The Economy Isn’t Too Hot for the Fed

The Commerce Department on Thursday reported that gross domestic product rose at a 6.4% annual rate in the first quarter from the fourth, continuing a rebound that economists believe began last May after the pandemic’s first wave in the U.S. began to subside. That left GDP 0.9% below the level it reached in the fourth quarter of 2019, before the crisis began.

With economists surveyed by IHS Markit looking for GDP to grow at an 8.3% annual rate in the second quarter, which translates into 2% growth in actual terms, the economy will soon be above that fourth-quarter 2019 mark. But of course GDP almost certainly would have been higher absent the pandemic. To reach the Congressional Budget Office’s estimate of potential GDP—its assessment of the economy’s just-right level—GDP would need to be 3.6% higher than it is now by the end of the year.

As of now, it looks as if it will get there. With millions more Americans getting vaccinated each week, the demand for travel and restaurant meals and days at the ballpark that built up over the past year is beginning to get unleashed. And after $5 trillion in government relief, with the potential for more government spending if President Biden gets his way, there is plenty of money to fuel that demand.

Despite all the signs of recovery, though, the Fed isn’t even thinking—publicly at least—about when it might scale back the amount of Treasury and mortgage-backed security purchases it has been making each month, much less when it might raise its target range on overnight interest rates.

“The economy is a long way from our goals, and it is likely to take some time for substantial further progress to be achieved,” Fed Chairman Jerome Powell said in introductory remarks for his press conference following the central bank’s policy-setting meeting Wednesday.

Part of the reason why is that the job market looks as if it has a lot further to go to reach recovery than GDP does: As of March, there were 8.4 million fewer U.S. jobs than before the pandemic hit. Moreover, the Fed is more willing to test just how tight the job market can get, waiting for it to actually show signs it is starting to run hot rather than moving to slow things down before the fact.

Mr. Powell on Wednesday was also steadfast on the Fed’s willingness to look through any inflation related to supply-chain problems that might emerge over the next several months. “We think of bottlenecks as things that, in their nature, will be resolved as workers and businesses adapt,” he said. “And we think of them as not calling for a change in monetary policy, since they’re temporary and expected to resolve themselves.”

There are certainly some investors who think the Fed might be making a mistake that it will later regret. But even as the prospects for the economy have improved, the central bank has stuck to the line that it is in no hurry to tighten. Investors should believe it.

Write to Justin Lahart at [email protected]