Richard H Clarida: Outlooks, outcomes, and prospects for US monetary policy

Speech (via webcast) by Mr Richard H Clarida, Vice Chair of the Board of Governors of the Federal Reserve System, at the Peterson Institute for International Economics, Washington DC, 4 August 2021.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Outlooks and Outcomes for the U.S. Economy

With the release of the gross domestic product (GDP) data last week, we learned that the U.S. economy in the second quarter of this year transitioned from economic recovery to economic expansion. Given the catastrophic collapse in U.S. economic activity in the first half of 2020 as a result of the global pandemic and the mitigation efforts put in place to contain it, few forecasters could have expected-or even dared to hope-in the spring of last year that the recovery in GDP, from the sharpest decline in activity since the Great Depression, would be either so robust or as rapid. In retrospect, it seems clear that timely and targeted monetary and fiscal policy actions-unprecedented in both scale and scope-provided essential and significant support to the economic recovery as it got under way last year. Indeed, just recently, the National Bureau of Economic Research's Business Cycle Dating Committee determined that the recession that began in March of last year ended in April, making it not only the deepest recession on record, but also the briefest. Moreover, with the development and distribution of several remarkably effective vaccines, the monetary and fiscal policies presently in place should continue to support the strong expansion in economic activity that is expected to be realized this year, although, obviously, the rapid spread of the Delta variant among the still considerable fraction of the population that is unvaccinated is clearly a downside risk for the outlook. That said, under the latest Congressional Budget Office (CBO) baseline forecast, the economy by the end of 2021 will have entirely closed the output gap opened up by the recession. If so, this would be the most rapid return following a recession to the CBO estimate of the trend level of real GDP in 50 years.

Importantly, while it is customary in business cycle analysis to date the transition from the recovery phase to the expansion phase according to the calendar quarter in which the level of real GDP first exceeds the previous business cycle's peak, in past U.S. business cycles, the recovery in employment has always lagged the recovery in GDP, and this cycle is no exception. Indeed, at the end of the second quarter of this year, even though the level of real GDP was 0.8 percent above the level reached at the previous business cycle peak, the level of employment as measured by the household survey remained about 7 million below the level reached at the previous business cycle peak. So while it is accurate to say we are in the expansion phase of the cycle in terms of economic activity, we remain in the recovery phase of the cycle in terms of aggregate employment.