People who’re not currently being counted in the jobless rate re-enter the labour force.
WASHINGTON (March 24): Federal Reserve Chair Jerome Powell said the central bank’s relatively muted forecast for lower unemployment this year – despite very strong expected growth – was actually disguising “highly desirable” labour market gains.
“We see participation expanding,” he told the Senate Banking Committee on Wednesday, referring to the process where people who’re not currently being counted in the jobless rate re-enter the labour force. “That holds the unemployment rate up – it is a highly desirable outcome.”
In quarterly forecasts published last week, 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, as calculated by the personal consumption expenditures price index, is seen in the Fed’s median forecast as ending 2021 at 2.4% but slowing to 2% next year. It clocked in at 1.5% in January.
Powell said prices would probably rise due to so-called base effects, as very low readings from last year fall out of the calculation, along with some pressure from pent-up spending and supply-chain bottlenecks.
But this shift is expected to be temporary and the long period of low inflation in the US would keep price pressures in check.
“Long term, we think the inflation dynamics we have seen for a quarter century are still intact,” he said. Powell added that if this prediction provided not to be the case, the Fed has tools to tackle unwanted inflation and would use them. Powell appeared before the committee along with Treasury Secretary Janet Yellen, as part of congressional oversight of the government’s response to the pandemic. Both policy makers testified before the House Financial Services panel on Tuesday.
Yellen expressed confidence that unemployment would be lower when supplementary unemployment benefits provided by the recently-passed US$1.9 trillion pandemic relief bill, known as the American Recovery Plan, begin to expire.
“While unemployment remains high and it’s important to provide the supplementary relief in the ARP, that begins to expire I believe in the fall when the economy will be getting back on its feet,” she said.
Yellen brushed aside concerns that extra unemployment aid would deter people from taking jobs, saying recent research showed the opposite to be true. Still, she said, the extra aid wouldn’t be necessary later this year.
“I think it’s appropriate as the economy recovers, and I hope it will by the fall, that that should be phased out,” she said.
Fed officials held interest rates near zero last week and said they’d maintain their massive bond-buying campaign at a US$120 billion monthly pace until “substantial further progress” had been achieved on their goals for employment and inflation.
Long-term interest rates have shot higher this year on expectations of faster economic growth, higher inflation and increased supply of Treasury debt from the government’s stimulus programs.
Asked about the rise in 10-year Treasury yields, Powell said this reflected a brighter economic outlook as vaccination roll-out accelerates and was not cause for concern.
“That has been an orderly process. I would be concerned if it had not been an orderly process,” he said.