Outlook Remains Bright, Uncertainty Demands Patience, Fed Governor Brainard Says
01:12 PM EDT, 05/11/2021 (MT Newswires) -- The US economy continues to recover even as data including the April employment report show recovery will be uneven as uncertainties remain, requiring the Fed to be patient, Federal Reserve Governor Lael Brainard said Tuesday.
In a virtual discussion sponsored by Society for Advancing Business Editing and Writing, Brainard said that Friday's weaker-than-expected employment report is proof that the Fed's new framework of "basing monetary policy on outcomes rather than the outlook will serve us well."
Brainard said the outlook for the US economy remains bright, but that levels of employment and inflation remain short of the Fed's goals.
"Remaining patient through the transitory surge associated with reopening will help ensure that the underlying economic momentum that will be needed to reach our goals as some current tailwinds shift to headwinds is not curtailed by a premature tightening of financial conditions," Brainard said, noting the expectation of that fiscal stimulus will give a smaller push to the economy that it did in the second half of 2020.
Uncertainty remains, Brainard said, particularly how soon and where the pent-up savings from the stimulus measures and the shutdowns are spent, and whether some of that spending will be overseas as opposed to domestic spending.
On the employment side of the Fed's mandate, she said that while the overall payrolls gain was smaller-than-expected in April, the 331,000 jobs gain in the leisure and hospitality sector was a welcome sign that the hardest-hit COVID sectors are coming back now that vaccinations are more widespread.
Brainard said the sharp jobs growth in that sector, one of the lowest paying in the economy, refutes the notion that workers are voluntarily turning down jobs to remain on unemployment.
"Many people face virus-related impediments in returning to full-time work, and many businesses face hiring challenges," she said.
At the time of the April employment report, two-thirds of students were learning virtually at least part of the time while childcare options remain limited due to COVID safety, Brainard noted, accounting for the decline in labor force participation by women.
On inflation, Brainard said persistent inflation concerns the Fed rather that transitory inflation. While it is assumed that inflation resulting from the reopenings of businesses will be "largely transitory," price increases due to supply bottlenecks may be harder to predict.
"It is much more difficult to predict the size and duration of supply-side bottlenecks and how these will interact with the pattern of demand to feed through into inflation," she said. "The production of certain semiconductors may take some time to ramp up, and the feedback effects between shipping delays and container shortages appear to be only slowly working themselves out."
However, it's not likely that a short period of bottlenecks will alone lead to the kind of persistent inflation that the Fed is concerned about.
"To the extent that supply chain congestion and other reopening frictions are transitory, they are unlikely to generate persistently higher inflation on their own," Brainard said. "A persistent material increase in inflation would require not just that wages or prices increase for a period after reopening, but also a broad expectation that they will continue to increase at a persistently higher pace."
As a result, there are "compelling reasons" to believe that the inflation dynamics seen for the last 25 years will return once this period of transition to a post-pandemic "new normal" has concluded, Brainard said.