The current Fed chief, Jerome Powell, may shed more light on the central bank’s strategy for dealing with the immediate crisis on Wednesday, when he is scheduled to speak at the Peterson Institute for International Economics.
He’s likely to disappoint investors looking for a detailed roadmap of the Fed’s future plans for the economy. But there’s no shortage of ideas for how the central could broaden its reach even more: Some Fed watchers are calling for negative interest rates in the U.S., expanding the scope of assets the central bank can buy to include corporate bonds, and even giving money directly to consumers, a move that would likely require congressional approval.
Yellen said the central bank has spent years worrying about how it could help jumpstart the economy in a downturn, given that interest rates — its main stimulus tool — were already low.
“Once they’ve pushed down interest rates across the curve pretty close to zero, there’s not much more they can do,” she said.
Powell himself has suggested Congress will need to spend more to help businesses and citizens weather the crisis. But while U.S. lawmakers have already approved record amounts of spending to bail out the economy, Republicans are starting to sound the alarm about the deficit, and White House economic adviser Larry Kudlow says formal negotiations on another relief package are on pause. Debt concerns, plus the inevitable partisan gridlock that’s likely to return, may limit lawmakers’ role in boosting growth when the emergency is over.
That will prompt Americans to continue to look to the Fed, which has few such constraints. Under temporary emergency powers, the central bank is already launching a vast series of lending programs with the goal of helping businesses, as well as state and local governments, survive what will potentially be the worst economic slump since the Great Depression. It has also saturated credit markets with massive amounts of funds to keep them functioning.
Powell said at a press conference late last month that the central bank would use all of its tools “forcefully, proactively, and aggressively until we’re confident that we’re solidly on the road to recovery. And also, to assure that that recovery, when it comes, will be as robust as possible.”
But ensuring a strong recovery in an economy where the unemployment rate already reached 14.7 percent in April — a figure that is almost surely an underestimate — will be a heroic task, even with a possible spike in growth once people feel comfortable resuming their normal lives.
“It’s entirely possible, though not a given, that by this summer, we’re going to see 30 percent unemployment,” said Claudia Sahm, director of macroeconomic policy at the Washington Center for Equitable Growth and a former Fed official. “At that point, we’re not talking about a bounce-back. We’re not even talking about a Great Recession-style recovery. We’re talking about a really serious problem.”
Many of the recommendations that Fed experts have offered to counter that grim scenario echo policy approaches taken in other economies like Japan and the European Union, and in some cases their merits remain unclear.
Calls for negative rates in the U.S., for example, have fallen flat as central bank officials continue to be skeptical about the idea. Yet investors have begun to dare the Fed to go there, betting rates will drop below zero by sometime next year.
“We do not see negative policy rates as likely to be an appropriate policy response here in the United States,” Powell said in March. Fed officials have said there’s mixed evidence that negative rates are effective and that such a move could significantly disrupt markets.
Yellen and former Fed Chair Ben Bernanke have suggested Congress consider expanding the scope of assets the central bank can buy to include corporate bonds, a common practice in other countries. The Fed is about to make its first foray into those purchases under its emergency powers, although only temporarily.
But at a certain point, households, businesses and municipal governments need money, not more debt. That has fueled calls among some Fed watchers for the central bank to just give cash to Americans, something it likely would not be able to do without a change in the law.
Source: politico.com
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