Lael Brainard of the Federal Reserve discusses the challenges facing U.S. economic recovery.
The C. Peter McColough Series on International Economics brings the world's foremost economic policymakers and scholars to address members on current topics in international economics and U.S. monetary policy. This meeting series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.
FERGUSON: Great, thank you very, very much and good afternoon, everyone. Welcome to today's Council on Foreign Relations meeting with Federal Reserve Governor Lael Brainard. I'm Roger Ferguson. I'm president and CEO of TIAA. I'm also a member of the Council and I will be presiding over today's discussion. This meeting is part of the CFR C. Peter McColough Series on International Economics and it's an honor for me to be here with Dr. Brainard.
Dr. Brainard took office as a member of the Board of Governors of the Federal Reserve System in 2014, to fill a term ending in 2026. Before that, she served in a number of roles in the US Department of Treasury, and received the Alexander Hamilton Award for her service. Early in her career, Dr. Brainard built a research program at the Brookings Institution to address global economic challenges. She served as the deputy national economic adviser to President Clinton, and taught Applied Economics at MIT Sloan School of Management, among other accomplishments. So I hope you'll join me in welcoming Governor Brainard to give her remarks. Governor Brainard the virtual podium is yours.
BRAINARD: Well, thank you very much for the introduction. It's an honor to be here with Roger Ferguson for this discussion. It's now been one year since the first wave of the COVID pandemic hit our shores. A year that we've seen substantial heartbreak and hardship, and I think we're all looking forward to a brighter time ahead. Certainly the expected path of the U.S. economy has strengthened with the prospect of widespread vaccinations and additional fiscal stimulus, but risks remain.
And we're currently far from our goals after a dark winter with elevated case counts and setbacks on service sector jobs. Case counts have come down and spending is picking up. Economic forecasts during the first quarter for growth have been significantly upgraded in response to the better than expected data. January data for household spending overall came in strong and it provided some confirmation at the renewal of fiscal support at the turn of the year provided a much needed boost to household incomes and spending. In recent weeks vaccinations have been increasing while weekly cases hospitalizations and deaths have decreased. As of yesterday, nearly seventy-seven million vaccination doses have been administered. While that progress on vaccinations is promising jobs are still down by ten million relative to pre pandemic levels.
Improvements in the labor market stalled late last year after rebounding partway in the summer of 2020. When we take into consideration that more than four million workers who have left the labor force since the pandemic started as well as misclassification errors, the unemployment rate is about 10% currently much higher than the headline unemployment rate of 6.3%. In fact, labor force participation by prime age workers stands lower now on net than it was in June after it bounced back partway from the decline in April. That decline is largely a result of lower participation by prime age women, which in turn partly reflects the increase in caregiving work at home with a move to remote schooling and shutdown of daycare.
On average over the period from November 2020 to January 2021, that three month average, the fraction of prime aged women with children ages six to seventeen, who were out of the labor force for caregiving had increased by 2.4% points from a year earlier. And that contrasts with an increase for men of about 0.6% points. If not soon reversed, the decline in the participation rate for prime age women could have scarring effects with longer term implications for household incomes and for potential growth. Roughly 90% of the shortfall in private payroll employment relative to the pre COVID level is concentrated in service industries with half of these job losses in leisure and hospitality. This has had a disproportionate effect on lower wage workers.
Workers in the lowest wage cartel face and extremely elevated rate of unemployment of around 23%. The advent of widespread vaccinations should revive in person schooling along with demand for the in person services that employed a large fraction of the lower wage workforce. Realized inflation remains low although inflation expectations appear to have moved closer to our 2% longer run target. Both core and headline twelve months PCE inflation, which is what we track, were 1.5% in January well below our longer run 2% goal. Market based indicators of inflation expectations have increased over recent months, with tips based measures in particular over the next five years rising about forty basis points in the ten year measure rising about thirty basis points since the end of last year.
So what do these developments tell us about the outlook? Increasing vaccinations along with enacted and expected fiscal measures and accommodative monetary policy point to a strong modal outlook for 2021, although considerable uncertainty remains, it's widely expected we'll continue to make progress controlling the virus, reducing the need for social distancing. But variants of the virus, slow take up of vaccinations or both, could slow that progress. Additional fiscal support is likely to provide a significant boost to spending when vaccinations are sufficiently widespread to support a full reopening of in person services. Various measures of financial conditions are broadly accommodative relative to historical levels and should remain so.
