Richard H Clarida: Flexible average inflation targeting and prospects for U.S. monetary policy

Speech (via webcast) by Mr Richard H Clarida, Vice Chair of the Board of Governors of the Federal Reserve System, at the Symposium on Monetary Policy Frameworks, The Brookings Institution, Washington, D.C., 8 November 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

The U.S. economy in the second quarter of this year made the transition 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 gross domestic product (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, the National Bureau of Economic Research's Business Cycle Dating Committee determined in July 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. The recovery that commenced in the summer of 2020 was quite robust, and, with one quarter to go, GDP growth in 2021 is projected by the Fed and many outside forecasters to be the fastest since 1983. However, it must be noted that the course of the economy this year and beyond will depend on the course of this virus. That said, under the median projection for GDP growth in the September Summary of Economic projections, the level of real GDP will have returned to its pre pandemic trend growth trajectory by the fourth quarter of 2021, which if realized would represent one of the most rapid such recoveries in 50 years.

In the September SEP round, my individual projections for GDP growth, the unemployment rate, inflation, and the policy rate path turned out to be quite close to the path of SEP medians for each of these variables over the 2021–24 projection window. Under these projections, GDP growth steps down from 5.9 percent this year to 3.8 percent in 2022 and further to 2.5 percent and 2 percent in 2023 and 2024, respectively. Not surprisingly, the projected path of above-trend GDP growth in 2021 and 2022 translates into rapid declines in the projected path for the unemployment rate, which is projected to fall to 3.8 percent by the end of 2022 and 3.5 percent by the end of 2023. This modal projection for the path of the unemployment rate is, according to the Atlanta Fed jobs calculator, consistent with a rebound in labor force participation to its estimated demographic trend and is also consistent with cumulative employment gains this year and next that, by the end of 2022, eliminate the 4.2 million "employment gap" relative to the previous cycle peak.4