Jerome Powell largely stuck to the dour script in prepared remarks delivered during a hotly-anticipated webinar on Wednesday.
The Fed chair described an economy reeling from an unprecedented shock, the likes of which most living human beings have never witnessed.
“People have put their lives and livelihoods on hold, making enormous sacrifices to protect not just their own health and that of their loved ones, but also their neighbors and the broader community”, he said, adding that “while we are all affected, the burden has fallen most heavily on those least able to bear it”.
As ever, critics will (justifiably) charge that the Fed’s own policies have exacerbated inequality, thereby making situations like the current debacle worse by leaving middle- and lower-income Americans even more vulnerable.
For example, it is not a coincidence that some measures of inequality increased at the onset of the Fed’s response to the GFC. The visual below is a poignant example.
Measures aimed at shoring up market confidence will tend to perpetuate that trend and others like it. As the Fed bolsters asset prices, the wealth of those in whose hands those assets are concentrated will grow disproportionately. The benefits of rising stock and bond prices are not linear – they accrue exponentially. That means the rich will get richer, yes, but it also means the very rich will see their lead on the “merely” rich balloon too.
In any event, Powell and the Fed have no choice but to pull out all the stops. Charges of “moral hazard” and concerns about forestalling the purge of misallocated capital (thereby perpetuating “zombie” dynamics) notwithstanding, it’s clearly not advisable for the central bank to stand aside and let the entire economy implode. Only a fanatic would suggest as much.
“A Fed survey being released tomorrow reflects findings similar to many others: Among people who were working in February, almost 40% of those in households making less than $40,000 a year had lost a job in March”, Powell said Wednesday, underscoring the plight of middle- and lower-income Americans. “This reversal of economic fortune has caused a level of pain that is hard to capture in words, as lives are upended amid great uncertainty about the future”.
Indeed. Crucially, the Fed chair emphasized that more fiscal help is likely necessary, irrespective of jitters about the national debt or the deficit.
“Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery”, he remarked, adding that “this tradeoff is one for our elected representatives, who wield powers of taxation and spending”.
On Tuesday, budget hawks pretended to be aghast at a record monthly deficit of $737.9 billion for April. Spending was nearly $1 trillion. Typically, the month shows a surplus from tax payments, which were obviously deferred this year.
House Democrats are looking to push a $3 trillion package of measures through Congress in order to provide extra relief and bolster the economy once the shutters are lifted and business resumes across the country.
Nancy Pelosi is angling to secure funding for state and local governments, as well as more money for direct cash payments, expanded unemployment insurance and food assistance. There’s a summary embedded below.
The Senate won’t pass it as written, but the point is to send a message to public: Democrats want to do more than simply provide “bridge liquidity” – they want to inject actual stimulus.
Trump claims to be in “no rush” on a fourth relief bill and Mitch McConnell lampooned Democrats’ proposal on Tuesday, calling it a “big laundry list of pet priorities” – as though there’s something that’s funny about the situation.
From a political strategy perspective, the GOP may want to take a step back and consider whether the composition of the “base” has changed under Trump. Republicans are going to need the president’s fervent supporters in November, and it goes without saying (or at least it should) that many of the president’s fans are not what one might describe as “affluent”.
One person who thinks the economic situation could deteriorate meaningfully if Congress fails to take the appropriate action is Jay Powell. I’ll leave you with his assessment, as delivered on Wednesday.
The overall policy response to date has provided a measure of relief and stability, and will provide some support to the recovery when it comes. But the coronavirus crisis raises longer-term concerns as well. The record shows that deeper and longer recessions can leave behind lasting damage to the productive capacity of the economy. Avoidable household and business insolvencies can weigh on growth for years to come. Long stretches of unemployment can damage or end workers’ careers as their skills lose value and professional networks dry up, and leave families in greater debt. The loss of thousands of small- and medium-sized businesses across the country would destroy the life’s work and family legacy of many business and community leaders and limit the strength of the recovery when it comes. These businesses are a principal source of job creation—something we will sorely need as people seek to return to work. A prolonged recession and weak recovery could also discourage business investment and expansion, further limiting the resurgence of jobs as well as the growth of capital stock and the pace of technological advancement. The result could be an extended period of low productivity growth and stagnant incomes.