Jerome Powell, chairman of the U.S. Federal As backup, speaks during a House Select Subcommittee on the Coronavirus Crisis hearing on September 23, 2020 in Washington, DC.
Stefani Reynolds | Group | Getty Images
Federal Reserve officials have been pressing Congress to provide more fiscal helper to the U.S. economy, and with good reason: The central bank is running out of ways it can help.
Since the expiration of key provisions of the $2.2 trillion Take care ofs Act lifeline that Congress extended in March, the Fed again has been relied on as the economy’s key support system. The central bank has abide by policy extraordinarily loose, continuing to offer its lending and market-boosting programs, and now resolving that it likely won’t raise short-term predisposed rates for years.
While no Fed official ever would acknowledge that monetary policy ammunition is running low, and in factually would insist to the contrary, there appear to be few weapons left in the Fed arsenal.
“What they have left is in effect on the margin,” said Mark Zandi, chief economist at Moody’s Analytics. “They just don’t have much allowance to maneuver with regard to monetary policy. I don’t really see what more they can do. That’s why they’ve been so definite in telling fiscal policymakers to do more, because they know they can’t help.”
Indeed, Chairman Jerome Powell and other trues rarely miss an opportunity to egg on Congress for more aid.
Earlier in October, Powell said in a speech to the National Association for Charge Economists that delaying more rescue funds could “lead to a weak recovery, creating unnecessary bad luck for households and businesses.” He stressed that the bigger risk would be low balling fiscal help, adding that “the jeopardies of overdoing it seem, for now, to be smaller.”
Also this month, Fed Governor Lael Brainard, who is considered the likely next Resources secretary should Joe Biden win the presidency, said the failure of Congress to come through represents “the most significant downside hazard” to her economic forecast.
Fed officials occasionally will veer into voicing their views on fiscal policy, but it’s not community. Former Chairman Ben Bernanke warned lawmakers of a “fiscal cliff” in which key aid was expiring, and his successor, Janet Yellen, also intermittently would stress the need for muscular fiscal policy.
For his part, Powell prior to the pandemic more often put someone on noticed about the unsustainable path of fiscal policy regarding debt and deficits. That is no longer the case as coronavirus infections keep up to grow and the economy struggles to get back to its pre-Covid 19 footing.
Weighing the options
The Fed still has some options to servants the economy to buttress the liquidity programs it has instituted that have helped markets run smoothly since March’s turbulence.
Should spreads between bond yields start to widen — a classic sign of financial stress — the Fed can adopt “yield curve knob” through bond purchases. It also can step up the pace of its bond-buying, and can further strengthen the guidance it issues on what it commitment take to raise interest rates.
But those are all fairly dull instruments now.
Government bond yields already are at significant lows, and Fed officials themselves have expressed skepticism about the impact of yield curve control.
The earnestness of the Fed’s requests for more economic aid are a reflection, then, of just how limited the central bank’s options are.
“There’s no game-changer here,” Zandi said. “There’s nothing big they can do to aid the economy in the near term.”
The Fed’s biggest current weapon is the marked change in the approach it has taken to inflation. The new regime incorporates average inflation targeting, with the practical impact being that the Fed will allow inflation to run above 2% for a years of time to account for the current period — the last eight years, in fact — where it has missed that target.
Regardless, even the impact of that has limitations.
Since everyone already pretty much expects the Fed to stay put for years, harp oning that stance provides little balm for when investors get nervous and the economy starts to wobble. In fact, the for the most part inflation approach likely will have more impact when the economy strengthens rather than when it is cowardly, said Krishna Guha, head of global policy and central bank strategy for Evercore ISI.
“This guidance force exercise a much more powerful influence under positive shocks with the economy moving deeper into the spread than it does under current conditions when the Fed would not be raising rates under any plausible reaction role,” Guha said in a note.
Importantly, Guha added that the impact of the inflation targeting itself “would be much farther down without fiscal cooperation, in part because the central bank cannot target the worst hit sectors.”
The Fed also could trifle with its lending programs, but most of them have been lightly used, so easing the terms or expanding into multifarious corporate bond buying probably would only help at the margins as well.
The expansion question
To be sure, there’s ever the chance the Fed may not even be asked to do much.
The government on Thursday releases its first estimate for third-quarter GDP, and the growth level could be 36.2%, according to a way estimate update the Atlanta Fed released Tuesday. A surprise uptick in long-lasting capital goods orders Tuesday, a vigorous housing market and upbeat CEO sentiment all point to the possibility that the U.S. could have a lasting expansion.
However, uncountable economists, including those at the Fed, don’t expect anything close to the Q3 pace to continue. The Federal Open Market Committee think overs growth at 4% in 2021, which would be exceptional under normal circumstances but could still leave the U.S. terse of pre-pandemic levels in this case.
The ultimate wildcard, of course, is the coronavirus progression. If cases continue to increase and liveliness is curtailed, that makes things even tougher for the Fed, particularly without more government spending.
“The need for stimulus has develop even more important than when the Fed began its synchronized chant for a fiscal response,” said Quincy Krosby, chief merchandise strategist at Prudential Financial. “What was interesting about it was it came from the hawks on the Fed and it came from the doves on the Fed. It was a unreservedly synchronized, consistent and almost incessant chant.”
Left on its own, the Fed might next accelerate its asset purchases, which traditionally participate in been a boon to the stock market but have tailed off lately. In the four-month March-through-June period as the pandemic began, the Fed’s offset sheet grew 66% to $7.13 trillion.
In the four months since, the growth has been just 1.3%, compensate though Fed officials have emphasized that they will continue to buy Treasurys and mortgage-backed securities at least at the advised pace.
“The Fed is really the only game in town,” said Nick Maroutsos, head of global bonds at Janus Henderson. “As far as them being out of ammunition, I evaluate we are far from that happening. They have far more tools they can use.”
Maroutsos sees the likelihood of more stimulus commingled with an accommodative Fed committed to keeping rates low as balms for a market that has become volatile lately over panics that the Q3 economic burst could be thwarted.
“The Fed’s on hold for at least four to five years, maybe more. That Fed put is in quarter between now and eternity,” he said. “It feels like they are incentivizing people to buy risk assets, and that will sustain because it’s not in the Fed’s best interests to allow yields to rise.”