St. Louis Fed's Bullard Presents "The Pandemic Endgame Begins"

ST. LOUIS – Federal Reserve Bank of St. Louis President James Bullard presented “The Pandemic Endgame Begins” via webinar for the Little Rock Regional Chamber on Thursday.

During his presentation, Bullard said that although the COVID-19 pandemic has worsened in the U.S. and Europe, the arrival of vaccines suggests the health crisis will wane in the months ahead.

In addition, he said, “In the U.S., monetary and fiscal policies have been especially aggressive, and the associated macroeconomic outcomes have been considerably better than originally expected at the pandemic onset.” He noted that aggregate resources available to fund consumption continue to be exceptionally high, suggesting continued recovery in the first half of 2021.

“Some downside risk remains, and continued execution of a granular, risk-based health policy will be critical in the months ahead,” he said.

Health Crisis Worsens but Is Expected to Wane

Regarding management of the global health crisis, Bullard noted that daily fatalities per 100,000 population have increased in both Europe and the U.S. He added that East Asia and Pacific countries continue to report daily fatalities per 100,000 population that are an order of magnitude lower than in the U.S. and Europe.

Bullard noted that vaccines will help bring the crisis to a close. “Vaccine distribution is being directed toward those most vulnerable to COVID-19, suggesting declining fatalities in the months ahead,” he said.

He observed that business restrictions today aren’t too different from what they have been in recent months in the U.S., as suggested by the University of Oxford’s stringency index. Renewed increases in infections in recent months are likely coming more from personal interactions at the household level, he added.

“Many businesses have learned to produce at normal levels despite health restrictions, contributing to rapid economic growth,” he said.

Effective Monetary and Fiscal Policies

Bullard said that U.S. monetary and fiscal policies have been exceptionally effective during the crisis. Monetary policy included lowering the policy rate to the effective lower bound and providing liquidity to financial markets through a variety of programs supported by the U.S. Treasury, he noted.

“The backstop programs stemmed an incipient financial crisis during the March-April time frame, to the point where current levels of financial stress are at pre-pandemic levels,” he said.

On U.S. fiscal policy in the first 11 months of 2020, Bullard noted that the total value of the Coronavirus Aid, Relief and Economic Security (CARES) Act along with additional legislation would be about $3.148 trillion. He pointed out that the shortfall in 2020 real GDP, according to forecasters, will likely be closer to 2%-2.5%, or about $400 billion to $500 billion.

He also noted that the fiscal response drove personal income up to an all-time high in the second quarter, which is the opposite of what normally happens in a recession.

In addition, the Consolidated Appropriation Act of 2021, which was signed into law Dec. 27, includes an additional $900 billion in pandemic relief, he pointed out.

U.S. Recovery Far Ahead of Schedule

Current macroeconomic data suggest that April will prove to be the lowest point of the crisis, provided the remainder of the crisis can be managed effectively, Bullard noted. He pointed out that third-quarter real GDP growth, at an annualized rate of 33.4%, was the fastest on record. He added that fourth-quarter real GDP appears to have grown at an above-trend pace, according to forecasts.

Bullard also noted that employment has rebounded more rapidly than expected, supporting the idea that many layoffs were temporary as firms adjusted to the pandemic. “As a result, the U.S. labor market recovery is four years ahead of where it was following the 2007-09 recession,” he said.

Inflation Expectations Recovering Toward Inflation Target

Bullard then discussed inflation expectations. “Market-based inflation expectations have recovered from lows reached during March 2020,” he said. The Federal Open Market Committee’s new policy framework, which was announced in Fed Chair Jerome Powell’s 2020 Jackson Hole speech, has likely encouraged some of this movement, Bullard explained.

He noted that TIPS-based breakeven inflation, which is based on consumer price index (CPI) inflation measures, could move considerably higher and still be consistent with a personal consumption expenditures price index (PCE) inflation outcome modestly above the Fed’s 2% inflation target.