Jerome Powell fielded questions from reporters Wednesday, and he made it clear that the Fed is a long, long way from abandoning its current dovish policy stance. The Fed plans to keep interest rates near zero, while monetizing US debt, financing zombie companies, and pouring new dollars into the market through balance sheet purchases. But even that may not be enough, and the Fed is now hinting that even more fiscal support may be necessary.
Let’s look at some of the details.
Interest Rates
When asked about interest rates, Powell replied:
With regard to interest rates, we now indicate that we expect it will be appropriate to maintain the current zero to 0.25% target range for the federal funds rates until labor market conditions have reached levels consistent with the committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.
This basically means ultralow rates from now until at least 2023. There’s no surprise there. Following the 2008 financial crisis and Great Recession, the Fed kept the target federal funds rate at 0.25 percent for eighty-three months, before slowly allowing rates to inch upward in 2015.
Over the last five years of that period, the Fed generally maintained that the economy was “strong,” “strengthening,” or generally doing well. The fact that the Fed refused to allow rates to move upward in this period hinted at the true weakness of the economy of that period, however.
We’re now just six months into the current period of target rates at 0.25 percent, and it’s now more implausible than ever to claim the economy is doing well. There are still more than 12 million Americans currently collecting unemployment checks, and as of last week, nearly eight hundred thousand workers filed new unemployment claims. As of late August, 30 to 40 million Americans were estimated to be at risk of eviction in coming months.
Not surprisingly, then, the Fed expects it to be a while before “full employment” is again achieved, and as Powell notes: “We expect to maintain an accommodative stance of monetary policy until these outcomes, including maximum employment, are achieved.”
The Balance Sheet and Other Tools
But beyond forcing down interest rates for six or more years—as happened during the last cycle—what else can the Fed do?
Powell seems to believe there’s plenty:
First of all, we do have lots of tools, we’ve got the lending tools, we’ve got the balance sheet, we’ve got forward guidance. There’s still plenty more that we can do. We think that our rate policy stance is…appropriate to support the economy. We think it[’]s powerful….But again we have the other margins [that] we can still use. So no, certainty we’re not out of ammo.
Certainly there’s no lack of lending tools available, and the Fed continues to be in the business of picking winners and losers using newly minted money. In many cases, these lending programs are simply bailout instruments, although these are officially regarded as “loans.” They are essentially tools used to bail out zombie companies and other institutions that can’t cash flow in a normal market due to mismanagement but which have been deemed too big to fail.
And then, of course, Powell is sure to mention the balance sheet.
This is certainly one of the areas where some of the most dramatic change can be seen, and the Fed’s balance sheet has again surged to over $7 trillion in recent days, reaching $7.01 trillion as of September 9.
As we can see in the second graph, total Fed assets were under $1 trillion until late 2008 when the Fed began buying up assets no one wanted anymore in order to keep too-big-to-fail institutions afloat. It also bought assets such as US Treasury debt to keep interest rates low. It made these purchases for its balance sheet primarily by creating new money out of thin air and spending it.
In the decade following 2008, the Fed vowed it would reverse course and sell its assets, and pull those trillions of new dollars back out of the economy.
It’s obvious that at this point that’s never going to happen, and the Fed is now in the business of monetizing the US government’s debt while creating artificial market demand for poorly performing or nonperforming assets held by the nation’s financial institutions.
Turning toward Fiscal Policy
That’s where we are now, and it’s difficult to imagine the Fed diverging from this course under anything even resembling current conditions. Given the current fragility of the market—fragility created by the Fed’s long-term commitment to financialization and propping up financial institutions that made bad bets—the Fed can’t abandon its current policy of “easy money forever.” To do so would expose the sheer number of overleveraged borrowers that absolutely rely on ultralow interest rates to make their next debt payment and thus avoid default. Moreover, the Fed can’t allow interest rates to increase, because this would lead to massive cuts to the Federal budget as Congress is forced to find ways to pay debt service on its rapidly growing $26 trillion debt.
But even with all this in place, there are fears in DC that it won’t be enough. Thus, the Fed is now being asked about how much “fiscal support” will be necessary from Congress. By “fiscal support,” we mean more unemployment checks, more direct bailouts and “forgivable loans” from Congress. We mean more US government spending in general, perhaps on infrastructure, military projects, wars, and other programs.
When Powell was asked about this yesterday, he replied:
My sense is that more fiscal support is likely to be needed. Of course, the details of that are for Congress, not for the Fed. But I would just say there are roughly 11 million people still out of work due to the pandemic and good part of those people were working in industries that are likely to struggle. Those people may need additional support as they try to find their way through what will be a difficult time for them.
Economists, especially Fed-enamored economists, have long pooh-poohed fiscal policy as inferior to monetary policy and as too slow. So the fact that we’re now asking how Congress can support the Fed with fiscal policy suggests that the Fed really is running out of options.
But is fiscal policy really all that distinguishable from monetary policy at this point?
After all, it’s not like Congress—should it wish to spend another trillion dollars—can come up with another trillion in tax revenues. Nearly all of the new stimulus spending being pushed by Congress in recent months has been paid for with deficit spending. This requires selling a lot of government bonds. And that should also mean rising interest rates for US debt as new debt floods the market. But why isn’t that happening? It’s because the Fed is buying up a lot of new debt to keep interest rates low.
Thus the line between monetary and fiscal policy becomes blurry. If new fiscal spending is mostly deficit spending—and a lot of that new debt is bought up by the Fed—fiscal policy just becomes another extension of monetary policy.
This may be where we’re headed, but it is perhaps one of those taboos topics we’re not supposed to mentions on Capitol hill.
