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For release on delivery
3:00 p.m. EDT
May 26, 2021

The Economic Outlook and Monetary Policy

Remarks by
Randal K. Quarles
Vice Chair for Supervision
Board of Governors of the Federal Reserve System
at the
Hutchins Center on Fiscal and Monetary Policy
The Brookings Institution
Washington, D.C.
(via webcast)

May 26, 2021

Thank you, David, and thank you to Brookings and the Hutchins Center for the
opportunity to lead things off and be part of this very distinguished panel. Today, I will
explain why I expect the U.S. economy to continue growing strongly over the remainder
of this year and what the implications of that outlook are for monetary policy. 1
After the shutdowns and other measures taken in response to the COVID-19
outbreak last spring caused the swiftest and deepest recession in U.S. history, the
economy has made a powerful recovery. Households and businesses adapted, supported
by the flexibility and inherent strength of our market-based economy, by the continued
resilience of our banking system, and by significant fiscal and monetary policy support.
Highly accommodative monetary policy by the Federal Reserve has fostered strong
growth in interest rate–sensitive sectors of the economy such as housing and durable
goods, offsetting some of the historic weakness in the service sector last year. With the
service sector reopening while other household and business spending remains strong, I
expect rapid growth to continue for some time before slowing to a still robust pace next
Inflation is running significantly above the Federal Reserve’s longer-run goal of
2 percent primarily as a result of three factors: the surge in demand as more services
come back on line while goods spending remains robust, the emergence of bottlenecks in
some supply chains, and the very low inflation readings recorded last spring dropping out
of the calculation of 12-month inflation. For reasons I will detail in a moment, I expect
that a significant portion of that recent boost to inflation will be transitory, and that it will

All of my remarks today represent my own views and not necessarily those of my colleagues on the
Federal Open Market Committee.


-2not interfere with the rapid growth driving progress toward the Fed’s maximumemployment goal.
We’ve come a long way since last spring, but reopenings over the past year have
been uneven, so it will still be some time before we repair all the economic damage.
Supply bottlenecks will likely hinder the quick expansion of production in some
industries in the next few months and raise some costs—in some cases significantly. The
progress in reopening has been slower in countries that are among our largest trading
partners, weighing on U.S. growth by reducing demand for U.S. exports. But even with
those impediments, I believe the strong recovery will keep rolling forward. Let me walk
through the evidence for that optimistic view.
First, I see increasing recognition by the private and public sectors that a broad
reopening can proceed safely. i The Centers for Disease Control and Prevention has
dropped most social-distancing recommendations for vaccinated people. 2 Although local
COVID-19 restrictions on schooling and economic activity continue in some areas, most
schools are teaching in person at least part time and more than half of states have dropped
all capacity constraints on restaurants, bars, and retail establishments. More than a dozen
more states are planning to do so over the coming weeks.
With these reopenings, consumer spending, which is two-thirds of gross domestic
product (GDP), will remain robust, supported by personal income that has, thanks to
significant fiscal support, now surpassed the trend it was on before the COVID event.
April’s retail sales results were flat, but that came after enormous gains in March that

See Centers for Disease Control and Prevention (2021), “Interim Public Health Recommendations for
Fully Vaccinated People,” webpage,


-3were boosted by the latest round of stimulus checks. Looking beyond the headline
numbers, sales were up 13 percent in March and 3 percent in April at restaurants and
bars, one of the sectors hardest hit by the COVID-19 event. April and March were the
third- and fourth-best months for vehicle sales to consumers in U.S. history, if you filter
out sales to car rental companies, a sector just beginning to recover.
You might expect this bounce will subside after consumption regains the strong
trend it was on pre-COVID-19, but one reason I think it will continue is the still high rate
at which people have been adding to their savings. Even as personal consumption
expenditures rose at a huge 10 percent annual rate in the first quarter of 2021, the saving
rate averaged 21 percent over those three months. Again, a lot of that reflected the most
recent round of stimulus payments, but as employment grows and people return to normal
life and work, the accumulated stock of savings will support spending for many months
to come.
Business investment took a big hit in the first half of 2020 but has come back
strongly and is now running above pre-pandemic levels. Current indicators of business
spending are pointing to continued elevated levels of investment in the months ahead.
Supply bottlenecks have depleted inventories for many goods and rebuilding those
inventories will be an important supplement for business spending and factory output.
I see two potential headwinds for the economy: the uneven global recovery and
the aforementioned supply bottlenecks. Strong U.S. demand is boosting imports, but
weaker demand outside the United States, where recovery is slower, is restraining
exports, and that problem may not resolve for some time. Supply bottlenecks are more

