PDF2021 Spring TEN Magazine

FEDERAL RESERVE BANK OF KANSAS CITY / SPRING 2021 SAVINGS SURGE Sharp increase for some Americans during pandemic, study shows 2020 ANNUAL REPORT VIGILANT SERVICE IN THE PUBLIC’S INTEREST Urgency on Affordable Housing | Diversity and Inclusion Report | Meet the New Tenth District Directors TEN MAGAZINE | | SPRING 2021 A FEDERAL RESERVE BANK OF KANSAS CITY / SPRING 2021 FEATURES VOLUME 16 • ISSUE 4 • ISSN 1554-7469 SENIOR VICE PRESIDENT Diane Raley ASSISTANT VICE PRESIDENT & ADMINISTRATIVE OFFICER Melissa Jackson ASSISTANT VICE PRESIDENT & PRODUCTION ADVISOR Lowell Jones 24 A SURGE IN SAVINGS ASSISTANT VICE PRESIDENT & PUBLIC INFORMATION OFFICER A study shows a significant increase in savings as a Bill Medley percentage of personal income during the pandemic. EDITOR Stan Austin DOWNTURN HEIGHTENS URGENCY MAGAZINE DESIGNER FOR AFFORDABLE HOUSING SOLUTIONS Alison Reichert The Kansas City Fed is engaging MANAGING EDITOR tenants, landlords and others to Rick Babson help improve access to safe, stable living arrangements in CREATIVE DIRECTOR Tenth District communities. Angela Anderson 7 CONTENT CONTRIBUTORS Gary Barber, Jason Collin, Cynthia Edwards, Bob Greenspan, Jeremy Hegle, Casey McKinley, Beth Norman, Sarah Pope, Erin Redemske, David Tejada, DIVERSITY AND INCLUSION Jennifer Wilding, Marlina Yates Yearly report to Congress shows how RESEARCH CONTRIBUTORS the Kansas City Fed’s business and Alison Felix, A. Lee Smith employment practices reflect many 34 backgrounds and experiences. TEN magazine is a quarterly publication of the Federal Reserve Bank of Kansas City focused on the connection between the Bank’s research and the Tenth Federal Reserve District. TEN features articles on the Federal Reserve’s history, structure and operations. The ANNUAL REPORT FOR 2020 views and opinions expressed in TEN are not Your guide to the Bank’s mission, necessarily those of the Federal Reserve Bank operations, officers, directors, of Kansas City, the Federal Reserve System, its advisory councils, roundtables governors, officers or representatives. 38 and more. TEN articles may be reprinted if the source is credited and the Public Affairs Department of the Federal Reserve Bank of Kansas City is provided with copies. Permission to photocopy ON THE COVER» Cover by Getty Images is unrestricted. Learn more about the Federal Reserve Bank of Kansas City and the history, leadership and governance of the Federal Reserve System at KansasCityFed.org/aboutus. From the President ESTHER L. GEORGE Sharing reflections in the wake of an unprecedented year ast year was one for the record books. The year had three broad categories. First, despite the best efforts Lboth the largest decline in quarterly GDP on record of policymakers, there are likely to be scars from as well as the largest increase. The unemployment rate the crisis that will take time to heal. Businesses and hit a 50-year low before climbing to levels not seen since workers have suffered a tremendous disruption, and the Great Depression. The equity market set record while there is some optimism for a quick bounce- highs, while the price of oil dropped below zero for back, it would not be unexpected for some of the the first time, if only for a moment. The year saw the negative effects to persist. Second, the crisis will leave largest fiscal policy reaction and the most rapid increase a lasting impact on business and public sector balance in government debt, even as the yield on government sheets, with governments taking on notably more securities fell to new lows. The Federal Reserve, for its debt, central bank balance sheets swelling around part, broke new ground in policy accommodation, while the world, and corporate borrowing soaring, even expanding its balance sheet to record size. Suffice to say, as household balance sheets, in the aggregate, have 2020 was not a typical year. improved. Third, the crisis will likely have a lasting effect on the structure of the economy, both by I am hopeful, as I believe many of us are, that 2021 changing the way that people work as well as what will mark the beginning of a return to something more and how they consume. like normal. I am generally optimistic that the year will be one of continued economic recovery, though Starting with the first category, there could be not without bumps and potholes, particularly in the economic scarring that eventually heals, but only first part of the year, as the virus continues to exact a after time. For example, at the end of 2020, 10 terrible human and economic toll. Even as the economy million fewer individuals were working relative to recovers, the events of the last year are likely to leave an before the pandemic. Given the notable decline in imprint for years to come. labor force participation over the same period, it would appear that about half of those workers that lost jobs dropped out of the labor force altogether. Long-term implications of the pandemic Traditionally, it has taken time to bring individuals When thinking about the long-term consequences of back into the labor force, and it has often taken a 2020, I