The labor market should strengthen perhaps significantly as the virus recedes, social distancing comes to an end, and the service sector springs back to life. An inflation is likely to temporarily rise above 2% on a twelve month basis when the low March and April price readings from last year fall out of our preferred twelve month measure. Transitory inflationary pressures are possible if there's a surge of demand that outstrips supply in certain sectors when the economy first opens up. The size of such a surge in demand will depend in part on the effects of additional fiscal stimulus along with any spin down of savings households may have accumulated, both of which are uncertain. But a surge in demand and any inflationary bottlenecks would likely be transitory as fiscal tailwinds to grow this year are likely to transition a headwind sometime thereafter.
And a burst of transitory inflation seems more probable than a persistent shift in trend inflation and an anchoring of inflation expectations to the upside. When considering the inflation outlook, it's important to remember that in the nine years since the FOMC announced a 2% inflation objective, twelve month PCE inflation has averaged under 1.5%. Recall that even at the end of 2019 when unemployment was at a multi decade low, and after the addition of almost one and a half million workers to the labor force during the prior year, the same measure of inflation was 1.6% for the year. So with that outlook in mind, let me turn finally to monetary policy.
After an extensive review, the FOMC revised its framework to reflect changes in economic relationships, in particular, a low equilibrium interest rate inflation persistently below target, and low sensitivity of inflation to resource utilization. The new framework calls for monetary policy to seek to eliminate shortfalls of employment from its maximum level. In contrast to the previous approach that called for policy to minimize deviations both when unemployment is too high, as well as when it's too low, it emphasizes that maximum employment is a broad based and inclusive goal assessed by a wide range of indicators. And to keep longer term inflation expectations well anchored at our 2% goal, monetary policy will seek to achieve inflation that averages 2% over time. These are important changes. They mean that we will not tighten monetary policy solely in response to a strong labor market.
The long standing presumption that accommodation should be reduced preemptively when the unemployment rate nears estimates of its neutral rate in anticipation of high inflation that is unlikely to materialize risks and unwarranted loss of opportunity for many of the most economically vulnerable Americans. It may curtail progress for racial and ethnic groups that have faced systemic challenges in the labor force. Instead, the shortfalls approach means the labor market will be able to continue to improve absent clear indications of high inflationary pressures or un-anchoring of inflation expectations to the upside.
The FOMC has set out forward guidance on both the policy rate and asset purchases to implement this new framework. The guidance indicates an expectation that it will be appropriate to maintain the current target range of the federal funds rate until labor market conditions have reached levels consistent with the committee's assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time. Even after economic conditions were on liftoff, changes in the policy rate are likely to be only gradual, since the forward guidance notes that monetary policy will remain accommodative in order to achieve inflation moderately above 2% for some time so that inflation averages 2% over time.
In addition, asset purchases are expected to continue at least at their current pace until substantial further progress has been made toward these goals. In assessing substantial further progress, I'll be looking for realized progress on both our employment and inflation goals. I'll be looking for indicators that show the progress on employment is broad based and inclusive rather than focusing solely on the headline unemployment rate, especially in light of the significant decline in labor force participation since the advent of COVID, and the extremely elevated unemployment rate for workers in the lowest wage portal. Likewise, while I will carefully monitor inflation expectations, it will be important to achieve a sustained improvement in actual inflation.
The past decade of underperformance on our inflation target highlights that reaching 2% inflation will require patience. And we've pledged to hold the policy rate in its current range until not only has inflation risen to 2%, but is also on track to moderately exceed 2% for some time. Of course we will be vigilant in parsing the data given the path of inflation to date. Our framework calls for inflation moderately above 2% for some time, if in the future inflation rises in moderately or persistently above target, and there's evidence that longer term inflation expectations are moving above our longer run goal, I wouldn't hesitate to act and believe we have the tools to carefully guide inflation down to target.
So in summary, the economy remains far from our goals today in terms of both employment and inflation, it'll take some time to achieve substantial further progress. Jobs are still ten million below the pre COVID level and inflation has been running below 2% for years. We will need to be patient in order to achieve the outcome set forth by our guidance. Back to you, Roger.
FERGUSON: Great, thank you very much for that very insightful outlook on the economy. Let me open with just a few questions. First, you spent some time talking about inflation and the new framework, the so called, I think it's called average inflation targeting or something of that sort. You emphasize the concept of moderately above the 2%. How does one think about that numerically? Or does one think about it numerically? How do we know when it's moderately above the target for a reasonable period of time? Or is it, you know, to use your phrase maybe too much or excessively above the number around that or is it more judgmental?
BRAINARD: So I think the assessment of inflation and inflation that runs moderately above target for some time, will be made in context. And in particular, I think the question about transitory relative to persistent increases inflation above target will be very important. So again, I do anticipate that we are going to see some transitory rise above 2%. First, when the low March and April price readings from last year fall out of our preferred measure, but it's also possible that we could see transitory inflationary pressures associated potentially with a surge of demand that outstrip supply when the economy first opens up fully.
