View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

For release on delivery
1:00 p.m. EST
February 24, 2021

U.S. Economic Outlook and Monetary Policy

Remarks by
Richard H. Clarida
Vice Chair
Board of Governors of the Federal Reserve System
at the
U.S. Chamber of Commerce
Washington, D.C.
(via webcast)

February 24, 2021

It is my pleasure to meet virtually with you today. 1 I look forward to our
conversation, but first, please allow me to offer a few remarks on the economic outlook,
the Federal Reserve’s monetary policy, and our new monetary policy framework.
Current Economic Situation and Outlook
In the second quarter of last year, the COVID-19 (coronavirus disease 2019)
pandemic and the mitigation efforts put in place to contain it delivered the most severe
blow to the U.S. economy since the Great Depression, but economic activity rebounded
sharply in the third quarter, supported by a robust and unprecedented fiscal and monetary
policy response. More recently, the pace of recovery has moderated in part because of a
winter resurgence in COVID-19 cases and hospitalizations.
A number of macroeconomic data releases have been weaker than expected in
recent months. Spending on services has continued to remain well below pre-pandemic
levels, particularly in contact-intensive sectors, including travel, leisure, and hospitality.
The pace of improvement in the labor market has slowed notably in recent months.
Although more than half of the 22 million jobs that were lost last spring have been
regained, the unemployment rate remained elevated at 6.3 percent in January, and once
one factors in the decline in the labor force since the onset of the pandemic and
misclassification, the true unemployment rate is closer to 10 percent. Core PCE
(personal consumption expenditures) inflation is running at just 1.5 percent, and, for
those sectors that have been most adversely affected by the pandemic, price increases
remain subdued.

The views expressed are my own and not necessarily those of other Federal Reserve Board members or
Federal Open Market Committee participants. I would like to thank Chiara Scotti for her assistance in
preparing these remarks.

1

-2Of course, we have also received some encouraging data. Retail sales stepped up
considerably in January, retracing the decline late last year. The housing sector has more
than fully recovered from the downturn, supported in part by low mortgage interest rates.
Business investment and manufacturing production have also rebounded robustly. And
while the economy might not continue to grow at the once-in-a-century 33 percent
annualized rate of growth reported in the third quarter of 2020, it is clear that the
economy has turned out to be more resilient in adapting to the virus, and more responsive
to monetary and fiscal policy support, than many predicted. Indeed, it is worth
highlighting that in the baseline projections of the Federal Open Market Committee
(FOMC) presented in the latest Summary of Economic Projections, released last
December, most of my colleagues and I revised up our outlooks for the economy over the
medium term, projecting a relatively rapid return to levels of employment and inflation
consistent with the Federal Reserve’s statutory mandate as compared with the recovery
from the Global Financial Crisis (GFC). 2 In particular, the median FOMC participant
projected in December that by the end of 2023—a little less than three years from now—
the unemployment rate will have fallen below 4 percent, and PCE inflation will have
returned to 2 percent. Following the GFC, it took more than eight years for employment
and inflation to return to similar mandate-consistent levels.
While the winter surge in new COVID cases and the spread of new variants of the
virus are cause for concern as well as a source of downside risk to the very near-term
outlook, the welcome news on the development of several effective vaccines and the
passage by the Congress in late December of a package of fiscal relief measures indicate
The most recent Summary of Economic Projections is available on the Board’s website at
https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm.