-4prevalent now, especially in the auto and housing industries, with shortages of inputs
leading to slower production that reduces employment growth.
Although I expect employment to rise significantly in coming months, the picture
is more mixed for the labor market than it is for spending. The unemployment rate
remains at 6.1 percent, compared with 3.5 percent pre-COVID-19, and there are 8 million
fewer jobs. Despite recent gains amid reopenings, employment in the travel, leisure, and
food services sectors remains well below pre-pandemic levels.
My optimism here reflects the apparent recovery in overall labor demand—by
many metrics, job openings are above 2019 levels, including for workers without a
college degree, a group especially affected last year. In the Job Openings and Labor
Turnover Survey data for March, private-sector job openings as a percentage of total
employment increased to 5.6 percent, which is above the previous record for that series
set in November 2018.
Job growth of 266,000 in April was a disappointing slowdown from recent
months, but good news lurked beneath the headlines: For those who were working,
average hours increased; the number of people working part time because they couldn’t
find full-time jobs decreased significantly; and wage growth was very strong.
The underlying strength in hours and wages lends support to widespread reports
that worker shortages are impeding hiring. Labor force participation remains about
3-1/2 million people lower than before COVID-19. Among the many factors driving this
shortage, as indicated by the Federal Reserve’s report Economic Well-Being of U.S.
Households in 2020, is parents who need to care for their children because of remote

-5school and aftercare. 3 We have also seen a wave of retirements by older workers in the
past year. And, although the evidence is mixed, we have received plenty of anecdotal
reports about the influence of generous unemployment benefits and large cash payments
on the willingness of workers to return to work. But those benefits are slated to expire
over the summer, and I hope that a fuller reopening of schools in the fall will ease the
pressure on parents. The spike in retirements may well moderate in a stronger economy,
as we saw in the year or two before the pandemic. So, while labor shortages could weigh
on job creation in coming months, I don’t yet perceive this development as significantly
slowing the U.S. economy beyond the next few months.
Now let’s turn to the other half of the Federal Reserve’s economic goals,
inflation. As I mentioned last week during congressional testimony, I agree with the
widespread view among my colleagues on the Federal Open Market Committee (FOMC)
and most private forecasters that the recent rise in inflation to well above 2 percent is
driven by temporary factors. I expect inflation to begin subsiding at some point over the
next several months and to be running close to 2 percent again at some point during 2022.
Market-implied inflation expectations have risen only to the levels that prevailed in the
early 2010s, after which inflation never ran consistently above 2 percent, and most survey
measures are sending similar signals. Therefore, I consider these recent increases in
inflation expectations a welcome development, reversing the large declines seen last
spring and perhaps edging up in response to the message in the FOMC’s new policy
framework. That said, my optimistic outlook for growth and employment places me

See Board of Governors of the Federal Reserve System (2021), “Federal Reserve Board Issues Report on
the Economic Well-Being of U.S. Households,” press release, May 17,


-6among those who see the risks to inflation over the medium term as weighted to the
upside, relative to my baseline forecast. Broadly speaking, there are three reasons for
First, there are wage pressures. A moment ago, I celebrated the upturn in wages
in April, but it may be a sign that the torrid growth of the economy and labor supply
shortages have begun pushing up wages faster than occurred with the moderate economic
growth over much of the past decade. Wages are a large component of business costs
that could pass through to prices more readily than increases in the cost of other inputs. It
seems like a paradox that there could be labor supply problems and wage pressures at
6 percent unemployment, but it is also a fact. Some of this surprising outcome reflects
temporarily lower labor force participation coming out of the enormous economic shock
last spring, but some of the Fed’s business contacts have said that shortages of skilled
laborers—particularly in manufacturing, transportation, and construction—predated
COVID-19 and are likely to persist.
Another factor that I referred to earlier—fiscal policy—carries potential costs as
well as obvious benefits. Even as the huge amount of stimulus money in people’s
pockets has been boosting income and spending in eye-popping ways, much of that
stimulus was saved. A larger-than-expected or faster release of those accumulated
savings while the economy is already growing rapidly could result in output exceeding
potential output by more than it has in decades. It is reasonable to ask if the strength of
spending stemming from this unprecedented fiscal stimulus will put significant upward
pressure on inflation as households and businesses emerge further from the COVID

