It's the Fed's rosiest picture of the economy since the coronavirus pandemic gripped the globe last year. But it also comes with risks.
The central bank is now predicting that consumer prices will jump, at least temporarily, as Americans spend their stimulus money and slowly return to normal life. Inflation is now expected to hit 2.4% this year, compared with the Fed's earlier estimate of 1.8% - the kind of pop some economists have warned could actually harm the economic recovery.
It's uncharted territory for Fed Chair Jerome Powell. The economy is getting stronger, but not enough for the central bank to roll back the emergency measures it put in place last year. Interest rates are already on the rise, worrying some economists and investors.
Over the coming months and years, Powell will face more pressure as he stands by the Fed's new commitment to letting the economy run hotter for longer before raising rates. And he must convince Wall Street that near-term price increases will be temporary and won't lead to widespread or persistent inflation.
"It's just a lot of people who need to get back to work, and it's not going to happen overnight," Powell said, explaining that the economy still had far to go before reaching pre-pandemic levels. "The faster, the better."
At the conclusion of two days of policy meetings Wednesday, the Fed did not raise rates or pare back its bond purchases, a sign that the economy has yet to fully heal. About 9 million jobs, and probably more, are still missing from the labor force. Entire industries, including hospitality and entertainment, cannot be revived until the pandemic is under control.
At a news conference Wednesday, Powell said some measures of economic activity and employment have "turned up," thanks in large part to more widespread access to coronavirus vaccines and additional aid from Congress.
"The recovery has progressed more quickly than generally expected," Powell said, adding that last month, the leisure and hospitality sectors, which have taken a beating since the pandemic began, recouped about two-thirds of the jobs that were lost in December and January.
The Fed now expects GDP growth to reach 6.5% this year, up from its previous projection of 4.2% and the fastest rate since the 1980s. The unemployment rate will fall to 4.5% this year and then tick down closer to pre-pandemic levels - 3.9% in 2022 and 3.5% in 2023, Fed leaders project. That would be a much faster recovery in the labor market than central bankers had previously forecast.
The last time Fed leaders released projections, in mid-December, the outlook for the economy and public health crisis was much different. Holiday-season travel sent coronavirus cases surging. And it was unclear when or whether Congress and the Trump White House would pass another stimulus package, even as Powell repeatedly urged more fiscal spending.
President Donald Trump ultimately signed a roughly $900 billion relief package days after Christmas. And last week, President Biden signed a $1.9 trillion aid bill into law - the result of Democrats' push to go big on a stimulus measure.
That latest package - known as the American Rescue Plan - significantly changed economists' expectations for how quickly the economy can return to its pre-pandemic strength. Goldman Sachs is now forecasting U.S. gross domestic product to grow 8% this year in the fourth quarter compared with the same period a year ago,marking the fastest increase in almost 60 years. Major companies, including American Airlines and United Airlines, said they would cancel tens of thousands of planned layoffs.
At the same time, the flood of cash from the latest stimulus bill has some economists warning that such precipitous growth could harm the economy by starting a dangerous cycle of inflation. Their concern is that the economy will overheat and prices will rise, forcing the Fed to raise interest rates and risk another recession.
Wall Street is also betting on soaring economic growth. Bond yields have risen sharply over the past month, and some investors see that as evidence that inflation is likely to materialize. According to the latest Bank of America survey of global fund managers, the pandemic is no longer the biggest "tail risk." Higher than expected inflation is.
Powell and other Fed leaders said there is no reason to expect that inflation will spiral out of control. Inflation hasn't reached the Fed's 2% target for years. Even if inflation hits and exceeds that figure, the Fed says, it will decide when or whether to raise interest rates based on the state of the economy, including how many people are still unemployed.
According to Wednesday's Fed data, seven of the central bank's 18 policymakers project a rate hike by the end of 2023.
"I don't want to get into putting a pin on the calendar [for a rate increase] because it's going to be data-dependent," Powell said. "When we are on track to see substantial future progress, we will say so. That involves judgment."
But economists, particularly those worried about risky cycles of high inflation, say sticking to that strategy could be difficult for the Fed if bond markets or stock prices react poorly. And for some, the Fed's inflation projections may fuel worries that the economy is growing too fast.
But Julia Coronado, a former Fed economist and president of MacroPolicy Perspectives, said Powell had "weaponized" the Fed's projections "to say: We expect higher inflation, and we're still going to hold" policy where it is now.
Even as policymakers expect a jump in inflation to 2.4% this year - followed by 2% in 2022 and 2.1% in 2023 - Powell's message is that those numbers don't necessarily reflect the long-term, repeated price increases the Fed needs to see before it raises rates.
"He's trying to say in words, for a long time now, that this isn't how inflation works, people," Coronado said. "Supply chain bottlenecks or reopening pops - that's not inflation. . . . It has to be tied to the strength of the economy, and not just a one-time sugar rush."
For example, the price of airline tickets has remained low since the pandemic gutted travel, Coronado said. But as more people get vaccinated and start traveling again, prices could jump as Americans rush to book their post-pandemic vacations.
Yet that dynamic won't keep up forever, Coronado said. Eventually, people will exhaust their stimulus cash, causing the surge in demand, along with ticket prices, to settle down.
"It doesn't keep repeating," she said. "People aren't going to keep getting stimulus payments year after year."
Published : March 18, 2021
By : The Washington Post · Rachel Siegel