Big Economic Challenges Await Biden and the Fed This Fall
WASHINGTON – The US economy heads into an increasingly uncertain fall as a surge in the Delta variant of the coronavirus coincides with the expiration of expanded unemployment benefits for millions of people, complicating what was supposed to be a return to normal as a wave of workers re-entered the labor market.
This dynamic creates an unexpected challenge for the Biden administration and the Federal Reserve in managing a fairly rapid recovery from a recession. For months, White House and central bank officials have pointed to the fall as a potential turning point for an economy struggling to completely shake off the effects of the pandemic – especially in the labor market, which millions of positions remain below prepandemic levels.
The widespread availability of Covid-19 vaccines, the reopening of schools and the expiration of improved unemployment benefits have been seen as a potent cocktail that is expected to push workers off the sidelines and into the millions of jobs as employers. say they have trouble filling.
But that optimistic outlook could be jeopardized by the resurgence of the virus and the response of policymakers to it. Large companies are already delaying plans to return to the office, an early and visible sign that life may not return to normal as quickly as expected. At the same time, long-standing federal supports for those affected by the pandemic are disappearing, including a moratorium on evictions, which ended on Saturday, and an additional $ 300 per week for the unemployed. This benefit expires on September 6 and some states have decided to end it earlier.
Federal lawmakers are also planning to reallocate more than $ 200 billion in Covid relief to help pay for a $ 1,000 billion infrastructure plan. A Senate infrastructure bill would wipe out virus funds previously allocated to colleges and universities as well as unused unemployment benefits and aid to airlines. It would also recover unspent funds from some expired programs for small businesses to help offset the plan’s $ 550 billion in new spending. Democratic leaders insisted the Senate would vote on the infrastructure bill before leaving Washington for a scheduled break in August.
White House economists said they did not yet see the need to consider major new measures to support the recovery. After months of successful economic growth, falling unemployment and complaints from business leaders and Republicans that government support is preventing workers from taking jobs, administration officials remain stuck on their political stance current despite the renewed risks.
Administration officials said President Biden was not pushing to extend the additional $ 300 per week for unemployed people. It is unclear whether the administration will try to expand a program that expands unemployment benefits to workers who would generally not be entitled to them, including self-employed, concert workers and part-time workers.
Officials say the $ 1.9 trillion economic aid package Mr Biden signed in March, which prompted forecasters to raise their growth estimates this year, has given the economy enough cushion. to endure a new outbreak of the virus. Mr Biden also vowed that the virus would not lead to further “lockdowns, closures, school closures and disruptions” like last year.
“We will not come back to this,” he said last week.
White House advisers say the most important thing the president can do for the economy is to continue to advocate for the vaccination of more people. Mr Biden on Thursday called on states to use money from the March stimulus package to pay $ 100 to each newly vaccinated person and said the government would reimburse employers who gave workers time off to get vaccinated. or take others to be vaccinated.
“We have argued from the start that fighting the pandemic and recovering the economy are inextricably linked. This continues to be true, ”said Brian Deese, who heads Mr. Biden’s National Economic Council, in an interview. “But because of the progress we have made in tackling the pandemic and building historic and lasting economic policy supports, we currently have a set of tools to address both of these challenges.”
The Fed is taking an optimistic but wait-and-see approach. Central bankers voted at their July meeting to leave emergency support in place for now. They have not given any specific date by which they could start reducing their aid to the economy, although they are starting to work out a plan to cut aid.
Like their White House counterparts, Fed officials are banking on strong economic data this fall. Jerome H. Powell, chairman of the Fed, said last week that he expected solid progress in the labor market in the months to come, in part because of virus fears and child care issues. ‘children should tone down.
“There have also been very generous unemployment benefits, which are falling. They’ll be fully completed in a few months, ”Powell said at a press conference after the Fed meeting in July. “All of these factors should fade away, and because of it, we should see strong job creation.”
Mr Biden told a CNN forum in Ohio on July 21 that he still saw no evidence that the additional benefits had a “serious impact” on hiring. But even if they had, he said, they would soon be running their course.
“We’re ending all of these things that keep people from going back to work,” he said.
This position involves some risk. While the economy grew faster in the first half of this year than it has in decades, the labor market is still short 6.8 million jobs from its February 2020 level, and while policymakers are optimistic, it’s unclear how quickly these jobs will return. The economy has never reopened after a pandemic before, and no one knows how much unemployment insurance deters workers.
“Seven to nine million Americans would have to be working right now if the pandemic had never happened, so it’s a lot of Americans that we have to get back to work,” said Neel Kashkari, chairman of the Federal Reserve Bank. from Minneapolis, on CBS “Face the Nation” Sunday. “But is it six months or two years? I’m not sure.”
If it takes workers longer to find a job, it could lead to a much slower economic recovery than the one the Fed or the White House are banking on. Workers stranded without increased benefits could cut spending, dragging down demand and slowing the rapid rebound underway in recent months.
So far, administration economists remain encouraged by the economic data. Officials said last week that they had yet to see any evidence of the deterioration in economic activity of the Delta variant, and that they hoped the more than 160 million Americans who were vaccinated would not reduce not their expenses even if the variant continued to spread – making this wave of the virus less economically damaging than previous ones.
And as public spending support to the economy slows, the Fed still has cheap money to borrow, which should continue to support economic growth.
Fed officials have said they want to see more evidence of a healing labor market before slowing down their monthly bond purchases, which will be their first step towards a more normal policy environment.
Mr Powell said at his press conference last week that “we are a long way from making any further substantial progress towards the maximum employment target”.
“I would like to see strong employment figures,” he added.
In a Friday speech, Lael Brainard, an influential Fed governor, said she wanted to see the economic data for September to assess whether the labor market was strong enough for the Fed to start cutting back. support, suggesting that it would not promote signaling. a beginning of a slowdown until the end of the fall. But his colleague Christopher J. Waller said in an interview with CNBC Monday that he would probably prefer to start withdrawing bond purchases quickly, if the jobs data holds up, perhaps as early as October.
Interest rate hikes – the Fed’s most traditional and powerful tool – remain more distant. Most Fed officials predicted in June that they would not hike the fed funds rate until 2023 at the earliest, as they would like the labor market to return to full force first.
How quickly the economy can achieve this goal is an open question. Employers regularly complain about improved benefits, but even they have sent mixed messages as to whether these are the main factor keeping work at bay.
“Many contacts were optimistic that labor availability would improve in the fall with the restart of schools and the end of improved unemployment benefits,” the Fed’s qualitative report revealed. ‘Atlanta on economic conditions in June. “However, many people don’t expect the labor supply to improve for six to nine months.”
Peter Ganong, an economist at the University of Chicago, said if the pattern he and his fellow researchers observed in employment data held up, he wouldn’t expect a wave of workers to pick up again. work simply because the additional benefits have expired.
“So far we are seeing small differences in use even when vaccines become available,” he said. Mr. Ganong and his co-authors compared the job search rates of people whose wages were more completely replaced by additional benefits and people whose wages were less completely replaced. They found small and relatively stable differences, even as the economy has reopened.
But Mr. Ganong cautioned that his research followed supplemental insurance. For many workers, unemployment benefits could end as extensions expire, which could have a bigger effect.
There is a lot of room for progress in the labor market. People in their early working years participate in the labor market by working or looking for work at much lower rates than before the pandemic – and that measure has made little headway in recent months.
“Americans generally want to work and they will find their way to the jobs they want,” Powell said last week. “It may take a while, however.”
Alan Report contributed reports.
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