2

-3to me that the prospects for the economy in 2021 and beyond have brightened and the
downside risk to the outlook has diminished.
Recent FOMC Decisions and the New Monetary Policy Framework
At our most recent FOMC meetings, the Committee made important changes to
our policy statement that upgraded our forward guidance about the future path of the
federal funds rate and asset purchases, and that also provided unprecedented information
about our policy reaction function. As announced in the September statement and
reiterated in the following statements, with inflation running persistently below 2 percent,
our policy will aim to achieve inflation outcomes that keep inflation expectations well
anchored at our 2 percent longer-run goal. 3 We expect to maintain an accommodative
stance of monetary policy until these outcomes—as well as our maximum-employment
mandate—are achieved. We also expect it will be appropriate to maintain the current
target range for the federal funds rate at 0 to 1/4 percent until labor market conditions
have reached levels consistent with the Committee’s assessments of maximum
employment, until inflation has risen to 2 percent, and until inflation is on track to
moderately exceed 2 percent for some time.
In addition, in the December statement, we combined our forward guidance for
the federal funds rate with enhanced, outcome-based guidance about our asset purchases.
We indicated that we will continue to increase our holdings of Treasury securities by at
least $80 billion per month and our holdings of agency mortgage-backed securities by at

The statements issued following the September and subsequent FOMC meetings are available, along with
other postmeeting statements, on the Board’s website at
https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm.
3

-4least $40 billion per month until substantial further progress has been made toward our
maximum-employment and price-stability goals.
The changes to the policy statement that we made over the past few FOMC
meetings bring our policy guidance in line with the new framework outlined in the
revised Statement on Longer-Run Goals and Monetary Policy Strategy that the
Committee approved last August. 4 In our new framework, we acknowledge that policy
decisions going forward will be based on the FOMC’s estimates of “shortfalls [emphasis
added] of employment from its maximum level”—not “deviations.” This language
means that going forward, a low unemployment rate, in and of itself, will not be
sufficient to trigger a tightening of monetary policy absent any evidence from other
indicators that inflation is at risk of moving above mandate-consistent levels. With
regard to our price-stability mandate, while the new statement maintains our definition
that the longer-run goal for inflation is 2 percent, it elevates the importance—and the
challenge—of keeping inflation expectations well anchored at 2 percent in a world in
which an effective-lower-bound constraint is, in downturns, binding on the federal funds
rate. To this end, the new statement conveys the Committee’s judgment that, in order to
anchor expectations at the 2 percent level consistent with price stability, it “seeks to
achieve inflation that averages 2 percent over time,” and—in the same sentence—that
therefore “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.” As Chair Powell indicated in his Jackson Hole remarks,

The statement is available on the Board’s website at
https://www.federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategy-tools-andcommunications-statement-on-longer-run-goals-monetary-policy-strategy.htm.
4

-5we think of our new framework as an evolution from “flexible inflation targeting” to
“flexible average inflation targeting.” 5 While this new framework represents a robust
evolution in our monetary policy strategy, this strategy is in service to the dual-mandate
goals of monetary policy assigned to the Federal Reserve by the Congress—maximum
employment and price stability—which remain unchanged. 6
Concluding Remarks
While our interest rate and balance sheet tools are providing powerful support to
the economy and will continue to do so as the recovery progresses, it will take some time
for economic activity and employment to return to levels that prevailed at the business
cycle peak reached last February. We are committed to using our full range of tools to
support the economy and to help ensure that the recovery from this difficult period will
be as robust and rapid as possible.

See Jerome H. Powell (2020), “New Economic Challenges and the Fed’s Monetary Policy Review,”
speech delivered at “Navigating the Decade Ahead: Implications for Monetary Policy,” a symposium
sponsored by the Federal Reserve Bank of Kansas City, held in Jackson Hole, Wyo. (via webcast),
August 27, https://www.federalreserve.gov/newsevents/speech/powell20200827a.htm.
6
See Richard H. Clarida (2020), “The Federal Reserve’s New Monetary Policy Framework: A Robust
Evolution,” speech delivered at the Peterson Institute for International Economics, Washington (via
webcast), August 31, https://www.federalreserve.gov/newsevents/speech/clarida20200831a.htm; and
Richard H. Clarida (2020), “The Federal Reserve’s New Framework: Context and Consequences,” speech
delivered at “The Economy and Monetary Policy,” an event hosted by the Hutchins Center on Fiscal and
Monetary Policy at the Brookings Institution, Washington (via webcast), November 16,
https://www.federalreserve.gov/newsevents/speech/clarida20201116a.htm.
5