Jerome Powell Got Everything Right – Until Someone Asked About Monetary-Fiscal Nexus

Jerome Powell Got Everything Right – Until Someone Asked About Monetary-Fiscal Nexus

Jerome Powell breezed through an uneventful press conference Thursday, sticking largely to familiar talking points and hitting the right note in answers to key questions.

His opening statement served as a reiteration of the Fed’s newfound emphasis on helping to ameliorate economic inequities, especially those associated with the pandemic.

Powell expressed sympathy for the services sector and specifically mentioned African Americans, Hispanics, and women, while discussing the need to ensure that no one is left behind in the recovery. “We will not forget” those that are still jobless, he pledged. That’s quite of bit of remembering to do. The US economy is nowhere near pre-pandemic levels of employment (figure below).

We will, of course, get an update on the labor market Friday. Both ADP and jobless claims were disappointing this week.

Predictably, Powell emphasized that the main factor for determining the timeline around a full recovery is the evolution of the virus. He implored Americans to “follow the advice of public health officials.”

One public policy analyst predicted US hospitals are at risk of hitting a “breaking point” by the middle of the month. If the current trajectory is maintained, “restrictions will gradually intensify,” Height’s Hunter Hammond wrote. Cases are, of course, completely out of control on any rational interpretation. The seven-day average is in the neighborhood of 90,000.

The recent rise in cases “is particularly concerning,” Powell said. “A full economic recovery is unlikely until people are confident that it’s safe to engage in a full range of activities.”

With the Fed having rolled out a totally boilerplate statement, Powell was left to fill in any nuance around expectations for fiscal policy. He reiterated that more fiscal stimulus “may be needed.”

Asked specifically how severe the threat is to the economy in the event another fiscal stimulus package isn’t passed by January, Powell engaged in the usual acrobatics to avoid getting mired in a political debate.

“I will say that the support provided by the CARES Act was absolutely essential. I do think it’s likely that further support is needed,” he remarked, citing the prospect of “dwindling savings.” He declined to comment on the potential size or timing of fiscal measures, saying “I’ll leave it at that.”

But the Wall Street Journal‘s Nick Timiraos wouldn’t let him “leave it at that.” “Would the lack of fiscal support compel the Fed to add monetary accommodation?,” he wondered, on the way to asking if the Fed is out of firepower and if a lack of policy room is perhaps motivating the Fed to be more vocal about the need for additional fiscal stimulus.

Powell talked up the Fed’s tools. “We’ll do what we think we need to do,” he responded. “That will go better and move more quickly if we have a broad set of policies from across the government.” He made reference to post-GFC austerity as something that perhaps held back economic activity after the financial crisis.

CNBC’s Steve Liesman asked a set of pointless questions about whether the Fed might need to reduce QE now that the Treasury market is functioning properly. Powell emphasized that asset purchases serve two purposes: Ensuring market function and supporting economic activity. “We haven’t looked at reducing purchases,” he said.

Pressed on whether D.C. gridlock or the absence of additional fiscal stimulus would perhaps be the impetus that would compel the Fed to extend the maturity profile of asset purchases or prompt an increase in the monthly quota, Powell simply said anything is possible. “We have a number of parameters we can shift and twist,” he said. “We can deliver more accommodation if appropriate. It depends on the circumstances.”

Asked about the Fed’s role in financing fiscal policy, Powell lied. With apologies, and with all due respect, I’m not sure how else to put it. Money-financed fiscal policies are “not something we would consider,” he claimed.

It’s highly unfortunate that Fed officials continue to perpetuate the same myths foisted on the public by lawmakers who either don’t know any better, have ulterior political motives, or both.

Monetary policy is clearly accommodating fiscal policy, not just in the US, but all around the developed world (see the figure above).

As discussed at length in the piece linked below, Powell is undermining his own efforts to get Congress moving on more fiscal stimulus. But beyond that, he’s perpetuating what he knows to be a fiction.

Powell Hurts Own Cause, Feeds Budget Hawks By Parroting Deficit Myths


4 thoughts on “Jerome Powell Got Everything Right – Until Someone Asked About Monetary-Fiscal Nexus

  1. A few good men, the movie comes to mind, when Jack Nicholson screams about people not wanting to know the truth. If the public really understood that the government was capable of helping a great deal more, “the man” would not be happy or safe…

    1. I was thinking about the need to keep the myth going. He needs to play ball. The end game is starting to come into focus. But, they still have many quarters (time periods, not quarter dollars) left to play the game “kick the can.”

      Honestly, at this point, with what’s happened in the election, they might just as well synchronize with all the other CBs, go to zero, buy the paper, let the balance sheet go where it will, all the while working on the monetary reset. Then we get the MMT.

      There are a lot of cold, hungry, and homeless, people wandering around my city. At this point I just hope the Red Senate is able to come to some compromises that doesn’t hasten the slide to full-on despair and eventual pre-mature death of so many. My city and state don’t own a printing press. Something’s gonna have to give.

  2. Risk assets to the moon without fiscal stimulus. No fiscal stimulus means much much much more financial assistance. Powell wouldn’t dream of holding back to force the politicians hands.

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