Lael Brainard: Navigating Delta headwinds on the path to a full recovery

Speech by Ms Lael Brainard, Member of the Board of Governors of the Federal Reserve System, at "Shocks, Shifts, and the Emerging Economic Landscape" 2021 Annual Meeting of the National Association for Business Economics, Arlington, Virginia, 27 September 2021.

The views expressed in this speech are those of the speaker and not the view of the BIS.

It is a great honor to join the community of NABE Fellows, and I want to express my appreciation to the Board of Directors of NABE.

Given the unprecedented nature of the pandemic shock, it should be no surprise that the recovery is not proceeding in a straight line. The economy continues to make welcome progress, but the Delta variant has been more disruptive than initially expected. The headwinds from Delta are a reminder that the virus continues to pose downside risks to the outlook. Delta highlights the importance of being attentive to economic outcomes and not getting too attached to an outlook that may get buffeted by evolving virus conditions.

Indeed, Delta disrupted both demand and supply. Many forecasters have downgraded consumer spending in the second half of the year, as Delta has limited the acceleration in services spending that had been anticipated to help offset the drag on activity from fiscal support shifting from being a tailwind to a headwind. Although the retail sales print for August was stronger than expected, the level of spending in August was not much changed from June. High-frequency data indicate that consumption of discretionary services, such as restaurants and travel, stalled or may have even moved lower in some categories since July. This development doesn't appear to be sensitive to regional variations in vaccinations, perhaps reflecting the high transmissibility of Delta. For example, the consumption of food services has declined recently even in states with relatively high vaccination rates and low case counts.