The Fed’s Stimulus Paradox – WSJ


Federal Reserve Chairman Jerome Powell speaks during a virtual news conference on Dec. 16.



Photo:

Daniel Acker/Bloomberg News

Federal Reserve Chairman

Jerome Powell

continues to stump for more economic “stimulus,” yet on Wednesday the Federal Open Market Committee mainly stood pat. Even more telling, the FOMC’s members again revised up their predictions for the economy this year and next.

The Fed itself was reportedly considering an increase in its purchases of Treasurys and mortgage securities, or at least extending the duration of its bond holdings to drive investors into riskier assets. The FOMC did neither. It said it will continue its current monthly rate of asset purchases of “at least” $80 billion in Treasurys and $40 billion of mortgage securities until there is “substantial” progress toward its targets of low unemployment and inflation above 2% for a sustained period.

This is highly accommodative policy, and we welcome the restraint not to go further. But why the mismatch between Fed words and deeds? Our guess is that it’s a mix of politics and economics. On the former, Mr. Powell wants to be in sync with the politicians who want to spend more money amid the pandemic. The chairman saluted that desire at his afternoon press conference by again exceeding his policy mandate to endorse whatever spending bill Congress comes up with.

Yet in their economic outlook, the Fed’s leaders again revised their forecasts in the direction of better growth and lower unemployment. The median projection of Fed governors and regional bank presidents for growth in all of 2020 improved to minus-2.4%, which is up from minus-3.7% in September, which was up from minus-6.5% in June. Their estimate for the jobless rate at the end of this year also fell to 6.7%, which is down from 7.6% in September, which was down from 9.3% in June.

The Fed’s economists clearly misjudged the economy’s resilience during the pandemic. Now Mr. Powell is predicting a rough few months as Covid-19 inspections spike. But the Fed also increased its median estimate for growth in 2021 to 4.2%, which is up from 4% in September. The sages are predicting that the jobless rate will fall to 5% in 2021, from 6.7% today.

These numbers mean that, even if the growth momentum flags in the first quarter, the economy will soar once enough of the public is vaccinated and regular commerce and travel resume. This is good news, and it’s one more reason to think the economy doesn’t need another $900 billion in spending from Congress.

The Fed’s forecasts also confirm that Treasury Secretary

Steven Mnuchin

was right to end support for the Fed’s expanded 13(3) lending facilities on Dec. 31 as Congress intended. Mr. Powell had lobbied to keep the $429 billion that the Fed hadn’t used, which could be leveraged as much as 10 times for lending. The Fed also made this disagreement public via leaks to the press in a way that gave the heavily pro-Fed press a chance to beat up Mr. Mnuchin.

At his press conference Wednesday, Mr. Powell ducked the question of whether he’d want the next Treasury secretary to send the money back to the Fed. What he should have said is that the financial markets are in good shape and no longer need the backstop.

With any luck, Congress will repurpose this money to finance its latest Covid spending blowout so at least that political moral hazard won’t be available to the Biden Treasury to steer for political purposes via the Fed. In a renewed crisis, Treasury can always ask Congress to appropriate new money.

The Fed plans to keep rates near-zero, and keep buying bonds, far into the future despite what could be a booming economy next year and in 2022. There’s no broad consumer price inflation in sight, but asset prices are moving up and the dollar is moving down. The test for the Fed will come when the post-pandemic boom arrives and signs of financial excess appear.

Wonder Land: Does politics have a larger purpose than dividing power by multiple categories? Images: Getty Images Composite: Mark Kelly

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Appeared in the December 17, 2020, print edition.

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