The US economy is poised for a powerful surge this year — one that’s expected to put millions more people back to work and push inflation higher to a more desirable level, according to Eric Rosengren, president of the Federal Reserve Bank of Boston.
Driving the fastest economic growth in decades will be a powerful mix of government stimulus spending, low interest rates, and a continued retreat of the COVID-19 pandemic as vaccinations continue, Rosengren said in remarks prepared for a virtual meeting on Monday of the Newton-Needham Regional Chamber.
“Assuming virus variants do not become especially problematic, we should see an unusually strong post-recession recovery,” Rosengren said.
Rosengren’s comments tracked those made by Federal chairman Jerome Powell, who said in a “60 Minutes” interview aired on Sunday the country is at an “inflection point . . . [where] the economy’s about to start growing much more quickly and job creation coming in much more quickly.”
And like Powell, Rosengren was quick to underscore that the recovery so far has been unequal, leaving many businesses and households behind. Lower-wage industries such as leisure and hospitality, which employ large numbers of Black and Hispanic workers, have lagged behind other sectors where social distancing is less of an impediment to business as usual. Women and younger workers have also been harder hit than others, he said.
“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,” Rosengren said.
In his interview, Powell said that unemployment is “in the range of 20 percent” for workers in the bottom quartile of the income ladder. The overall jobless rate in March was 6 percent.
Both Fed officials spoke as the country appears to be gradually winning the war against COVID-19. While cases are rising in some parts of the country, including Massachusetts, economists and epidemiologists alike expects vaccinations to win out over the next several months.
The consensus of forecasts from the Federal Reserve and private economists put growth in gross domestic product — the nation’s output of goods and services — at about 6.5 percent, which would be the highest rate since the Reagan boom of the 1980s. Unemployment should fall to 4.5 percent in the fourth quarter, according to forecasters.
Inflation, or the increase in prices for goods and services, is expected to rise slightly above the Fed’s 2 percent target this year and remain there in 2022 and 2023, according to the central bank’s forecasts.
Rosengren noted an important shift in the Fed’s thinking. In the past, when unemployment was forecast to fall and inflation to rise, the Fed would preemptively begin raising interest rates to prevent the economy from overheating.
Today, under the Fed’s new approach, policy makers “can be more patient and wait for more tangible signs that inflation has increased, rather than just forecasts, before starting to raise rates,” Rosengren said.
Nonetheless, Rosengren warned that “running a so-called ‘hot’ economy for a prolonged period is not without risks.”
He said the low inflation and tight job market that prevailed prior to the pandemic contributed to several breakdowns in the financial system that need to be addressed, even after overhauls that were made following the financial crisis of 2008-2009. He identified three areas of concern:
- Short-term credit markets, as some money market mutual funds experienced a run by investors at the start of the pandemic.
- The Treasury market, which was disrupted as some financial firms sold government debt amid a liquidity squeeze.
- Bank lending, which the Fed at the beginning of the pandemic worried might be cut off as banks sought to preserve capital.
“The factors underlying these financial market stresses, in my view, must be addressed — to avoid a future repeat of the issues the economy experienced at the start of the pandemic,” Rosengren said.
His list of potential fixed included:
- Requiring money market funds that invest in corporate and municipal debt to convert into funds that only hold US government debt.
- Creating expanded central clearing mechanisms for Treasury securities and the financing of Treasury securities.
- Mandating that banks create extra capital cushions during good times to absorb losses during downturns.
“During the economic recovery, policymakers should be diligent about removing these risks to financial stability, which translate into risks for the economy and every firm and worker in it,” Rosengren said.