September 2020 National Economic Outlook

Fed to Keep the Pedal to the Metal; Labor Market Recovery Continues,

Although Job Growth Is Slowing

Executive Summary

The Federal Open Market Committee is implementing the new monetary policy framework it put in place in August and has announced a more aggressive policy stance. 

The FOMC said in its September monetary policy that it expects to keep its short-term policy interest rate, the fed funds rate, in its current range of 0 to 0.25 percent until “inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.” 

This promise to keep the fed funds rate extremely low, until inflation gets to 2 percent, is intended to reassure financial markets that monetary policy will remain highly aggressive in the near term; this will put downward pressure on medium- and long-term interest rates as well.

In its new policy framework the central bank will try to have inflation average 2 percent “over time.” Previously, the goal was to have inflation of around 2 percent. 

But with the new framework in the current environment, with inflation having undershot 2 percent for years, the statement indicates that the FOMC would like to see “inflation moderately above 2 percent for some time so that inflation averages 2 percent over time.” 

In addition, the FOMC has said that the link between a tight labor market and higher inflation has weakened over time. 

With inflation consistently below 2 percent throughout the recovery from the Great Recession, and now further below 2 percent because of the coronavirus pandemic, and the weaker link between the tight labor market and higher inflation, the FOMC will now wait until inflation actually hits 2 percent before raising the fed funds rate. 

This approach is much more explicitly supportive of near-term economic growth than previous FOMC statements.

The August employment report was solid, with the U.S. adding 1.371 million jobs during the month, according to a survey of employers. The economy has added back almost one-half of the 22 million jobs lost in the spring due to the coronavirus pandemic. 

While the past four months have seen the largest job gains on record, employment growth has slowed since June, and August job growth received a temporary boost from hiring for the Census that will reverse itself over the next few months. 

The unemployment rate dropped sharply in August, falling to 8.4 percent, from 10.2 percent in July, but is far above the 3.5 percent rate of early 2020. 

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September National Economic Outlook

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