-7event. But, at least to date, the latest round of stimulus seems to be supporting spending
and growth without causing an inordinate rise in interest rates or inflation expectations.
That outcome aligns with the advice of those in the economics profession who
have produced research in recent years that leaves them much more comfortable with
high deficits and debt, at least in countries with low interest rates, than they used to be. 4
In 2006, when I was serving as Under Secretary of the Treasury, we were subject to harsh
criticism for running a deficit of not quite $250 billion, with total debt held by the public
at 35 percent of GDP. 5 By contrast, in 2021, the deficit is currently projected to be $3.4
trillion, and total debt held by the public at the end of fiscal year 2020 was 100 percent of
GDP. 6
Further fiscal policy actions are, of course, the purview of the Congress and the
Administration. History tells us that once the dreadnought of government spending
gathers speed, it is difficult and slow to turn around. Surely the deficits being run to
offset the COVID-related shocks have made it even more critical to address the
sustainability of government debt in the years ahead.
And, finally, recent monthly readings on import prices, producer prices, and
consumer prices have all come in above consensus expectations. These upside surprises
cannot be attributed to base effects. It is true that many of the factors driving the April

See Olivier Blanchard (2019), “Public Debt and Low Interest Rates,” American Economic Review, vol.
109 (April), pp. 1197–229; Lawrence H. Summers (2018), “Secular Stagnation and Macroeconomic
Policy,” IMF Economic Review, vol. 66 (June), pp. 226–50; and Jason Furman and Lawrence Summers
(2020), “A Reconsideration of Government Debt in an Era of Low Interest Rates,” presentation to the
Hutchins Center on Fiscal and Monetary Policy and Peterson Institute for International Economics,
December 1,
For the deficit projection for 2021, see Congressional Budget Office (2021), The Budget and Economic
Outlook: 2021 to 2031 (Washington: CBO, March),
See Federal Reserve Bank of St. Louis (2021), “Federal Debt: Total Public Debt as Percent of Gross
Domestic Product,” FRED Economic Data (accessed May 21),

-8consumer price index report and other inflation surprises continue to be supply
bottlenecks, and it is reasonable to conclude that these will ease over time. But clearing
some of those supply disruptions will require additional investment and the time to
expand production capacity. If these shortages persist into 2022, people may adjust their
expectations higher for future inflation, which could make above-target inflation more
persistent than we currently expect.
I don’t want to overstate my concern—I am not worried about a return to the
1970s. We designed our new monetary policy framework for the very different world we
live in now, which involves an equilibrium for the economy with slow workforce growth,
lower potential growth, lower underlying inflation, and, therefore, lower interest rates.
One of those differences is that the kinds of “wage-price spirals” that characterized
inflation dynamics in the 1970s have not been present for a long time. It’s quite possible
that this situation now prevails because inflation is never high enough for long enough to
enter decisionmaking in a material way.
So, what are the implications for monetary policy? I am fully committed to the
FOMC’s new monetary policy framework and the two pieces of related guidance that we
have put in place for asset purchases and the federal funds rate to implement that
framework. The conditions required to change the pace of asset purchases and those
required to increase the federal funds rate are sequential: The latter requires
improvement in the economy that clears a much higher bar. Let me address each of those
in turn.
The guidance on asset purchases, introduced in December, commits us to
increasing our holdings of securities at least at the current pace until substantial further

-9progress has been made toward the Committee’s maximum-employment and pricestability goals. My personal view is that the rise in inflation—even after discounting
temporary factors—and inflation expectations since December will prove sufficient to
satisfy the standard for inflation in the guidance around asset purchases later this year,
but improvement in the labor market has been slower than I would have liked. For
instance, the unemployment rate has decreased only 0.6 percentage points to 6.1 percent,
and the labor force participation rate is still nearly the same as it was at the time of the
December meeting. Therefore, we need to remain patient in the face of what seem to be
transitory shocks to prices and wages so long as inflation expectations continue to
fluctuate around levels that are consistent with our longer-run inflation goal.
For me, it is a question of risk management. The best analysis we currently have
is that the rise in inflation to well above our target will be temporary. But those of us on
the FOMC are economists and lawyers, not prophets, seers and revelators. We could be
wrong; and what happens then? Part of the calculus in balancing the risks of either
overshooting or undershooting our 2 percent goal is that the Fed has the tools to address
inflation that runs too high, while it is more difficult to raise inflation that falls below
target. If we’re wrong, we know how to bring inflation down. But if our assessment is
correct that inflation is temporary, it would be unwise for us to take actions that might
slow the recovery prematurely by trying to stay ahead of inflation, when our best estimate
is that we are not far behind.
If my expectations about economic growth, employment, and inflation over the
coming months are borne out, however, and especially if they come in stronger than I
expect, then, as noted in the minutes of the last FOMC meeting, it will become important