And that'll depend on a number of factors. But there's also substantial resource slack in the economy. As I noted, employment remains ten million below the level of one year ago. And so any surge in demand, any inflationary bottlenecks would likely be transitory. And that just seems more likely to me than a persistent shift above target. And so we'll take that into account when we're assessing how much that inflation is consistent with our goals, and what it means for the time at which liftoff would be appropriate. And then the gradual path that would be appropriate following liftoff.
FERGUSON: Great, thank you. Stay on the inflation target is one more question and maybe two. I've heard from a few people that, not just the fed, but central banks in general, with the focus on consumer prices or prices of goods and services is missing another type of inflation, which is the so called inflation and asset prices. So what do you say to that? Should one think about asset prices is rising being an inflation? Is that something that central banks should worry about? How, what's the framework with respect?
BRAINARD: Yeah so we now have a well elaborated and consistent framework that we use to adjust, to assess vulnerabilities in the financial system in particular, and that set of assessments are very focused on what kinds of imbalances have led to various kinds of setbacks to the economy, historically. And so one of the areas that we do look at is the extent to which asset price valuations may be elevated relative to historical levels. So we keep very close track of that.
And the set of tools that we have in our financial stability toolkit are the appropriate set of tools for addressing high asset price valuations as well as the other kinds of vulnerabilities that have previously proven to be problematic, such as high leverage, mismatches and liquidity transformation. So there we really look to both are very strong structural or through the cycle tools, as well as macro prudential tools to address those, those potential imbalances. And so I in particular, I have been very attentive to the potential for elevated asset valuations and other forms of financial system vulnerabilities to knock us off track. But again first line of defense, very important, is our both macro prudential and micro prudential toolkit.
FERGUSON: Alright, so you've said you've been very attentive for those who are in the markets, does that suggest why you're clearly focusing in being attentive at this stage? Doesn't sound as I think asset prices are so out of line as to call for use a word significant use of those macro prudential tools? Maybe I'm misinterpreting though.
BRAINARD: Yeah so we have looked at asset valuations recently, and actually I noted yesterday a number of areas where asset valuations seemed to be relatively in the high part of the historical distribution. Now of course we also take into account for instance, in the area of the equity markets, we look at the equity risk premium. And so when you make those kinds of adjustments that changes the assessment there a little bit. But we do regularly look at those, and the assessment recently has been, we are seeing some signs of stretched valuations, but those are not broad at this juncture.
FERGUSON: Okay, so you're watching closely some signs of stress, but not drawn at this juncture. Okay. Thank you. Let me talk about another set of measurements. It was notable to me that you clearly think about labor markets in a broader and more nuanced way. It's no longer just, you know, the headline unemployment rate, which is now about 6%, 6.5%, 6.2% something in that range. Can you explain, you know, why is that evolution taking place? Why are we now hearing about workers who are discouraged? Or the number of I guess, it's called labor force participation? I've heard that phrase from you as well. Give us some more context about how you're thinking and the Fed’s thinking has evolved, and its base on labor markets.
BRAINARD: Yeah, so I think we've learned a lot over the last cycle or two. And certainly what we learned in the last cycle was that after unemployment had reached and then gone below what many economists had assessed to be the normal level of employment or the level that was consistent with no inflationary pressures, In fact there was very substantial additional increase in the number of workers who came into the workforce. And we saw very substantial reductions to historically low levels for groups of workers that have faced systemic challenges. So we saw unemployment gaps for Black workers coming down to levels that had not been seen historically. We saw gaps also for Hispanic workers coming down to historically lower levels.
In the current environment, I'm certainly focused on a whole set of indicators that just looking at the pre COVID level gives us some real indication that there's a lot of slack out there. So again, you know, if you take that 6.3% headline unemployment rate and you just adjust it for misclassification errors, and then you add the four million people who have dropped out of the labor force, that gives you a 10% unemployment rate, if you look at the employment to population ratio, we have nearly 4% points to get back to where we were prior to COVID. If you look at women's participation, it has also fallen, in part for the reasons associated with more caregiving work at home.
If you look at Black unemployment, that gap has opened up again, similarly for Hispanic unemployment. And if you look at part-time, for economic reasons, it's about one point six million greater than it was pre COVID. Again, those two are workers that are basically saying they want full time work and cannot find it. That's a lot of different margins of slack. The other important factor is we've seen some research suggesting that those disadvantaged groups benefit disproportionately from tightening labor markets late in the cycle.
