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For release on delivery
1:00 p.m. EST
March 2, 2021

U.S. Economic Outlook and Monetary Policy: An Update

Remarks by
Lael Brainard
Board of Governors of the Federal Reserve System
at the
C. Peter McColough Series on International Economics
Council on Foreign Relations
New York, New York
(via webcast)

March 2, 2021

It has been one year since the first wave of the COVID-19 pandemic hit our
shores—a year marked by heartbreak and hardship. We are all looking forward to a
brighter time ahead, when vaccinations are widespread, the recovery is broad based and
inclusive, and services, schools, sports, and social life are in person. The expected path
of the U.S. economy has strengthened with the prospect of widespread vaccinations and
additional fiscal stimulus, but risks remain, and we are currently far from our goals. 1
Current Situation
After a dark winter with elevated case counts and setbacks on service-sector jobs,
case counts have come down and spending is picking up. Economic forecasts for growth
during the first quarter have been significantly upgraded in response to the better-thanexpected data. 2 January data for household spending overall came in strong—confirming
that the renewal of fiscal support at the end of the year provided a much needed boost to
household incomes and spending at the turn of the year. The income support provided by
fiscal authorities to hard-hit workers, households, businesses, and states and localities, as
well as the actions of the Federal Reserve to promote orderly functioning in financial
markets and low borrowing costs for households and businesses, have been providing
vital support for the economy.
In recent weeks, vaccinations have been increasing, while weekly cases,
hospitalizations, and deaths have decreased. The seven-day moving average of daily
COVID deaths, which peaked in mid-January, declined about 35 percent during the
I am grateful to Kurt Lewis for assistance in preparing these remarks. These remarks represent my own
views, which do not necessarily represent those of the Federal Reserve Board or the Federal Open Market
See, for example, the Federal Reserve Bank of Atlanta’s GDPNow, which revised up the estimate for
first-quarter growth by 5 percentage points on the release of the retail sales data. The latest estimate is 8.8
percent. The GDPNow forecast is available on the Federal Reserve Bank of Atlanta’s website at

-2month of February, although sadly it is still at high levels. 3 As of yesterday, nearly 77
million vaccination doses had been administered.
While the progress on vaccinations is promising, jobs are currently down by
10 million relative to pre-pandemic levels. Improvements in the labor market stalled late
last year after rebounding partway in the summer and fall of 2020. When we take into
consideration the more than 4 million workers who have left the labor force since the
pandemic started, as well as misclassification errors, the unemployment rate is close to 10
percent currently—much higher than the headline unemployment rate of 6.3 percent.
Labor force participation by prime-age workers stands lower now, on net, than it
did in June after it had bounced back partway from the decline in April. 4 The decline in
labor force participation relative to last June is largely a result of lower participation by
prime-age women, which, in turn, partly reflects the increase in caregiving work at home
with the move to remote schooling and the shutdown of daycares due to COVID. On
average, over the period from November 2020 to January 2021, the fraction of prime-age
women with children aged 6 to 17 who were out of the labor force for caregiving had
increased by 2.4 percentage points from a year earlier, while for men the fraction had
increased by about 0.6 percentage point.5 If not soon reversed, the decline in the

For more information, see the Centers for Disease Control and Prevention’s COVID data page, which is
available at
See the lower panel of figure 3 in Lael Brainard (2021), “How Should We Think about Full Employment
in the Federal Reserve’s Dual Mandate?” speech delivered at the Ec10, Principles of Economics, Lecture,
Faculty of Arts and Sciences, Harvard University, Cambridge, Mass. (via webcast), February 24,
The percentages are staff calculations based on the microdata from the January Current Population
Survey. For more information on this analysis, see the box “Disparities in Job Loss during the Pandemic”
in Board of Governors of the Federal Reserve System (2021), Monetary Policy Report (Washington:
Board of Governors, February), pp. 12–14,

