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Larry Edelman

The Fed is ‘running the economy hot’ to avoid another jobless recovery

Vaccinations, US stimulus, and more tolerance for inflation should spark an unusually strong recovery, Boston Fed president Eric Rosengren says

The president of the Federal Reserve Bank of Boston, Eric Rosengren (left foreground), and Fed chairman Jerome Powell both  forecast a strong economic recovery.
The president of the Federal Reserve Bank of Boston, Eric Rosengren (left foreground), and Fed chairman Jerome Powell both forecast a strong economic recovery.Steven Senne/Associated Press

“Go strap yourselves in, I’m going to make the jump to lightspeed.”

That, hardcore “Star Wars” fans know, is what Han Solo told Luke Skywalker and Obi-Wan Kenobi in the very first film, as he took the Millennium Falcon into hyperspace to escape Imperial pursuers. But it could be the Federal Reserve today, alerting us the US economy is poised to blast off as it breaks free from the constraints of COVID-19.

The Fed sees a period of hypergrowth that should put millions more people back to work and, hopefully, avoid the pain of the “jobless recovery” that stretched out for a decade after the Great Recession. It’s a forecast shared by many private economists, though some think the central bank’s outlook isn’t rosy enough.


Fueling the fastest economic growth in decades will be a powerful mix of government stimulus spending, cheap money from the Fed, and a continued retreat of the COVID-19 pandemic as vaccinations go on. Inflation is expected to reach the Fed’s 2 percent target on a sustained basis after long falling short.

Assuming COVID variants don’t get out of control, “We should see a really robust recovery,” Eric Rosengren, president of the Federal Reserve Bank of Boston, said Monday during a virtual meeting of the Newton-Needham Regional Chamber.

Rosengren’s comments tracked those made by Federal Reserve chairman Jerome Powell in a “60 Minutes” interview aired Sunday in which he said the country was at an “inflection point . . . [where] the economy’s about to start growing much more quickly and job creation coming in much more quickly.”

Both Fed officials spoke as the country appears to be gradually winning the war against COVID-19. While cases are flaring up in some parts of the United States, including Massachusetts, economists and epidemiologists alike expect vaccinations to win out over the next several months.


The Fed is “running the economy hot,” Rosengren said, noting an important shift in policy. 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. That should help guarantee we get back to full employment more quickly than after the 2008-2009 financial crisis.

Before we get too giddy, it’s essential to reiterate that the recovery so far has been unequal, leaving many businesses and households behind. When it comes to rehiring, lower-wage industries such as leisure and hospitality, which employ large numbers of Black and Hispanic workers, have lagged behind other sectors in which social distancing is less of an impediment to business as usual. Women and younger workers have also been harder hit than others.

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.

While people at the bottom always have it tougher, the inequity gap seems unacceptable.

“Policy makers [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.


So should Congress.

The concept of equity — economic and environmental — runs throughout President Biden’s infrastructure plan. At nearly $2 trillion, the initiative is as expensive as it is sweeping. But as lawmakers inevitably scale it back, they shouldn’t lose focus on making sure everyone gets a chance to come along for the ride.

And it promises to be quite a ride.

The consensus of forecasts from the Federal Reserve and private economists puts growth in gross domestic product — the nation’s output of goods and services — at about 6.5 percent this year, which would be the highest rate since the Reagan boom of the 1980s. The most bullish estimates say growth will top 8 percent.

Meanwhile, the jobless rate should fall to 4.5 percent in the fourth quarter, according to forecasters, though the Fed doesn’t see employment returning to pre-pandemic levels until 2023.

Inflation, or the increase in prices for goods and services, is expected to stay above the Fed’s 2 percent target this year and remain there in 2022 and 2023, according to the central bank’s forecasts.

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 panicked investors scrambled to sell government debt; and lending, which the Fed at the beginning of the pandemic worried might be cut off as banks sought to preserve capital.

Rosengren said he believed money market funds that invest in corporate and municipal debt should be required to convert into funds that hold only US government debt. He suggested expanding central clearing mechanisms for Treasury securities and the financing of Treasury securities to ensure smooth trading. And he proposed mandating that banks create extra capital cushions during good times to absorb losses during downturns.

“During the economic recovery, policy makers 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.

Despite their caveats and words of caution, Rosengren and Powell were about as upbeat as we’ve heard them be in in a long time.

“It’s nice to give an optimistic presentation,” Rosengren told the Newton-Needham webcast.

Larry Edelman can be reached at larry.edelman@globe.com. Follow him on Twitter @GlobeNewsEd.