FERGUSON: So let me just continue to pursue that because you're now talking about different groups, you're talking about marginal groups implicit in that as discussion about income inequality as well. So I've heard Chairman Powell speak about income inequality, and not just the need for, but maybe the ability of the Fed to help bring down income inequality. Should we think about that as a specific kind of informal target or mandate? Or is it much more there's the notion that a really strong economy that is running pretty tight, has the added benefit of helping all groups and hopefully over time reducing income inequality?
BRAINARD: Yeah, it's really that Congress gave us a very clear mandate for maximum employment as well as price stability. And as I read through the origins of that mandate, as I see it, both in the amendments to the Federal Reserve Act, as well as to the Humphrey Hawkins Full Employment Act. You see in there this concept of full employment, which really does take into account the benefits of a strong labor market for all Americans, and also references the importance for addressing discrimination in employment and other kinds of inequity. So we really stick very closely to our mandate, but our mandate has some very important implications we believe for equity.
FERGUSON: Okay, so if one looks at the legislative history, you could see some discussion of inequity. And what I'm hearing you say is you're taking that history in that context very, very seriously, which sounds to me very, very positive. Could I talk just a little bit about markets and market behaviors? You talked about asset prices already. But how do you interpret what's happened to the longer term treasury yields? And some people think maybe they're suggesting markets are more concerned about inflation than others, and we've seen some volatility even last week. And most importantly, would the Fed consider taking action against rising yields at the longer end of the yield curve?
BRAINARD: Yeah so I am paying close attention to market developments. Some of those moves last week and the speed of the moves caught my eye. I would be concerned if I saw disorderly conditions, or persistent tightening and financial conditions that could slow progress towards our goal. And it's worth emphasizing that those goals are stated in terms of the realized levels of employment and inflation. And from my perspective, we're far from reaching the goals that we set out in the guidance. So we were just talking roughly ten million fewer jobs, and four million fewer people in the labor force, 1.6 million more people who want full employment but who are part-time. We've been at about 1.5% inflation now for us since 2012. So that's a long time.
And it is true that we will see some transitory increases in inflation, both when those low readings drop out. And potentially, if there is a surge in demand that temporarily outstrip supply. But it's really important to remember that we're focused on sustained levels of inflation and the liftoff criteria that inflation is on track to moderately exceed 2% for some time, is really important in thinking about that. And the final thing I would say is, you know, even after the conditions for liftoff have been met, changes in that policy rate are likely to be only gradual. So for all those reasons, you know, I do, watch these developments very, very carefully.
FERGUSON: Let me take you back because you brought it back in, the notion of inflation having under run the Fed’s target for over a decade. Obviously, things have changed. Do you have any theories or hypotheses of why it is that our economy at this stage seems somewhat less prone to inflation? And what does that mean about the ability to actually, you know, get it to run moderately, get the inflation run moderately above the target for a period of time? Is that really gonna be a very difficult thing to achieve to get it above that 2% for a short period of time?
BRAINARD: Well, I think that observation that inflation has been consistently running below target is a very important one. It certainly was a main motivation for reviewing our monetary policy framework. And I think what we learned in thinking hard about the monetary policy framework is, on the one hand, real success over many decades in anchoring inflation expectations. On the other hand, the observation that the neutral rate, the equilibrium interest rate globally, has come down very significantly over the last, you know, two decades means that if we didn't make those changes to our monetary policy framework, we would really risk having a downward bias both in inflation outcomes and employment outcomes in a potentially downward spiral as that bias led to lower inflation expectations. We've seen that in some other foreign economies and that's a risk that we really did not want to take. And so that's why we've changed the framework. It's too early to tell, but some of the early market reads I think, after the change in our framework, do suggest that market participants have understood that our reaction function has changed.
FERGUSON: Okay, I'm going to alert to the audience that I'm going to come to you in just a few minutes for questions. So when you'll start to get them ready, you'll hear how to introduce your questions. Let me go to Brainard and continue this with one or two more questions. One is around the question of uncertainty. You painted a pretty optimistic forecast with the vaccine, fiscal stimulus, etc. Now, any ounce of uncertainty around that one should be aware of? Anything that might throw that off a little bit?
BRAINARD: Yeah, so uncertainty is a very big factor I think in certainly my outlook. There is uncertainty about how much vaccine acceptance there will be. There is uncertainty about some of the new more contagious variants that are circulating. On the other side, there's uncertainty also about how much of the accumulated savings that some households have managed to put away during the COVID crises, how much of that will be brought into the economy and demand. There's uncertainty also about what kind of response the economy will have to some of the types of fiscal stimulus that are anticipated, how much of an impact that will have. So I think there is quite a bit of uncertainty around that most likely path of the economy. And it's certainly something that is informing my patience and my caution in looking forward to this more optimistic time.
