As the Federal Reserve wraps up its two-day monetary policymaking meeting on Thursday, Chairman Jerome Powell is expected to face questions about how — or if — the central bank could further intervene to assist the economy.
Powell, along with other Fed officials, has urged Congress, in increasingly urgent tones, to come to an agreement and pass another fiscal stimulus package to keep the fragile economic recovery going as Covid-19 cases soar around the country.
As the first wave of the pandemic raged in the spring, Powell has cast himself as reassurer-in-chief for financial markets, pledging to provide liquidity to keep markets functioning smoothly, keep interest rates low for some time into the future and otherwise keep monetary policy accommodative to encourage banks to lend to the struggling small businesses at the heart of the American economy.
The Fed has a formidable set of policy tools it can deploy to support financial institutions, but it can’t do the one thing economists say households and businesses really need: Offer direct income support, either in the form of stimulus checks or expanded unemployment insurance benefits.
“A lot of the tools they have are either already in use or designed to fix an issue such as financial markets seizing up,” said Greg McBride, chief financial analyst at Bankrate.com. “There isn’t anything obvious they could do at this juncture that would be effective.”
“The Fed has lending powers, not spending powers, as Chairman Powell often reminds investors,” said Bill Merz, senior portfolio strategist and head of fixed income research at U.S. Bank Wealth Management.
“Ever since the pandemic struck in March, the Fed has been transformed into a quasi-fiscal agent of the U.S. government,” said Karen Shaw Petrou, co-founder of consulting and analysis firm Federal Financial Analytics. “The Fed decided to take on this huge, unprecedented role to reduce the pandemic’s macroeconomic destruction.”
“The Fed could take a bigger role, but the more it does this, the more it just becomes an arm of the Treasury — and more political.”
“Without a new fiscal stimulus bill, the Fed could take a still bigger role,” Petrou said, but she warned that this could compromise the central bank’s vaunted independence. “The more it does this, the more it’s just an arm of the Treasury and… the more political it is sure to become,” she said.
Market observers say Powell is likely to point to the Fed’s extensive and ongoing bond-buying as an example of what it can still do. “The most obvious tool the Fed could deploy is buying more bonds, specifically long-term Treasurys and mortgage-backed bonds, in an effort to drive interest rates lower,” McBride said.
The challenge there, he said, is that interest rates are already so low that Powell risks chasing diminishing returns.
The Fed also has the option of tweaking the parameters of the initiatives it launched to provide liquidity and improve the climate for lending activity. “They could make additional adjustments to their Main Street Lending Program to boost utilization and provide capital to small and mid-sized businesses,” Merz said. The Fed could also coordinate more direct purchases of corporate bonds and funnel more liquidity into the new channels it created earlier in the year, he added.
Ultimately, analysts agree with Powell’s oft-stated reminder that the monetary policy instruments he can control are only part of the equation, and there is fading hope for legislative solutions as the resistance to compromise hardens between lawmakers in the Capitol.
“The results of the U.S. election are indicative that no single party will control the policymaking process, a scenario that significantly brings down the impetus for a large fiscal spending package,” said Charlie Ripley, senior investment strategist for Allianz Investment Management. “The Fed will likely have a more difficult job as they balance the proper amount of monetary support in a slower economic recovery against smaller fiscal support from lawmakers.”
“Right now the need is for Congress to provide more stimulus to households and businesses that are reeling and heading closer to the financial brink,” McBride said.