By Steven K. Beckner
- GDP Level Almost 100% Back, But 8 Million Jobs Short
- Would Want Adjust Policy If Economy Overheats But ‘Far In Future’
- Brainard Urges Patience to Generate Enough Momentum To Reach Goals
(MaceNews) – Although the economy has come a long way, it still has far to go to return to full employment, Atlanta Federal Reserve Bank President Raphael Bostic said Tuesday.
So Bostic, a voting member of the Fed’s policymaking Federal Open Market Committee, made clear he is not prepared to consider making monetary policy less stimulative in the near term.
Like many of his colleagues, the sixth district president downplayed the risks of excessive inflation, while saying he is keeping a “nervous” eye on current price pressures.
“We are definitely, firmly on the road to recovery, but there’s a long way to go,” Bostic told participants in a webinar sponsored by the Alexandria, Louisiana Rotary Club.
He said GDP is “almost 100% back” to pre-pandemic levels, and he added, “If you think about output we are getting there, and current economic metrics suggests that that strength is going to continue.”
But Bostic was far less ebullient about the employment picture in wake of an April employment report that showed a far less than expected 206,000 rise in non-farm payrolls, substantial downward revisions to prior months and a one-tenth uptick in the unemployment rate to 6.1%.
“If you look at employment and compare the level of jobs we have today versus the level of jobs we had pre-pandemic we are about 8 million jobs short,” he said. “That’s 8 million people who are not in the work force that were pre-pandemic.”
Bostic said “that means there’s still a lot of pain out there; there’s a lot of destruction out there.”
“So there’s a lot that needs to happen, and as long as we are that far away from our employment targets, I think that it’s really appropriate for our policy to stay in an accommodative mode to promote growth and to provide as much support to the economy as we possibly can,” he asserted.
The job shortfall “really tells me we really need to keep rates low and stay engaged in trying to stimulate economic activity,” he added.
Bostic acknowledged that due to “base effects,” supply shortages and resurgent consumer demand, prices have begun rising faster, and he said he’s “going to remain vigilant” and look to see “exactly where the economy is headed.”
“If it looks like the economy is heading toward overheating, I will make the case that we need to adjust policy.”
“But that’s well in the future,” he added.
Earlier, Fed Governor Lael Brainard also suggested it is much too soon to think about removing monetary accommodation.
Brainard vowed to be “attentive” to the risk of “persistent” inflation pressures, but said they are likely to prove “transitory.” She put more emphasis on downside risks and advocated being “patient” about firming monetary policy to ensure sufficient growth to achieve the Fed’s goals of 2% average inflation and “maximum employment” that is “broad and inclusive.”
“Achieving our inflation goal requires firmly anchoring inflation expectations at 2%,” Brainard told the Society for Advancing Business Writing and Editing. “Following the reopening, there will need to be strong underlying momentum to reach the outcomes in our forward guidance.”
“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,” she continued.
“The outlook is bright, but risks remain, and we are far from our goals,” Brainard went on. “The latest employment report reminds us that realized outcomes can diverge from forward projections and underscores the value of patience.”
“As the economy reopens fully and the recovery gathers momentum, it will be important to remain patiently focused on achieving the maximum-employment and inflation outcomes in our guidance,” she said, adding that policy should be based on “outcomes, rather than the outlook.”
Meanwhile, non-voting Cleveland Fed President Loretta Mester, usually thought of as on the more “hawkish” end of the policy spectrum, said she remains optimistic about the economy despite a “disappointing” jobs report. But despite “upside risks” to inflation, she said the Fed is “not there yet” in terms of tapering asset purchases.
Bostic and Brainard joined in a unanimous April 28 FOMC decision to keep the federal funds rate in a target range of zero to 25 basis points and to maintain $120 billion of bond buying per month until the FOMC judges there has been “substantial further progress” toward its objectives.
Last Friday, Brainard warned of mounting financial market risks in commenting on the Fed’s latest Financial Stability Report.
“Vulnerabilities associated with elevated risk appetite are rising,” she said. “Valuations across a range of asset classes have continued to rise from levels that were already elevated late last year.”
“Equity indices are setting new highs, equity prices relative to forecasts of earnings are near the top of their historical distribution, and the appetite for risk has increased broadly, as the ‘meme stock’ episode demonstrated,” she continued.
Brainard also pointed to “elevated risk appetite” in corporate bond markets, and warned, “the spreads of lower quality speculative-grade bonds relative to Treasury yields are among the tightest we have seen historically.”
She added that “the combination of stretched valuations with very high levels of corporate indebtedness bear watching because of the potential to amplify the effects of a re-pricing event.”
Asked whether low interest rates are skewing investments in inappropriate directions, Bostic said he has not seen that.
Shifting Fed views on financial risks matter. Financial stability is not formally part of the Fed’s statutory “dual mandate,” but in its Statement on Longer-Run Goals and Monetary Policy Strategy, renewed Jan. 26, it states, “sustainably achieving maximum employment and price stability depends on a stable financial system.”
And in its April 28 policy statement, the FOMC again listed “financial and international developments” among the factors it “will take into account” in deciding whether or not to adjust monetary policy.
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Contact this reporter: steve@macenews.com.
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