FERGUSON: The other thing I've heard a few people say is in a post COVID world maybe, you know, some of the benefits of global supply chains might be reduced as, you know, we rethink businesses do and others, you know, how their supply chains work that might create some frictions on the supply side of the economy, that could potentially lead to unexpectedly high inflation. Do you have any sense of that change or anything else post COVID that might have an impact on the outcome?
BRAINARD: Yeah. So absolutely. I think there's also questions about structural changes, changes in business models domestically, potentially globally. Now those could lead to some short term frictions. They could also lead to some changes in employment patterns, some sectoral shifts longer term, potentially some higher productivity. So I think COVID has also brought a number of changes in the way we organize ourselves for work. And we don't know yet how persistent those are going to be and what kinds of implications those will have for how quickly the economy gets back to full resource utilization and also for productivity longer term.
FERGUSON: Great, thank you. So at this time, I'd like to invite members to join our conversation with your questions. A reminder, the meeting is on the record, and the operator will now remind you how to join the question queue. So operator, if you give us instructions, they will open up for questions from the membership.
STAFF: (Gives queuing instructions.) We will take our first question from Kayla Tausche. Please accept the unmute now button.
Q: Hi. Thank you so much for not only doing this but also doing it on the record. This is Kayla Tausche from CNBC. And I have a question for both of you. Governor Brainard, we expect the composition of the Federal Reserve to change this year. And I'm wondering what attributes or policy goals you believe are most important to the Biden administration as it considers some of those shifts and some of the personnel for those roles. And Roger for you, your retirement from TIAA becomes effective this month and I'm wondering to what extent we could see you join the administration. Thanks.
BRAINARD: So I really can't speak to that question at all. It's a question that we'd probably be better directed elsewhere. You know, we at the board, we have our clear responsibilities, we have our terms. And you know, we're just very focused on the task at hand, which is getting the economy back to full employment and inflation back to its 2% goal. So let me hand that over to Roger.
FERGUSON: Right. Thank you. So I can't speak directly to, you know, the probability of my joining the Biden administration. I will say, as I go into my retirement years, I'm retiring from TIAA, but I hope to stay involved in some of the issues that are relevant and passionate for me including making capitalism more inclusive, thinking about some of the equity issues that have emerged, obviously, in our society. I'm focused on financial literacy, continued good corporate governance, and, you know, the nature and quality of markets and FinTech. So I've got a number of things that I'm very passionate about and interested in. And the Biden ministration itself will determine whether there's a place for me. But at this stage, my focus is on the range of topics I just talked about. All which I hope will have a positive impact on not just America, on the world, and hopefully making capitalism much more inclusive and more equitable in the ways that the Governor Brainard herself has talked about. So operator, can we go to the second question from the audience, please?
STAFF: We will take our next question from Lewis Alexander
Q: Hi. Thanks very much for doing this. Governor Brainard, you talked about a couple of different aspects of how markets have evolved recently. You talked about the level of long term rates, you're talking about market functioning. There's another aspect of it, though, which is the markets now expecting a fairly rapid increase in interest rates. So it's pricing, three increases by the end of 2023. I wonder if you could just comment on whether or not that's consistent with your forecasts. And whether or not there's anything the fed might do to address that. You've talked in the past about yield curve control measures, particularly short term yield curve control measures, one might argue that's something that's relevant for that particular set of circumstances. Thanks.
BRAINARD: Yeah. So, you know, as I was kind of speaking earlier, I just would say that from my perspective, we're far from reaching the objectives that are set out in our guidance. And, you know, recall that the criteria for liftoff is not only on the level of employment, and that inflation has reached that 2% goal, but it's also on track to moderately exceed for some time. From where we are today, we are ten million jobs short of where we were pre COVID. We have four million people out of the labor force relative to where we were pre COVID. We have one point six million people who want full time work relative to pre COVID and currently only have part-time hours.
We're still seeing inflation that is running short of our goals and that has been true now for many years, on nine years, and other than the expectation that there will be some transitory increases, we really will be looking for a sustained performance of inflation. So for all of those reasons, you know, I at least see things that we have quite a bit of ground to cover. And even after that, we have been clear that changes in the policy rate are likely to be only gradual. Now, of course, we'll continue to monitor carefully and communicate where we think we are, as I said today, feel that it is appropriate to be patient. And of course we can contemplate additional measures, if necessary, but for where we are today, I think our statement provides very clear guideposts for the path of both of asset purchases and of policy.
