Taking Stock of the Economic Recovery and the Opportunities to Bolster Financial Stability
April 12, 2021
Newton-Needham Regional Chamber
Six Takeaways from Boston Fed President Eric Rosengren’s April 12 Remarks
- Takeaway: The economy is showing signs of recovering from the impacts of the pandemic, but many businesses and households are still experiencing significant economic distress. Industries where social distancing is difficult have been disproportionately affected, and they include many lower-wage and Black and Hispanic workers. Women, too, have been disproportionately affected.
Excerpt: “Policymakers [should] examine some of the problems brought to the forefront over the past year…to ensure we are rebuilding an economy that works for all Americans throughout the inevitable business cycle.”
- Takeaway: Assuming vaccines remain effective against new variants of the virus, the U.S. economy is likely to recover strongly, propelled by pent-up demand and accommodative monetary and fiscal policy.
Excerpt: “It seems likely that the economy will grow rapidly this year … over the next couple of years, we will see the unemployment rate falling back to pre-pandemic levels, with significantly improved labor-force participation rates.”
- Takeaway: The Fed seeks to avoid a prolonged slow recovery, but it’s important to acknowledge that running a so-called “hot” economy for a prolonged period is not without risks. It arguably factored into some of the challenges to financial stability that emerged at the start of the pandemic:
- Prime and tax-exempt money market mutual funds saw rapid outflows, disrupting short-term credit markets.
- Many financial firms experienced a liquidity squeeze that led to a wave of sales of usually liquid Treasury securities, disrupting the Treasury market.
- Various forbearance for borrowers and banks became necessary, to prevent constriction of the flow of bank credit, which would have exacerbated the economic downturn.
- Takeaway: There are some potential solutions to these structural risks, which should be considered:
- Require prime and tax-exempt MMMFs to convert to so-called government funds (which invest in short-term U.S. Treasury and agency securities and private debt fully collateralized by such instruments).
- Create a structure less reliant on broker-dealers’ balance sheets to maintain liquid markets for U.S. Treasury securities.
- Enact a capital regime that’s sufficiently flexible during economic downturns without temporary, special measures (e.g., use a Countercyclical Capital Buffer built up during good times and utilized during downturns).
- Takeaway: The Fed’s revised monetary policy framework should support a quicker recovery. In the past, forecasts of returning to full employment at the target inflation rate of 2% would have suggested increases in interest rates. But the median FOMC participant expectation is that short-term rates will remain close to zero through 2023.
Excerpt: “With the revised [framework] adopted by the FOMC, monetary policymakers can be more patient and wait for more tangible signs that inflation has increased, rather than just forecasts, before starting to raise rates.”
- Takeaway: The most recent data on employment is quite consistent with an economy beginning to expand from the constraints of the pandemic. But there are signs of continued strains on the labor market, including reduced labor force participation rates of prime working age men and women.
Excerpt: “With many schools either in a remote or hybrid learning mode, many parents have left the workforce to provide support for their children. … Reduced labor force participation represents a concerning development. While … improving of late, it is still well below the participation rate we saw before the pandemic.”