- 10 for the FOMC to begin discussing our plans to adjust the pace of asset purchases at
upcoming meetings. In particular, we may need additional public communications about
the conditions that constitute substantial further progress since December toward our
broad and inclusive definition of maximum employment. This standard presents inherent
communications challenges because it cannot be summarized by a single labor market
indicator, such as the unemployment rate thresholds used in the Committee’s interest rate
forward guidance between late 2012 and late 2013.
In contrast, the time for discussing a change in the federal funds rate remains in
the future.i The guidance for the federal funds rate commits to maintain the current rate
until labor market conditions are consistent with our goal of maximum employment and
inflation not only has reached 2 percent, but also is on track to moderately exceed
2 percent for some time. In the FOMC’s most recent Summary of Economic Projections,
no participants—even those with optimistic growth forecasts such as I’ve outlined
today—thought it appropriate that liftoff occur before 2022. Perhaps even more
important than the timing of liftoff will be the expected trajectory of rate increases
afterward, and you can see that even among participants with an earlier expected liftoff,
those paths are quite shallow. Thus, I expect that monetary policy will remain highly
accommodative for some time.
Let me conclude with a few thoughts on financial stability. As the Fed’s most
recent Financial Stability Report notes, the bright outlook, ample supply of credit, and
accommodative fiscal and monetary policy have pushed some asset valuations to very
high levels that could be subject to sharp reversals if expectations are not met. Likewise,
business debt is high relative to past experience, which is a good reason to carefully

- 11 weigh the risks. But the strong economy reassures me here: Earnings are growing, many
businesses have ample stockpiles of cash, expected bond defaults are below their longrun medians, and the pace of credit rating downgrades has slowed to a trickle.
When I think about financial stability, I think most directly about resilience to
shocks, and it would be hard to imagine a better test of that resilience than what occurred
in the spring of 2020. Banks met extraordinary demands for credit last spring from
nonfinancial businesses and households while simultaneously providing forbearance on
millions of existing loans and building substantial loss reserves, all without significant
strains to their overall health. The largest banks at the core of the financial system are
better capitalized than they have been in decades, and these institutions are sitting on
large amounts of highly liquid assets while relying on relatively low levels of short-term
funding. The banking sector is strong.
I also see a resilient household sector. Household credit is primarily owed by
borrowers with prime credit scores, rising home prices have most homeowners flush with
equity, and, as I noted earlier, households are sitting on a large stock of savings.
It is true that there are structural vulnerabilities in the nonbank financial sector,
particularly money funds and hedge funds, and these are being scrutinized by U.S. and
international authorities, including the Financial Stability Board under my chairmanship. 7
But I believe these risks are manageable, and I come down on the side of the research that
concludes these and other concerns are best addressed by targeted financial regulation

See Department of the Treasury (2020), “President’s Working Group on Financial Markets Releases
Report on Money Market Funds,” press release, December 22,; and Financial Stability Board (2020), Global Monitoring Report on Non-Bank Financial
Intermediation 2020 (Basel: FSB, December),


- 12 and supervision rather than the blunt tool of monetary policy. 8 At a crucial moment in
our recovery from the COVID-19 event, the utility of using monetary policy to try to
address financial stability concerns would be greatly outweighed by the costs to
employment and growth.
Before ending, I’d like to reemphasize that I am quite optimistic about the path of
the economy. While prices will run above our 2 percent target this year, I believe most of
this increase will be transitory. After an exceedingly difficult year, we are poised to enter
a robust and durable expansion.
Thank you again for the invitation to be here today, and I look forward to our
Note: This speech was updated on May 26, 2021 to match remarks made at the Brookings Institution. On
page 2, the sentence should read, “First, I see increasing recognition by the private and public sectors that a
broad reopening can proceed safely.” On page 10, the sentence should read, “In contrast, the time for
discussing a change in the federal funds rate remains in the future."


See, for example, Lars E.O. Svensson (2019), “The Relation between Monetary Policy and FinancialStability Policy,” in Alvaro Aguirre, Markus Brunnermeier, and Diego Saravia, eds., Monetary Policy and
Financial Stability: Transmission Mechanisms and Policy Implications (Santiago, Chile: Central Bank of
Chile), pp. 283–310,