-3participation rate for prime‑age women could have scarring effects, with longer-term
implications for household incomes and potential growth. 6
Roughly 90 percent of the shortfall in private payroll employment relative to the
pre-COVID level is concentrated in service-providing industries, with half of these
service job losses in leisure and hospitality. The concentration of job losses in services
has had a disproportionate effect on the lowest-wage workers. Workers in the lowestwage quartile face an extremely elevated rate of unemployment of around 23 percent. 7
The advent of widespread vaccinations should revive in-person schooling and childcare
along with demand for the in-person services that employ a significant fraction of the
lower-wage workforce.
Realized inflation remains low, although inflation expectations appear to have
moved closer to our 2 percent longer-run target. Both core and headline measures of 12month personal consumption expenditures (PCE) inflation were 1.5 percent in January,
well below our longer-run 2 percent inflation goal. Longer-term inflation expectations
appear to have moved up in recent months, consistent with the Federal Open Market
Committee’s (FOMC) new commitment to achieving inflation that averages 2 percent
over time. Market-based indicators of inflation expectations increased over recent
months, with Treasury Inflation-Protected Securities-based measures of inflation
compensation over the next 5 years and 10 years rising about 40 and 30 basis points,

See Olivia Lofton, Nicolas Petrosky-Nadeau, and Lily Seitelman (2021), “Parents in a Pandemic Labor
Market,” Working Paper 2021-04 (San Francisco: Federal Reserve Bank of San Francisco, February),; and Lael Brainard (2020),
“Achieving a Broad-Based and Inclusive Recovery,” speech delivered at “Post-COVID—Policy
Challenges for the Global Economy,” Society of Professional Economists Annual Online Conference,
October 21,
For more information on the analysis on employment by wage quartile, see the box “Disparities in Job
Loss during the Pandemic” in Board of Governors, Monetary Policy Report, in note 5.

-4respectively, since the end of last year. Some survey measures of inflation expectations
have also moved up in recent months, although, on balance, they have only moved up
toward their pre-COVID levels.
In many foreign countries, growth moderated at the end of 2020, as a spike in
COVID hospitalizations and deaths led to tighter public health restrictions in many
economies. Retail sales and measures of services activity weakened even as
manufacturing and exports remained more resilient. Foreign activity should strengthen
later this year as vaccinations rise, COVID case counts decline, and social distancing
eases. It should also be aided by some rundown in the stock of excess savings, continued
fiscal and monetary support, and strong U.S. demand. The turnaround in growth in each
country will hinge on success in controlling the virus and limiting economic scarring
from the past year’s downturn, as well as on available policy space, and underlying
macroeconomic vulnerabilities.
So, what do these developments suggest for the U.S. outlook? Increasing
vaccinations, along with enacted and expected fiscal measures and accommodative
monetary policy, point to a strong modal outlook for 2021, although considerable
uncertainty remains. It is widely expected that we will continue to make progress
controlling the virus, reducing the need for social distancing, but variants of the virus,
slow take-up of vaccinations, or both could slow progress.
Additional fiscal support is likely to provide a significant boost to spending when
vaccinations are sufficiently widespread to support a full reopening of in-person services.
Various measures of financial conditions are broadly accommodative relative to historical

-5levels 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.
Inflation is likely to temporarily rise above 2 percent on a 12-month basis when
the low March and April price readings from last year fall out of our preferred 12-month
PCE measure. Transitory inflationary pressures are possible if there is a surge of demand
that outstrips supply in certain sectors when the economy opens up fully. The size of
such a surge in demand will depend in part on the effects of additional fiscal stimulus,
along with any spend-down of accumulated savings, which are uncertain. 8 But a surge in
demand and any inflationary bottlenecks would likely be transitory, as fiscal tailwinds to
growth early this year are likely to transition to headwinds sometime thereafter. A burst
of transitory inflation seems more probable than a durable shift above target in the
inflation trend and an unmooring of inflation expectations to the upside.
When considering the inflation outlook, it is important to remember that inflation
has averaged slightly below 2 percent for over a quarter-century. In the nine years since
the FOMC’s announcement of a 2 percent inflation objective, 12-month PCE inflation
has averaged under 1-1/2 percent. Readings of 12-month inflation have been below

For examples of the range of estimates of the effects of the expected fiscal stimulus, see Wendy Edelberg
and Louise Sheiner (2021), “The Macroeconomic Implications of Biden’s $1.9 Trillion Fiscal Package,”
Brookings Institution, January 28,; Alex Arnon, Daniela Viana Costa,
Zheli He, Austin Herrick, Jon Huntley, Marcos Dinerstein, Victoria Osorio, and John Ricco (2021),
“Macroeconomic Effects of the $1.9 Trillion Biden COVID Relief Plan,” Penn Wharton Budget Model
(Philadelphia: Wharton School of the University of Pennsylvania, February 3),; and Olivier Blanchard (2021), “In Defense of Concerns over the $1.9 Trillion Relief Plan,”
RealTime Economic Issues Watch (Washington: Peterson Institute for International Economics, February