FERGUSON: Operator, is there another question please?
STAFF: We will take our next question from Katherine Mann. Please accept the unmute now button.
Q: Hello, how are you doing? Very good to see you both. Sort of a little bit of a reunion of Fed people. So thank you very much for the opportunity. I'd like to extend the question that has come up a number of times having to do with the manner in which the Federal Reserve may respond to turbulence in the financial markets. They of course, playing the important role of being the intermediator from monetary policy to real economic outcomes, those real economic outcomes being the ones that you care about. So the issue is that on the one hand, the market participants are going to read your view as being a return of the Fed put, for a maintenance of the Fed put.
But at the same time of course we have other colleagues out there amongst the economics crowd who are viewing the very large fiscal stimulus that is in place as being the foundation of a potential sustained increase in prices going forward. So you kind of are sitting between the [INAUDIBLE] of the financial markets who say you are on put mode and other of our colleagues in the economics profession who say that you are the behind the curve. So the question is, does the magnitude of the fiscal stimulus alter the way we should be thinking about the Fed put? Does it mitigate or alter the Fed put attitude that financial markets surely do have?
BRAINARD: So I think we all will take into account in our modal outlook as well as in risks around that outlook on the potential for fiscal stimulus and the potential magnitude of it, the potential timing of it. But, you know, there's a lot of different estimates out there with that range of magnitudes might mean for actual activity. And so, you know, if I take into account all of the recent developments, my modal outlook, has certainly brightened since the winter.
But I'm also very cognizant of the risks, as we talked about earlier, more contagious variants, not clear yet about the rates of vaccine acceptance. And not clear about exactly, you know, how much we'll see in terms of that potential surge in demand. Now, our framework is about realized progress, and it's about levels of employment and levels of inflation. And so, I will be watching as the data come in, to gage that realized progress. But I do think it's important to remain patient. Certainly what we have learned over past cycles, particularly given that performance of inflation over a very long period right now that underperformance of inflation.
FERGUSON: Operator, is there another question?
STAFF: We will take our next question from Alan Blinder.
Q: Hi there Roger, how are you? Nice to see you. You're hearing me? You are.
FERGUSON: We're hearing you Alan.
Q: Lael, you mentioned the danger of scarring from a period of long unemployment. So as Janet Yellen, so a lot of people. What I'm wondering about is this. We had a period, a lengthy period, of high unemployment beginning in the fall of 2008 that lasted for years. What do you and more broadly, the Fed think we learned about that particular history's question?
BRAINARD: Well, I think one of the things that became clear over the course of the last very lengthy recovery, as you noted, is that although the estimates of the natural rate, I think early in the recovery, in the recovery of the response to the global financial crisis, natural rate estimates were bumped up. And it was assumed that there would be a longer term impact. What we saw, in fact, over the course of a very lengthy recovery, is that natural rate estimate kept coming down. And we saw millions of Americans coming into the labor force very late in that recovery, and margins of slack that we hadn't seen, but for a long time, actually closing.
So I'm keeping that experience very much in mind. I mean, the other thing, I think we learn more broadly, it's outside of our remit, but that the very rapid and kind of targeted fiscal response that we've seen, and that has been increased over the course of this recovery, you know, has really focused on some of the potential areas of scarring. So in particular, I think the assistance to small businesses and credit in general means that we're less likely to see scarring in terms of the sort of shuttering of otherwise viable businesses and the associated employment there. So I think there's some reasons to be optimistic. But again, we have to keep our eye on the ball and maintain that very favorable economic environment to avoid that kind of scarring.
FERGUSON: Operator, the next question, please. Thank you, Alan.
STAFF: We will take your next question from Nili Gilbert.
Q: Hi. Thank you so much for this great session. My name is Nili Gilbert. I'm representing the David Rockefeller Fund. I wonder if you could comment on how the international dynamics of changing monetary policy may be considered in the Board of Governors deliberations. Whether we think about the Fed’s leadership and moving to symmetric inflation targeting, the degree of fiscal stimulus that we've seen in the U.S., which sets it apart. How does the board think about potential feedback loops from international actors? And the way that this could affect some of your reaction functions? I've been thinking about, for example, the relative changes in money supply, expected changes in international capital flows, could be changes in the value of the dollar, pressures on national debt, you know, these common topics. How do you see it in your role?
