Speech

Welcome to the press conference on our conclusions from this year’s U.S. Article IV consultation.  We had a very useful discussion earlier today with Chair Powell and Secretary Yellen about the current state of the economy and the challenges ahead as the U.S. emerges from the shadow of the pandemic. I would like to thank them and staff of the Federal Reserve, the Treasury, and other agencies for their time and insights over the past few weeks. 

Let me give you a brief summary of the main messages from the consultation.

First, the US economy is coming out on a strong footing from the very difficult circumstances of the past year. We expect the economy to grow at 7 percent this year, the fastest annual growth rate since 1984, and continue with very strong momentum into next year. This is very good news for the U.S. and for the world economy.

Our outlook is based on the assumption that the American Jobs Plan and American Families Plan are legislated later this year, and in a form that is similar to that proposed by the administration. It is worth noting that these two packages would put in place many of the policies proposed in Article IV consultations over the past several years. We believe that these two packages will add to near-term demand, raising GDP by a cumulative 5¼ percent over 2022-24.

And—perhaps more importantly—our assessment is that GDP will be 1 percent higher even after 10 years, thanks to the significant, positive effects on labor force participation and productivity introduced by these two plans. Rather than just offering a short-term boost to demand that then fades away, the Jobs and Families Plans are expected to produce a lasting improvement in income and living standards for many years to come. In this regard, it is welcome to see the bipartisan agreement to move forward legislation on the physical infrastructure parts of these two packages. Today’s agreement in the House is an important step forward.

I am particularly impressed by the administration’s commitments to strengthen social safety nets and increase the progressivity of the tax system. We know that the burden of the pandemic has been borne disproportionately by the poor, by women, and by minority households. Many of the proposed policies--—including paid family leave, the refundable child tax credit, support for childcare and healthcare, investments in education, and a higher minimum wage—will directly support working mothers, markedly help black and Hispanic families, and boost participation in the labor market.

Second, we are cognizant of the vibrant public debate about inflation in the U.S. Certainly we have seen large consumer price movements in recent months, and we think that those fairly high inflation readings will continue for a few months. However, I want to emphasize that the evidence suggests that this inflation will be transitory and is largely a product of relative price movements that are occurring as the economy rebounds from the impact of the pandemic, sometimes in a rather uneven way. We estimate that core inflation—excluding volatile food and energy prices—could get close to 4 percent by the end of the year. After those temporary factors play out, we expect inflation to be around 2½ percent by end-2022.

We do not see overheating as the most likely outcome. At the same time, we cannot ignore the risk that a sustained, faster rise in inflation would pose for the U.S. and world economy.  The introduction of the Federal Reserve’s new Flexible Average Inflation Targeting framework last August was timely. It has helped policymakers negotiate the uncertainties created by the pandemic and appropriately provided significant accommodation for the economy as it recovers. It also emphasizes the importance of communication and forward guidance in shaping both inflation and inflation expectations. We believe the Fed has been clear in communicating its intentions, and we anticipate that such transparent and proactive communications will continue as asset purchases are scaled back and, eventually, as interest rates move upwards. This matters for sustaining robust growth in the US, as well as for the impact interest rates in the US have on the world economy, especially on countries with high levels of dollar denominated debt. 

This takes me to my third point, the US’s leadership in seeking multilateral solutions to the world’s most pressing challenges.  I welcome the U.S. administration’s efforts to provide vaccine assistance to a broad range of countries, as well as its support for the proposed SDR allocation. I would also like to express strong support for the proposal to establish a global minimum corporate tax which will help reduce incentives to shift taxable income to low-tax jurisdictions. I join Secretary Yellen in welcoming the widespread endorsement among 130 countries for this plan.

On trade, our discussions revealed the administration’s commitment to an open, transparent, and rules-based international system. We are also supportive of the administration’s priority to ensure that trade creates tangible benefits for the American people. We do not think these two objectives are in conflict. Indeed, we believe that—with the ongoing efforts to increase productivity and make the U.S. more competitive—a rolling back of recent trade restrictions and tariffs, as well as a level playing field in federal procurement, will be important forces to create good, well-paying jobs and to strengthen living standards.

Finally, I want to welcome the administration’s renewed focus on reducing carbon emissions and to boost investments in climate change mitigation and adaptation. U.S. leadership in this area is critical for the well-being of our planet and for our future. Proposed spending on green infrastructure and efforts to remove fossil fuels subsidies are valuable steps forward. And more will have to follow. In this consultation, we have particularly argued for a greater focus on curbing emissions in the agriculture sector, and for pricing carbon, best done through a federal carbon tax, for the benefits of jobs and growth in the U.S. and of the goal of addressing the global climate challenge.

With those introductory comments I would like to now turn to your questions.