Wednesday, October 7, 2020

Powell says main risk is spending too little

Fed Chair Jerome Powell gave a speech yesterday at the National Association for Business Economics' Annual Meeting. He provides an assessment of the response to the economic fallout from Covid-19 and discusses the path ahead. The most-discussed part of Powell's speech was his call for more fiscal stimulus. He's made the point several times already, but this time with more urgency.

"The expansion is still far from complete. At this early stage I would argue that the risks of policy intervention are still asymmetric. Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses. Over time, household insolvencies and business bankruptcies would rise, harming the productive capacity of the economy, and holding back wage growth. 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. The recovery will be stronger and move faster if monetary policy and fiscal policy continue to work side by side to provide support to the economy until it is clearly out of the woods."

A couple additional notes from the speech..

Powell cited three things the Fed could do to help address the effects from the health crisis:

  1. Provide stability and relief during the acute phase of the crisis
  2. Support expansion when it comes
  3. Limit longer-run damage to the productive capacity of the economy.
"In response, we deployed the full range of tools at our disposal, cutting rates to their effective lower bound; conducting unprecedented quantities of asset purchases; and establishing a range of emergency lending facilities to restore market function and support the flow of credit to households, businesses, and state and local governments. We also implemented targeted and temporary measures to allow banks to better support their customers."
Powell points out that although the combination of fiscal and monetary policy have supported a partial recovery in demand and muted the recessionary dynamics that would otherwise be occurring,
"The burdens of the downturn have not been evenly shared. The initial job losses fell most heavily on lower-wage workers in service industries facing the public-job categories in which minorities and women are overrepresented ... Combined with the disproportionate effects of COVID on communities of color, and the overwhelming burden of childcare during quarantine and distance learning, which has fallen mostly on women, the pandemic is further widening divides in wealth and economic ability."

Last thing I'll mention.. Powell notes "that the underlying structure of the economy changes over time, and that the FOMC's framework for conducting monetary policy must keep pace." Powell's flexibility is a change from Greenspan, who failed to update or discover a flaw in his model of the economy until after the start of the global financial crisis. Is it because Powell was trained as a lawyer?

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