Light At End Of Tunnel? Fed Sees Faster Economic Growth, With Only Modest Inflation

Mar 17, 2021
Originally published on March 18, 2021 12:55 am

The Federal Reserve expects the U.S. economy to grow faster this year, although it still expects only a modest uptick in inflation.

The central bank issued its new forecast at the end of a two-day meeting. It comes as the public health outlook is improving and after Congress approved trillions of dollars in federal spending to help the country recover from the coronavirus pandemic.

"The recovery has been faster than we expected," Fed chairman Jerome Powell told reporters. "Part of that just is it's very hard to predict, given we've never seen an event like this. But part of it is just the strength of the fiscal response, which I think will look good over the years."

Investors welcomed the Fed's comments. The Dow Jones Industrial Average rose 189 points to close above 33,000 for the first time. The broader S&P 500 index also closed at a record high.

Despite the more bullish forecast, the central bank echoed public health officials in cautioning that the pandemic is far from over.

The Fed still plans to keep interest rates near zero for an extended period, helping support the economy until the job market is fully recovered and inflation is on track to moderately exceed 2%. Several participants in the meeting suggested that could happen in 2022 — up from just one who thought so in December.

"The path of the economy will depend significantly on the course of the virus, including progress on vaccinations," the Fed said in a statement. "The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook."

A forecast released Wednesday shows Fed officials now expect the economy to grow at a rate of 6.5% this year, up from 4.2% that was projected in December.

Unemployment is now expected to fall to 4.5% by year's end. That's an improvement from the 5% unemployment rate that was predicted three months ago.

Fed officials have cautioned that the headline unemployment rate understates the damage the pandemic has done to the labor market, since it doesn't include millions of people who have dropped out of the workforce.

And despite warnings from some economists that a surge of new spending could trigger a spike in inflation, the Fed is predicting only a modest rise in consumer prices.

Fed officials said they anticipate inflation of 2.4% by the end of this year — up from the 1.8% inflation rate they predicted in December. Excluding volatile food and energy prices, inflation is expected to be 2.2%.

For most of the last decade, inflation has fallen short of the Fed's 2% target. Prices of some goods are likely to jump more than that this year, especially when compared to the early months of the pandemic when prices were depressed. But Fed officials say any increase is likely to be temporary, and not a sign that runaway inflation is at hand. By 2022, inflation is expected to fall back to 2%.

"You can only go out to dinner once per night, but a lot of people can go out to dinner," Powell said. "It will turn out to be a one-time sort of bulge in prices but it won't change inflation going forward."

Since mid-December, when the Fed issued its previous set of forecasts, Congress has passed two big pandemic relief bills, totaling $2.8 trillion in federal spending. The measures include direct cash payments to most Americans as well as expanded unemployment benefits.

That's expected to boost consumer spending — a key driver of the broader economy.

At the same time, the decline in new coronavirus infections and the spread of vaccinations should allow more opportunities later this year for travel, entertainment and other forms of spending that have been largely off-limits during the pandemic.

New infections have fallen sharply since January, although they remain elevated, with nearly 54,000 people testing positive on Tuesday. The pace of vaccinations has been ramping up to more than 2 million each day.

President Biden has said he expects to have sufficient COVID vaccine available for all adults in the country by the end of May.

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AILSA CHANG, HOST:

The Federal Reserve is offering a rosier forecast for the U.S. economy. The central bank now says it expects the economy to grow by 6.5% this year. That is a remarkable turnaround after last year's steep drop. Since the Fed's previous forecast, Congress has approved nearly $3 trillion in additional relief spending. And the public health outlook has improved as well, with new coronavirus infections dropping and the pace of vaccinations ramping up. To talk more about all of this, we're joined now by NPR's Scott Horsley.

Hey, Scott.

SCOTT HORSLEY, BYLINE: Good to be with you.

CHANG: Good to be with you. OK, so tell us about this new Fed forecast.

HORSLEY: Well, the Fed says the U.S. is bouncing back from the pandemic recession more quickly than had been expected. That 6.5% growth rate you mentioned would be the fastest since the 1980s. The Fed also expects the unemployment rate to drop to just 4.5% by the end of this year. Now, that headline number does understate the problem a little bit because it doesn't reflect the millions of people who've dropped out of the workforce, but it would still be a huge improvement from the nearly 15% unemployment rate we had last April, and it's a lot better than a lot of people would have expected.

CHANG: Yeah. I mean, this all does sound really encouraging. But how confident does the Fed seem in this outlook?

HORSLEY: Certainly more confident than it was three months ago. When the Fed issued its last forecast, you know, we were in the middle of that winter spike in coronavirus cases. There was still a lot of uncertainty about how much help Congress would provide. Since then, Congress has passed two big relief bills that both included direct cash payments to most Americans, as well as expanding unemployment benefits. So that's giving money - it's giving people more money to spend, and they should also have more opportunities to spend it as COVID restrictions are gradually relaxed around the country and as people just feel more comfortable eating out and traveling and going to concerts, that kind of thing. As rosy as that forecast is, though, Fed Chairman Jerome Powell says there is still a lot of uncertainty, as this is pretty uncharted territory for the central bank.

(SOUNDBITE OF ARCHIVED RECORDING)

JEROME POWELL: The path of the virus continues to be very important. We have these new strains which can be quite virulent. We're clearly on a good path with cases coming down. But we're not done, and I'd hate to see us take our eye off the ball.

HORSLEY: Of course, the Fed itself has also done a lot to support the economic recovery, and Powell promised to keep that up.

CHANG: But I thought - we've been hearing a lot of warnings that all of this extra spending could spark a surge in inflation. So I mean, you know, that's rattled the stock market in recent weeks. What is the Fed saying about all of that?

HORSLEY: They're not too concerned. You know, for years, the Fed's been more worried about inflation that's too low rather than too high. Powell and his colleagues do expect some increase in prices this year as people start to spend money more freely. But Powell says that should be both manageable and temporary.

(SOUNDBITE OF ARCHIVED RECORDING)

POWELL: You can only go out to dinner once per night, but a lot of people can go out to dinner. It's also - wouldn't be surprising if - and you're seeing this now, particularly in the goods economy - there'll be bottlenecks. They won't be able to service all of the demand maybe for a period. And so it'll turn out to be a one-time sort of bulge in prices, but it won't change inflation going forward.

HORSLEY: And investors seemed reassured by that. The Dow closed above 33,000 today for the first time ever.

CHANG: So does this mean the Fed's going to keep interest rates near zero for a lot longer?

HORSLEY: They're certainly promising to keep rates very low for an extended period. There are some Fed officials who say we could see rates go up as early as next year, but most think any rate hike will be 2023 or maybe later.

CHANG: That is NPR's Scott Horsley.

Thank you, Scott.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.