MANHATTAN (CN) — The Federal Reserve has been a leader in combating the economic recession brought about by the Covid-19 pandemic, but the central bank wants Congress to pick up more of the slack.
In a live telecast Wednesday morning hosted by the Peterson Institute for International Economics, Chairman Jerome Powell said the Fed can do only so much with monetary policy and that legislators must do more to help fiscal policy.
“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 said, noting that the “passage of time can turn liquidity problems into solvency problems.”
Markets initially slumped after Powell’s speech, with the Dow Jones Industrial Average falling more than 100 points at the opening bell. By the day’s closing bell, the Dow had fallen more than 500 points, with similar but lesser drops in the S&P 500 and Nasdaq.
Powell’s comments give little comfort to bulls who expect a sharp, quick V-shaped recovery in the second half of 2020. They also serve as a counterweight to Republicans looking to move past Covid-19 and reopen American businesses right away.
“He might be trying to offset some of the more positive comments from officials in the administration,” Lamont Black, a former economist at the Fed, said in an interview. “I don’t think positive comments to boost consumer sentiment is always the wisest approach.”
Others see it as one of Powell’s defining moments, as well as a potential shot across the bow for Congress to do more.
“This could be his Bernanke moment,” said Robert Hockett, a banking and finance professor at Cornell University, referencing the Fed chairman whom President Obama reappointed after an initial two years in the Bush administration.
Ben Bernanke was vocal during the 2008 financial crisis about the need for Congress to prop up the flailing economy with various fiscal measures.
“Powell finds himself calling plaintively for Congress to help so he doesn’t have to keep doing this,” said Hockett, who has done consulting work for the Federal Reserve Bank of New York.
Other Federal Reserve regional bank presidents also have taken on a more cautious tone than the administration, warning investors not to expect a quick economic rebound during the second half of 2020.
“I anticipate that the second quarter will show the most severe effects on the economy,” Loretta Mester, president of the Federal Reserve Bank of Cleveland, said in a speech on Tuesday.
“The Cleveland Fed’s national survey of consumers indicates that most respondents initially thought the virus outbreak would last less than six months,” Mester continued. “More now believe it will last one year, and a growing number think it could last two years.”
Flareups of coronavirus later in the year could also overwhelm the health care system and cause further instability to the banking system, Mester warned. “At this point,” she said, “I think some of the more pessimistic outcomes are almost as likely as the reasonable baseline I just described.”
Lawmakers on Capitol Hill already are working on a fourth stimulus package, but politics are likely to slow progress more than the three previous iterations. House Democrats put forth a bill early in the week, but some Republicans called it a “liberal wish list” and vowed it would never see the light of day in the Senate. Senate Republicans plan to issue their own bill in the coming days.
Even without Congress acting, the Fed can certainly do more. “This is an institution that cannot run out of money,” Hockett said. “There is nothing the Fed cannot afford.” Rather than create new lending facilities that will rile up libertarians like Senator Rand Paul, however, Hockett says the central bank should tinker around the edges of what they have.
The staffers in charge of the Fed’s municipal and small-business lending programs are all located at the New York Fed in Manhattan, Hockett notes, proposing instead that new and existing regional Federal Reserve banks can and should facilitate the Fed’s lending programs.
The Fed also could work to make the lending facilities more attractive to cities and municipalities, which might feel a stigma is attached to taking money from the central bank.
Black also said that, while the Fed can do more, the effectiveness of additional liquidity programs may soon wear off. “I think it’s more about the diminishing effectiveness of monetary policy,” said Black, a finance professor at the DePaul University’s Driehaus Business College. “Monetary policy got pushed to the wall after 2008 and it didn’t really recovery. [The Fed] can expand their balance sheet further, but I’m not sure they will.”
Powell has continuously emphasized, including in his remarks Wednesday morning, that the Federal Reserve has “a good tool kit” to address liquidity issues. One tool he has so far resisted, however, is further slashing rates.
The Fed cut rates nearly to zero in March, but some — including President Trump — want the central bank to go below the 0.25%–0% range. “As long as other countries are receiving the benefits of Negative Rates, the USA should also accept the ‘GIFT’. Big numbers!” the president tweeted on the eve of Powell’s speech.
Powell has so far resisted such pressure, noting the Fed’s open markets committee is unanimous in opposing cuts going into negative territory. “The committee’s view on negative rates really has not changed. This is not something that we are looking at,” Powell said during the webcast. “I know there are fans of the policy, but for now it is not something we will be considering.”
Negative interest rates mean banks and investors must pay central banks if they have surplus cash. The move is intended to get banks to quit hoarding cash and open up lending to businesses and individuals.
In recent years a handful of countries, including Japan, Denmark and Switzerland, have used the aggressive tactic of negative interest rates. Late Tuesday New Zealand’s central bank also indicated it would look at lowering rates below zero.
“There is sufficient precedent for it … [but] even countries that have done it are thinking about ways to get out of it,” Black said, noting that negative interest rates can actually add to uncertainty in the markets. “I don’t think the Fed’s going to do it and I don’t think they should,” he said.
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