BRAINARD: So I think we are. Thank you. Thank you for that question. So I think we are very attentive to possible spillovers and spill backs to foreign economies, from our policy mix, both certainly monetary, but also the kind of mix of monetary and fiscal. In terms of the changes that we have made to our monetary policy framework, I'll just say that the same forces that led us to revisit the framework for monetary policy, the observation that neutral rates have fallen and have been low for some time, the observation that the Phillips curve is quite flat, or has been very flat in the kind of responsiveness of inflation to labor market tightness, as well as that persistence of low inflation. Those are common features among the advanced economies, and some of the struggles that our pure central banks have had, in terms of keeping inflation anchored at 2%, in getting inflation performance back to 2%, has informed our own thinking.
And, you know, as we've undertaken this review, there have been a number of our pure central banks, who have also taken on board how we're approaching things differently, and they're undertaking their own reviews, and giving thought to the very same thing. So, it is possible that we'll see changes in central bank frameworks more broadly, that will be different, but will take into account these changes. Now, of course, as we look at the recovery, you know, strong demand in the U.S. will spill over positively abroad.
Different countries are recovering at different speeds, depending on the progress they're making on vaccines, their policy space, their policy mix. And so, you know, we do think about other countries, some of whom have moved faster, and many of whom are likely to move a little bit more slowly. And hopefully the mix here in the U.S. will be positive for both advanced economies and emerging markets. But we also anticipate that stronger growth abroad will be very important for us over the longer term.
FERGUSON: Operator, next question, please.
STAFF: We will take our next question from Larry Meyer.
Q: Hello, Roger. And hello, Lael. I have two questions interrelated about inflation. You always give this a wonderful discussion of maximum employment going over the various indicators, and it's really, really wonderful. But I call maximum employment, the new NAIRU. And that's because how could we ever judge that we've gotten to maximum employment? And the answer is, we keep going, we keep going. We don't worry about point estimates of the NAIRU. We keep going until inflation begins to rise, number one. Number two, the new framework was designed for stabilizing inflation in the face of very low inflation. And getting inflation back to two is an impediment to containing inflation when there is inflation risk. And the reason for that is good to wait until inflation is already 2% on track to overshoot 2% before you even begin to raise rates, and you're good to go very slowly at that point. Is that worrisome?
BRAINARD: So I would say that our framework is both a sort of flexible, average inflation targeting framework as well as maintaining the maximum employment second leg of the mandate. It is true, that we are thinking about that maximum employment mandate differently. And in particular, thinking about shortfalls rather than deviations. But with regard to inflation, now the real focus there is on ensuring that longer term inflation expectations are anchored at 2%. Given current circumstances, and the fact that we have seen underperformance on that inflation target for many years, the way that we get inflation expectations back, anchored back up at two, is by that moderate above 2% inflation performance for some time. But the core of that framework is still the anchoring of inflation expectations at 2%. And so of course, you know, we have both the tools and the mandate to ensure that we don't see any un-anchoring of inflation expectations to the upside, or a persistent in moderate level of inflation above our 2% target.
FERGUSON: Operator next question, please.
STAFF: We will take the next question from Diane Swonk.
Q: Hi and thank you both for being there. I really appreciate it. I just wanted to follow up. I'm Diane Swonk from Grant Thornton. I just wanted to follow up on the issue on scarring in the labor market, Governor Brainard and anything you wanted to add as well Roger. What I'm worried about is how much we displaced workers in our acceleration to whatever hybrid there may be to work from home, and how the Fed is thinking about what may be displaced workers going forward. I know Chairman Powell has referred to the probability that we've displaced workers and also more broadly, even though small businesses, we've seen a lot of new creation of small businesses, I worry about how many have failed, and how much concentration we have now, in very large firms, which are productive, but may not be sharing their productivity more broadly for the economy?
BRAINARD: Well, I'll start and then Roger, maybe you want to jump in on this as well? So I would say that, yeah, I think I do worry. When you look at the various indicators, that they do suggest that the most vulnerable Americans are the ones that have suffered the most from the pandemic and question marks about how quickly those groups can get back into full time good employment. I already mentioned that depression, your level of unemployment, for the lowest wage quartile of 23%. If you look at unemployment for Black workers, that has jumped 3.2% points. It's now up at 9.2%. For Hispanic workers, it's up at 8.6%. That's just the headline number.
Of course, women's participation rates have suffered disproportionately for the reasons we talked about. Workers without a college degree have experienced much larger employment declines. And then, as you noted, many small businesses are struggling, but in particular, small businesses owned by Blacks and Hispanics seem to be struggling. So I do worry that the setbacks that have been suffered so far could have long lasting effects on employment, on income, on wealth, and opportunity. And I think that's why our policies, and some of the fiscal support is so important to make sure that that kind of scarring doesn't set in.
