Monetary Policy During an Uneven Recovery Webcast Recap

We all know that the pandemic has had unbridled impacts on the labor markets and economic outputs. On October 21, 2020, Alex Marre of the Federal Reserve Bank of Richmond talked to the FEI Baltimore chapter about those effects and the Federal Reserve’s response to help in economic recovery.* Alex’s presentation was separated into three focus areas:
 
A general economic outlook
If you have ever played in an orchestra or was part of your school band, you understand the terms “first chair,” “second chair” and so on. Alexander used this analogy as to how they’re looking at the current economic situation:
  • That “first chair” in the existing public health crisis. If you take away COVID-19 tomorrow and give people certainty that it’s safe to go back to work and spend as before, we’re no longer in this economic situation.
  • The “second chair” is the fiscal policy response from the states and Congress. We’ve seen an early response on the part of the Federal government and some states. It has been in the news quite a bit what Congress and the President have and haven’t been negotiating, which provides some floor for those impacted industries.
  • The Federal Reserve is in the “third chair” position with monetary policy. Their major goal is to promote stability throughout the financial system, and make sure the credit is there for the people who need.
 
Diving into economic outlook by examining the labor market, unemployment claims are elevated at record levels. However, the national unemployment rate is down from the initial peak, falling to 7.9% in September. Looking at economic output and demand, GDP fell 32% in the second quarter, but there is likely recovery from that historic low in the third quarter. On the business side, fixed investment looks very weak, but both manufacturing and non-manufacturing indicators are showing signs of improvement.
 
A positive data point surprising Alex is how durable goods consumption has been and how much it has recovered. Since consumer behavior makes up about 60-70% of GDP, if you want to know how that number will look, examine how people are spending on goods and services. It has come back strongly in part due to fiscal stimulus payments from the federal government, which has led to a jump in income and decline in spending. Cash on hand and low interest rates have also led to car sales improving and new home sales going strong, which is near the mid-2000s heyday.
 
Disparate impacts across different industries and households
Looking at the jobs picture by industry is overall down from last year but shows improvement. Construction is a standout industry, particularly the residential side.
 
There has been a hit to jobs concentrated in the leisure and hospitality industry, particularly person-to-person businesses like hotels and restaurants, which are down 20-23% across the US. In DC alone, it’s down 46.6%.
 
On the household side, Alex shared a survey by the Pew Research Center on the financial pain points during the outbreak:

Picture1.png
They surveyed adults on four categories:
  • Those who had to use money from a savings or retirement fund to pay the bills
  • Those who had trouble paying their bills
  • Those who have gotten food from a food bank or outside organization, and
  • Those who had trouble paying their rent or mortgage
 
The first section is an average of all adults surveyed. Then, they separated the data into race, followed by income level. Clearly, Black and Hispanic communities have had much higher instances of these pain points, as have middle and especially lower income families during the pandemic.
 
Insight into the August statement and dual mandate
Looking into the Federal Reserve’s response, raised rates are not being considered right now, especially while the labor market is at record levels of unemployment.
 
This is where Alex addressed the dual mandate the Federal Reserve has from Congress. Think of it as two metrics: stable prices (through inflation) and maximum employment. The Fed has a 2% target of inflation, which is a more specific metric than the maximum unemployment.
 
The FOMC meets every six weeks to talk about their response to economic conditions and how they’re going to influence the interest rate. Looking at their statement from June, Alex highlighted this sentence because it addresses those two dual mandate target metrics: “In determining the timing and size of future adjustments to the stance of monetary policy, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective.”
 
The following statement from the FOMC in September reflects the changes the Fed talked about in the end of August: “The Committee decided to keep the target range for the federal funds rate at 0 to ¼ percent and expect it will be appropriate to maintain this target range 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.”
 
Alex explained that the difference between the two statements are that these conditions are going to be tied together and we need to meet all three. The implication is that they can keep rates low longer than they expected without risking inflation going above that 2% target.
 
The mechanics of how this is going to work out is still being discussed, but what is clear is that the committee has communicated a degree of willingness to let the economy ‘run fast’ for an extended period of time so that those groups disproportionately impacted have the chance to experience recovery in full.
 
*Disclaimer: the views expressed during the presentation are the presenter’s and not necessarily those of the Federal Reserve Bank of Richmond of the Federal Reserve System.
 
About the Speaker:
Alex Marre
Picture2.jpg
Alex is a regional economist at the Baltimore branch of the Federal Reserve Bank of Richmond. He monitors and briefs the public on regional economic conditions and conducts research on economic issues in the Fifth Federal Reserve District. Learn more about this speaker.