-62 percent in 95 of those 109 months. According to recent research, statistical models
estimate that underlying core PCE inflation ranges from one- to four-tenths of 1
percentage point below our 2 percent longer-run target.9 Recall that at the end of 2019,
with unemployment at a multidecade low and after the addition of almost 1-1/2 million
workers to the labor force during the previous year, PCE inflation was 1.6 percent for the
Monetary Policy
With that outlook in mind, let me turn to monetary policy. After an extensive
review, the FOMC revised its monetary policy framework to reflect important changes in
economic relationships characterized by a low equilibrium interest rate, inflation
persistently below target, and low sensitivity of inflation to resource utilization. The new
framework calls for monetary policy to seek to eliminate shortfalls of employment from
its maximum level, in contrast to the previous approach that called for policy to minimize
deviations when employment is too high as well as too low. It emphasizes that maximum
employment is a broad-based and inclusive goal assessed by a wide range of indicators.
In addition, in order to keep longer-term inflation expectations well anchored at our 2
percent goal, monetary policy will seek to achieve inflation that averages 2 percent over
time. Consequently, following periods when inflation has been running persistently
below 2 percent, appropriate monetary policy will likely aim to achieve inflation
moderately above 2 percent for some time.

See the point estimates for 2019:Q2 in table 1 in Jeremy B. Rudd (2020), “Underlying Inflation: Its
Measurement and Significance,” FEDS Notes (Washington: Board of Governors of the Federal Reserve
System, September 18),


-7These changes mean that we will not tighten monetary policy solely in response
to a strong labor market. The long-standing presumption that accommodation should be
reduced preemptively when the unemployment rate nears estimates of the neutral rate in
anticipation of high inflation that is unlikely to materialize risks an unwarranted loss of
opportunity for many of the most economically vulnerable Americans. 10 It may curtail
progress for racial and ethnic groups that have faced systemic challenges in the labor
force. Instead, the shortfalls approach will enable the labor market to continue to
improve absent clear indications of high inflationary pressures or an unmooring of
inflation expectations to the upside.
The FOMC has set out forward guidance on the policy rate and asset purchases
that implements the new framework. The guidance indicates an expectation that it will
be appropriate to maintain the current target range of the federal funds rate until labor
market conditions have reached levels consistent with the Committee’s assessments of
maximum employment and inflation has risen to 2 percent and is on track to moderately
exceed 2 percent for some time. Even after economic conditions warrant liftoff, changes
in the policy rate are likely to be only gradual, as the forward guidance notes that
monetary policy will remain accommodative in order to achieve inflation moderately
above 2 percent for some time so that inflation averages 2 percent over time. In addition,
asset purchases are expected to continue at least at their current pace until substantial
further progress has been made toward our goals.

See Stephanie R. Aaronson, Mary C. Daly, William L. Wascher, and David W. Wilcox (2019), “Okun
Revisited: Who Benefits Most from a Strong Economy?” Brookings Papers on Economic Activity, Spring,
pp. 333–75,


-8In assessing substantial further progress, I will be looking for realized progress
toward both our employment and inflation goals. I will be looking for indicators that
show the progress on employment is broad based and inclusive rather than focusing
solely on the aggregate headline unemployment rate, especially in light of the significant
decline in labor force participation since the spread of COVID and the elevated
unemployment rate for workers in the lowest-wage quartile and other disproportionately
affected groups.11
Likewise, while I will carefully monitor inflation expectations, it will be
important to achieve a sustained improvement in actual inflation to meet our average
inflation goal. The past decade of underperformance on our inflation target highlights
that reaching 2 percent inflation will require patience, and we have pledged to hold the
policy rate in its current range until not only has inflation risen to 2 percent but it is also
on track to moderately exceed 2 percent for some time.
Of course, we will be vigilant in parsing the data. Given the path of inflation to
date, our framework calls for inflation moderately above 2 percent for some time. If, in
the future, inflation rises immoderately or persistently above target, and there is evidence
that longer-term inflation expectations are moving above our longer-run goal, I would not
hesitate to act and believe we have the tools to carefully guide inflation down to target.
Today the economy remains far from our goals in terms of both employment and
inflation, and it will take some time to achieve substantial further progress. Jobs are still
10 million below the pre-COVID level, and inflation has been running below 2 percent
for years. We will need to be patient to achieve the outcomes set out in our guidance.
See Lael Brainard (2021), “How Should We Think about Full Employment in the Federal Reserve’s Dual
Mandate?” in note 4.