Clarida Says It Will Take Some Time to Restore Pre-Virus Economy


Federal Reserve Vice Chair Richard Clarida said the U.S. economic recovery remains incomplete, even as the central bank forecasts stronger growth ahead.

“It will take some time for economic activity and employment to return to levels that prevailed at the business cycle peak reached last February,” Clarida said Thursday in remarks prepared for a virtual event hosted by the Institute of International Finance. “We are committed to using our full range of tools to support the economy until the job is well and truly done to help ensure that the economic recovery will be as robust and rapid as possible.”

Clarida Says It Will Take Some Time to Restore Pre-Virus Economy

U.S. central bankers said last week they are committed to keeping their benchmark lending rate near zero and buying $120 billion in Treasury bonds and mortgage-backed securities a month until the economy shows substantial further progress and inflation rises to 2% on a sustainable basis.

Under a new policy framework, Clarida said a low unemployment rate 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.”

Data Driven

Governor Lael Brainard said in a speech earlier this week that the Fed’s policy response hinges on outcomes in data under the new framework rather than forecasts. That’s created tension in the forward-looking bond market, where expectations of higher inflation under the push from trillions of dollars in government-financed aid and low-cost credit are increasing.

Yields on U.S. 10-year notes stood at 1.6% in New York trading, up from just under 1% at the start of the year.

In quarterly forecasts published March 17, officials saw unemployment declining to 4.5% by year end from 6.2% in February. They also projected economic growth of 6.5% in 2021. That would be the fastest pace since 1983 when measured fourth quarter over the same three months a year earlier and would follow a 2.4% contraction in 2020 as a result of the pandemic.

Inflation Bump

Inflation, as calculated by the personal consumption expenditures price index, is seen in the Fed’s median forecast ending 2021 at 2.4% but slowing to 2% next year. It stood at 1.5% in January.

Clarida said he expects any move above 2% inflation “to be transitory and for inflation to return to -- or perhaps run somewhat above -- our 2% longer-run goal in 2022 and 2023.”

“This outcome would be entirely consistent with the new framework we adopted in August 2020,” he said.

Clarida led the Fed’s framework review, which concluded in August, with a new statement on long-run goals that said policy makers will commit to averaging 2% inflation over time. They also defined maximum employment as a broad and inclusive goal and said they would now focus on shortfalls -- a mandate, in effect, to explore how tight the labor market can go without spurring unwanted inflation.

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