There were many thousands of viewers watching Federal Reserve Chair Jerome Powell’s news conference on Wednesday afternoon, between various online feeds and financial news networks. But his most important message was directed at just 536 people.
That would be the 435 members of the House of Representatives, the 100 members of the United States Senate, and the president of the United States.
The Fed has taken expansive efforts to prop up lending markets in the United States, pledging to inject trillions of dollars of support into the markets, including for corporate bonds (big companies), bank lending (midsize companies), mortgage-backed securities (home buyers) and municipal bonds (states and localities). Congress has encouraged this, authorizing billions to the Treasury to be combined with Fed resources.
But each of these programs, under the legal terms through which the Fed operates, is set up to lend money, not to spend it. The Fed takes collateral, and the borrowers must ultimately repay the loans or face bankruptcy.
The Fed’s programs are potentially powerful tools to help, say, an otherwise strong business weather a difficult few months during this pandemic. But they are no substitute for the kinds of actions Congress can take to directly support the payrolls of shuttered businesses or make direct payments to unemployed individuals.
“This is the time to use the great fiscal power of the United States to do what we can to support the economy and try to get through this with as little damage to the longer-run productive capacity of the economy as possible,” Mr. Powell said, after noting that he himself has been an advocate of lower deficits in more normal times.
Fed leaders generally avoid giving elected officials specific recommendations for fiscal policy, but Mr. Powell was reasonably clear about what those actions might include. He mentioned policies that protect businesses and households from avoidable insolvency and allow businesses to keep going so they can return to full productivity as the crisis abates.
“Those are going to be key policies that will come with a hefty price tag,” Mr. Powell said. “But we would come out of this eventually with a stronger economy and with less long-run damage to the economy.”
Mr. Powell didn’t say so directly, but the Fed is also doing what it can to help the government carry out such expansive policies. It has set short-term interest rates near zero and is pledging to keep buying government bonds and other assets indefinitely. The Fed is putting its money where its mouth is, essentially ensuring that the Treasury can borrow at record-low interest rates for the indefinite future.
Those rates, in turn, should make it manageable for the government to finance a large national debt.
What really matters for the sustainability of public finances is not the size of the debt, but the ratio of debt service costs to the overall economy. Mr. Powell is effectively pledging to keep the numerator low (through low interest rates), while asking Congress to do what it can to keep the denominator high (by preventing a sustained economic collapse).
It’s a 180-degree inversion of a traditional relationship — between elected officials and independent central bankers — that economics students learn in school.
Politicians, in this conventional logic, always have an eye toward the next election. So they have every incentive to embrace economic policies that make people feel prosperous in the short run but could be damaging in the long term, such as by causing inflation or by risking a fiscal crisis. In such a case, you’d want an independent, hardheaded central banker focused on a longer time horizon and the power to rein in those tendencies, typically by raising interest rates if the economy is overheating.
But right now, the Fed is pulling out all the stops to shore up the economy while Congress is starting to show signs of bailout fatigue. Republican leaders have begun raising alarms about rising deficits. They’ve expressed opposition to federal help for state and local governments, while some Democrats have voiced concern that programs meant to support businesses don’t have enough strings attached, such as requirements to suspend dividend payments to shareholders or eliminate bonuses to top executives.
Instead, the hardheaded central banker is the one encouraging Congress to spend whatever it takes to get the economy through this crisis. It would be as if a doctor who normally implored a patient to lay off the spaghetti carbonara and milkshakes instead concluded that the patient was dangerously underweight and needed all the calories he could get.
This is not the first inversion of the usual relationship between elected officials and a central banker. After the 2008 financial crisis, Ben Bernanke, then the Fed chairman, often encouraged Congress to take more aggressive fiscal action. And the European Central Bank president, Mario Draghi, spent much of his recently concluded eight-year term doing the same.
But it’s a moment of striking clarity. This crisis has moved so fast that it’s easy to lose the central thread. Mr. Powell is, in effect, urging elected officials to take a deep breath and grapple with what has happened.
The United States is experiencing a shutdown of a huge portion of economic activity for a long and uncertain period. If that causes widespread business failures and sustained unemployment, the economic effects could last far longer than the public health crisis does. The job of the government is to do whatever it can to ensure that there’s a healthy economy waiting for us on the other side of the crisis.
Low interest rates and a bunch of loans from the central bank, Mr. Powell is imploring, can help get toward that goal but not achieve it on their own. The question is whether the rest of the government will listen to him.
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