Responses to COVID-19 and the Committee for a Responsible Federal Budget’s estimates of the cost of President Trump’s executive orders. 13 Personal income above 2019 trend Sources: Bureau of Economic Analysis, IHS Markit and author’s calculations. Last observation: December 2020. 14 Delinquency rates remain low Source: Federal Reserve Board. Shaded areas indicate U.S. recessions, assuming the 2020 recession ended in the second quarter. Last observation: 2020-Q3. 15 U.S. Recovery Far Ahead of Schedule 16 Labor markets continue to improve • Employment has rebounded more rapidly than expected, supporting • • the idea that many layoffs were temporary as firms adjusted to the pandemic. Hall and Kudlyak (2020), in particular, have emphasized that the temporary layoff category of unemployment has been dramatically more important in this recession as compared with previous recessions.* As a result, the U.S. labor market recovery is about four years ahead of where it was following the 2007-09 recession. * See R.E. Hall and M. Kudlyak, 2020, “Unemployed With Jobs and Without Jobs,” National Bureau of Economic Research, Working Paper No. 27886. 17 Unemployment declining more rapidly than after the previous peak Sources: Bureau of Labor Statistics and author’s calculations. Last observation: December 2020. 18 Unemployment driven by temporary layoffs Source: Bureau of Labor Statistics. Shaded areas indicate U.S. recessions, assuming the 2020 recession ended in April. Last observation: December 2020. 19 Potential unemployment declines • A back-of-the-envelope calculation suggests that there is room for • • • further decline in the official unemployment rate in the months ahead. If all those unemployed identifying as “on temporary layoff” are simply recalled and nothing else changes, the official unemployment rate would decline to 4.8%. If the “on temporary layoff” category returns to a normal value (e.g., 1 million workers) and nothing else changes, the official unemployment rate would still decline to 5.4%. The median U.S. unemployment rate in the postwar era is 5.6% 20 How far ahead of schedule is the U.S. labor market? February peak April trough December Percentage Recovered Months ahead of previous recovery Aggregate weekly hours (index) 112.0 93.2 105.6 66.0% 46 Civilian employment (millions) 158.7 133.4 149.8 64.9% 48 Nonfarm payrolls (millions) 152.5 130.3 142.6 55.6% 48 Sources: Bureau of Labor Statistics and author’s calculations. Last observation: December 2020. 21 The CBO projects GDP recovery in 2021 Source: Congressional Budget Office. Last observation: 2020-Q3. 22 Inflation Expectations Recovering Toward Inflation Target 23 Inflation expectations improving Sources: Federal Reserve Board and author’s calculations. Last observations: Jan. 22, 2021, and Feb. 1, 2021. 24 Inflation expectations moving higher • Market-based inflation expectations have recovered from lows reached • • • during March 2020. The FOMC’s new policy framework, announced in Chair Powell’s 2020 Jackson Hole speech, has likely encouraged some of this movement. The chart indicates that TIPS-based breakeven inflation, based on CPI inflation measures, could move considerably higher and still be consistent with a PCE inflation outcome modestly above the 2% target. This would be a welcome development for the FOMC, as inflation has generally been below target for many years. 25 Conclusion 26 Light at the end of the tunnel • The early arrival of vaccines suggests that the global pandemic will • • • wane during the first half of 2021. In the U.S., monetary and fiscal policies have been especially aggressive, and the associated macroeconomic outcomes have been considerably better than originally expected at the pandemic onset. Aggregate resources available to fund consumption continue to be exceptionally high, suggesting continued recovery in the first half of 2021. Downside risk remains, and continued execution of a granular, riskbased health policy will be critical in the months ahead. 27 Connect With Us James Bullard stlouisfed.org/from-the-president DISCOVER STLOUISFED.ORG NEWS & VIEWS Stay informed of our world-renowned economic research through blogs, podcasts and publications. FRED® ECONOMIC EDUCATION Federal Reserve Economic Data Graph, transform and share hundreds of thousands of data series from trusted sources around the world. EXPLORE THE EXHIBITS Find award-winning activities, videos, lessons and more, with publicly available resources for all ages. COMMUNITY DEVELOPMENT Learn how the St. Louis Fed promotes the financial stability of communities, neighborhoods and families. S U B S C R I B E & S T AY I N T O U C H Subscribe to e-newsletters Follow us on social 28