In a speech, titled Getting Back to a Strong Labor Market, in February 2021, Jerome Powell, Chair of the Federal Reserve’s Board of Governors, stated “Employment in January of this year [2021] was nearly 10 million below its February 2020 level, a greater shortfall than the worst of the Great Recession’s aftermath” (para. 8). He also stated, “After rising to 14.8 percent in April of last year, the published unemployment rate has fallen relatively swiftly, reaching 6.3 percent in January. But published unemployment rates during COVID have dramatically understated the deterioration in the labor market. Most importantly, the pandemic has led to the largest 12-month decline in labor force participation since at least 1948… All told, nearly 5 million people say the pandemic prevented them from looking for work in January.” (para. 9). Evaluate Powell’s two statements, and explain how the two statements are related. Why is it important for the Federal Reserve to accurately estimate how many people might still need to be brought back into the labor market as economic recovery continues? Why might it be difficult for the Federal Reserve to make such estimates? What potential policy errors might the Federal Reserve make if its estimates are inaccurate? Use the AD-AS model/graph to demonstrate your responses.
https://www.federalreserve.gov/newsevents/speech/powell20210210a.htm