find it helpful to group the potential factors into fairly hot labor market to do so. TEN MAGAZINE | | SPRING 2021 1 An additional dynamic with this crisis has been the commercial and retail real estate—which could in turn disproportionate decline in labor force participation among raise important financial stability considerations. women. In particular, about half of the decline in women’s participation is attributable to caregiving, likely reflecting disruptions in child care. While this could suggest a Monetary policy quicker bounce-back once the virus is checked and normal An exceptionally uncertain economic outlook, with the child care options return, it is important to note that chance of both downside and upside surprises, creates even after returning to the job, these workers could suffer a complicated and difficult environment for monetary interruptions in human capital development and career policy. While vaccines promise an eventual end to the progression, with unfortunate long-term effects. virus’s hold on the economy, there remains a substantial gap to be bridged before we get there. Turning to the second category, 2020 has scrambled balance sheets across the economy. While household Monetary policy is also playing an important role in balance sheets are generally in good shape, this has supporting the economy, as it has since the start of the come at the expense of government finances. The federal pandemic. In March 2020, the Federal Open Market government increased its liabilities to fund transfers that, Committee (FOMC) cut its policy interest rate to near in many cases, have turned into household assets. Again, zero and launched an aggressive balance sheet expansion it must be noted that the relative strength of household program, purchasing large quantities of Treasuries balance sheets is in the aggregate. Certainly, the pandemic and mortgage-backed securities (MBS). While these has led to significant economic hardship for many, as purchases were initially directed toward smoothing market a large number of households struggle to pay bills and functioning, the expansion of the Fed’s balance sheet purchase necessities. One of the defining features of also supports accommodative financial conditions, to the the pandemic has been the unevenness of its economic benefit of the overall economy. In September, the FOMC impact. There has been substantial variation in how provided forward guidance, consistent with the Fed’s new different industries, professions and geographies have monetary policy framework, that interest rates would been affected, with some sectors reporting record activity remain near zero until the labor market reached levels even as others have seen demand collapse. consistent with maximum employment and inflation had both risen to 2% and was on track to exceed 2% for some On the business side, nonfinancial corporations have time. In December, the Committee further extended its further increased borrowing from already elevated levels, forward guidance to cover its asset purchases, stating that in part to cover pandemic-related holes in revenue but it will continue to increase its holding of Treasuries and also, for larger corporations, to take advantage of near- MBS by at least the current pace until substantial further zero interest rates and favorable borrowing conditions. progress has been made on its employment and inflation These shifts in balance sheets can have long-run impacts. goals. Overall, the outlook is for monetary policy to For example, the large increase in government debt could remain accommodative for some time. limit a fiscal policy response during some future crisis. Higher levels of business debt could threaten financial Clearly, in the current environment where the economy stability, increasing the fragility of the financial system to continues to heal, an accommodative policy stance is prospective shocks. appropriate. It is too soon to speculate about the timing of any change in this stance. The Committee has agreed Finally, looking at the third category, the pandemic that further substantial progress in achieving high has likely unleashed, or at least accelerated, structural employment and average inflation at its 2% target is and technological changes that will continue to play necessary before making adjustments. This wait-and-see out over years or even decades. These include a shift to approach will guide the trajectory of monetary policy. As remote work, as well as online retail and entertainment. the data come in, and the economy evolves, the public While these changes could ultimately result in increased and markets should be able to adjust their expectations economic productivity, there will likely be near- and regarding the policy path. This feature of forward medium-term disruptions as resources shift between guidance is especially useful now given the heightened sectors. These changes also increase the risks around uncertainty around the outlook, stemming in large part the value of capital in certain sectors—for example, from the path of the virus.

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