FERGUSON: I share many Governor Brainard's concerns, I mean all of them. Let me add a few more that I think we need to worry about. One is the impact on education, you know, we have had a year very disrupted K to twelve education and even beyond that. And what we've seen is that the digital divide that affects higher income people versus lower income people has played through there as well. And it will take, I fear, you know, some time for that to be undone. I also worry that for some individuals, minority individuals, women and Blacks, and Hispanics, the need to bridge the periods of unemployment, by dipping into retirement savings, for example, will prove to be an element of scarring that really hasn't been thought very much about yet.
And then finally, the health impacts African-Americans makeup on around 12% or 13% of the economy, more than 20% of those influenced by COVID have been Black. And that has to do with the kinds of jobs I do. And literally, we don't yet know the long term impacts on health from having had COVID. So I think in addition to the kinds of very good macro factoids and insights from Governor Brainard, there are some others that we need to worry about. So I think this notion of scarring has a broader range of meanings. So thanks for bringing that up Diane. Operator, next question, please.
STAFF: We will take the next question from Paul Sheard.
Q: Thank you. Paul Sheard from the Harvard Kennedy School. Thank you very much Governor Brainard. I'd like to ask you to say a little bit more about how you see the Fed operationalizing the average inflation targeting framework when it gets into the second half of inflation actually running above 2%. The statement from the Fed is perhaps deliberately and appropriately somewhat vague in talking about for some time averaging 2% over time. How would you actually sort of go about measuring how long a time period you're looking at? Will there be any trade off? You do mentioned the word sort of moderately, but if you have very long sustained period where inflation was somewhat below target, in the second phase would you prefer a longer elongated period of just moderately above 2%? Or would you look for periods where perhaps you welcomed, short, sharp increases in inflation that got you to that average figure a little bit quicker? So a little bit more about how you would actually operationalize the framework.
BRAINARD: Yeah, so I think, you know, we did not put in place a sort of a tight average inflation targeting strategy advisedly. We thought about it, you can see that, I think, in the minutes of some of the FOMC discussions. So we don't have a formulaic approach, which would have us sort of mathematically get to taking into account shortfalls over a pre specified period of time. And the reason that we did that was multifold. In part was because of communications challenges and in part because we anticipated circumstances under which that might be challenging to deliver. Instead, we have what we call the flexible average inflation targeting strategy. And it leaves a little bit to the judgment of the committee to determine at what juncture inflation performance has been on track to anchor inflation expectations at 2%.
So, you know, as we're making these judgments, obviously, we will be looking at a variety of realized inflation numbers, but we'll also we'll be looking at a set of different inflation expectations, gages, as well as statistical models that I look at frequently have underlying trend inflation, and I think that complex of indicators, you know, will give us a sense of whether, in fact, that inflation expectation, that's really the focal point of our monetary policy inflation leg, is well anchored at 2%. And at that juncture, I would expect that we will be very careful in guiding inflation back down towards target.
FERGUSON: We got time for just one more question and answer. We've got a couple minutes left. Operator, last question, please.
STAFF: We will take our last question from Teresa Barger.
Q: Hello. Lael and Roger, thanks for doing this. I was curious on our journey of [INAUDIBLE] yield rises from August to December to last Thursday. Really was only on February 25 where real rates were implemented. And then had the Reserve Bank of Australia reacting very quickly while the Fed remained patient. So just wondering if there's any concern about the market bringing forward their [INAUDIBLE] expectations? And what you think of RBA's actions? Thanks.
BRAINARD: Yeah, so certainly, I did note the speed of some of the moves and the actual moves last week. And I would be concerned, if I saw a persistent tightening in financial conditions that could slow progress towards our goals. From where, you know, I set, the way I see recent developments, we are far from reaching those levels that we set out in our forward guidance. So there is, we've got some distance to cover. And I think, you know, our guidance is just very clear that our asset purchases will continue, at least at the current pace, until we have seen substantial further progress. And again, that's in terms of both legs of the dual mandate, and then lift off likewise. I've talked about the conditions there in terms of actual realized inflation and employment outcomes. So certainly, you know, I'll continue to watch market developments carefully. And if those market developments are inconsistent at that juncture, we can make a judgement. But certainly, for where I sit, we've got some distance to go to meet our goals.
FERGUSON: Great. Thank you very, very much. Let me now close by saying three sets of thank yous. First and foremost, thank you to Governor Lael Brainard for an insightful speech, and then, you know, very, very good responses to good questions. Let me thank the questioners, some of whom have a Fed history for bringing forward some insightful questions based on technical background and overall understanding as well. And finally, let me thank all of you for joining our discussion today, our virtual meeting. So this session is now drawn to a close. Please feel free to disconnect. Thank you all very much for joining us.