Jay Powell stressed the importance of “patiently accommodative” monetary policy to support the struggling US labour market, warning that achieving full employment in the world’s largest economy will not be easy.
In prepared remarks to the Economic Club of New York on Wednesday, the chair of the Federal Reserve said US employment was far from its pre-pandemic level. He did not reveal any anxiety about a rise in inflation later this year triggered by President Joe Biden’s $1.9tn fiscal stimulus plan.
“Despite the surprising speed of recovery early on, we are still very far from a strong labour market whose benefits are broadly shared,” Powell said. “Employment in January of this year was nearly 10m below its February 2020 level, a greater shortfall than the worst of the Great Recession’s aftermath.”
Powell also indicated that US policymakers, including health officials, fiscal authorities and central bankers, would still have plenty of work to do in order to close that gap, suggesting the Fed did not see a quick end in sight to the economic downturn triggered by the pandemic.
“Experience tells us that getting to and staying at full employment will not be easy,” Powell said. “Policies that bring the pandemic to an end as soon as possible are paramount,” including more fiscal stimulus.
“Workers and households who struggle to find their place in the post-pandemic economy are likely to need continued support. The same is true for many small businesses that are likely to prosper again once the pandemic is behind us,” he said.
Powell reaffirmed the ultra-dovish monetary policy being pursued by the Fed, which involves waiting for the US to reach full employment and for inflation to rise above 2 per cent for some time before tightening.
“Also important is a patiently accommodative monetary policy stance that embraces the lessons of the past — about the labour market in particular and the economy more generally,” he said.
The Fed chair then made a broader appeal, including to business and government, to help revitalise the post-pandemic US jobs market.
“Given the number of people who have lost their jobs and the likelihood that some will struggle to find work in the post-pandemic economy, achieving and sustaining maximum employment will require more than supportive monetary policy,” Powell said.
“It will require a society-wide commitment, with contributions from across government and the private sector. The potential benefits of investing in our nation’s workforce are immense.”
Powell’s comments follow a vigorous debate among economists and senior officials about whether Biden’s fiscal stimulus plan might trigger an unwelcome spike in inflation while juicing the recovery this year. However, Fed officials have shrugged off such worries.
Investors have begun to price in higher inflation later this year, but few fear a destabilising resurgence. Since November, market measures of inflation expectations have steadily climbed. One metric derived from US inflation-protected government securities, the 10-year break-even rate, now sits above 2 per cent. It languished around 1.7 per cent in October.
Expectations for additional government spending and, in turn, stronger growth have also pushed long-dated Treasury yields higher. On Monday, the 30-year bond traded above 2 per cent for the first time since last February.
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