Fed Watch: Policymakers Weigh In On COVID Aid, New Flexibility On Inflation

Fed Watch: Policymakers Weigh In On COVID Aid, New Flexibility On Inflation

Investing.com  | Oct 13, 2020 02:24

Federal Reserve Chairman Jerome Powell picked just the wrong moment to reiterate his call for more fiscal stimulus last Tuesday, as his warning of “tragic” consequences came just hours before President Donald Trump shut down talks on a comprehensive economic aid package for COVID-19.

Though Trump later backtracked, compromise between the White House and congressional Democrats on a stimulus package was still not in the cards. As of this writing the stalemate continues.

The risks of policy intervention are asymmetric, Powell argued in a video speech to the National Association for Business Economics.

“Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses,” Powell said.

“By contrast, the risks of overdoing it seem, for now, to be smaller. Even if policy actions ultimately prove to be greater than needed, they will not go to waste.”

Failure to provide further stimulus to the economy could trigger a recessionary dynamic, the Fed chair warned, as weakness feeds on weakness. “A long period of unnecessarily slow progress could continue to exacerbate existing disparities in our economy,” Powell said. “That would be tragic.”

Nuances Of Opinion, Message Of Patience

Minneapolis Fed chief Neel Kashkari added his voice to Powell’s call for more government aid. “There are enormous consequences if we just let things go, and the downturn will end up being much worse,” he said on CNBC.

“If we don’t support people who have lost their jobs, then they can’t pay their bills and then it ripples through the economy and the downturn is much worse than it needs to be.”

The plea from the central bankers did not seem to move the needle for politicians, however, and some conservatives criticized the Fed officials for getting involved in government spending. They accused Powell of endangering the credibility and independence of the Fed by taking part in a political debate, and some also questioned the efficacy of fiscal stimulus.

Other Fed policymakers sounded off last week. The Federal Open Market Committee (FOMC), which debates monetary policy every six weeks or so, consists of the five members of the Washington-based board of governors and the presidents of the 12 regional Federal Reserve Banks—and each of them has become more outspoken in recent years.

Their remarks provide considerable insight into the nuances of opinion on the committee, and clues to where monetary policy might be headed.

Eric Rosengren, head of the Boston Fed, reinforced his position as a hawk on the committee by criticizing the Fed’s low interest rate policy, which he said had increased risk-taking ahead of the pandemic and that means the recovery will be slower than hoped. In a virtual speech Thursday for Marquette University in Milwaukee he said:

“The build-up in risks in commercial real estate, and leverage in the corporate sector, prior to the COVID-19 pandemic are likely to result in more bankruptcies and higher unemployment during this crisis than if less risk had been taken.” 

Hawks generally favor tighter monetary policy, traditionally taking the form of higher interest rates, while doves advocate for looser policy and lower interest rates.

Chicago Fed chief Charles Evans, who leans dovish, said last week that if the Fed had adopted its more flexible approach to inflation earlier, it probably would not have raised interest rates from 2015 to 2019—a move which it had to quickly reverse.

Fed chair Powell announced in August that the Fed would no longer raise benchmark rates preemptively, as it had in that cycle, to head off inflation, but would instead tolerate a temporary overshoot of its 2% target to reach its goal of maximum employment

“It’s highly likely that this strategy would have forestalled raising rates in 2015 and 2016,” Evans said in his virtual speech to the NABE. “A looser policy would have made the real economy more resilient to the headwinds that hit in 2018 and 2019,” he added.

Esther George, head of the Kansas City Fed, provided further nuance about that new framework, however. She clarified that the new policy called for “tolerance” of higher inflation, but is not “a promise to engineer” that inflation through lax monetary policy. It is, she said in a video speech for Wichita State University in Kansas, “a message of patience.”


Related Articles

Latest comments

Add a Comment
Please wait a minute before you try to comment again.
Write a reply...
Please wait a minute before you try to comment again.

Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.

English (USA) English (UK) English (India) English (Australia) English (South Africa) English (Philippines) English (Nigeria) Deutsch Español (España) Español (México) Français Italiano Nederlands Português (Portugal) Polski Português (Brasil) Русский Türkçe ‏العربية‏ Ελληνικά Svenska Suomi עברית 日本語 한국어 简体中文 繁體中文 Bahasa Indonesia Bahasa Melayu ไทย Tiếng Việt हिंदी
Sign out
Are you sure you want to sign out?
Saving Changes


Download the Investing.com App

Get free real time quotes, charts and alerts on stocks, indices, currencies, commodities and bonds. Get free top of the line technical analysis/predictors.

Investing.com is better on the App!

More content, faster quotes and charts, and a smoother experience is available only on the App.