Federal Reserve officials must always strike a delicate balance between confidence and optimism about the economy, on the one hand, and realism about hard times on other.
Too often, official concerns about spooking financial markets or denting consumer confidence make Fed policymakers excessively rosy about the outlook—with potential long-run costs to the institution’s credibility.
Right now, the prevailing view is that the recovery from this slump will be much quicker than that which followed the Great Recession of 2007-2009.
That’s already a downgrade from officials’ immediate post-pandemic view that the economy would slump in the second quarter but might bounce right back in the third in a “V-shaped” recovery that now, with unemployment still at 8.4%, looks deeply unrealistic.
But the outlook encompassed in the Fed’s September economic projections is still fairly strong compared to recent history, and it remains unclear why exactly that is.
The last recovery took over a decade. This time, the Fed predicts, the economy will be back in full swing within three years, even though the hit to growth—not to mention the human toll—has been more severe and long lasting.
Perhaps most bullish, St. Louis Fed President James Bullard last week posited “an outside chance that U.S. GDP could reach the 2019 average level by the end of 2020, a form of ‘full recovery.’”
The Fed’s Vice Chair for Regulation, Randall Quarles, gave a speech to the Institute for International Bankers via webinar entitled “Optimism in the time of Covid”:
“The economy has rebounded more strongly than almost any forecaster expected,” he said, while cautioning that “a full recovery is still a good way off.”