The Fed’s Stimulus Paradox – WSJ's-Stimulus-Paradox-WSJ.5.jpeg

The chairman of the Federal Reserve, Jerome Powell, will speak at a virtual press conference on January 16. December.


Daniel Acker/Bloomberg News

Chairman of the Federal Reserve System

Jerome Powell.

continued to give new impetus, but the Federal Open Market Committee remained largely stable on Wednesday. In addition, FOMC members have also revised their economic outlook this year and next year.

The Fed itself would have considered buying even more treasury and mortgage-backed securities, or at least extending the maturity of its bonds to attract investors for riskier assets. The FOMC did neither. It stated that it will continue its current monthly asset purchases of at least $80 billion in Treasury bills and $40 billion in mortgage-backed securities until substantial progress is made in reducing unemployment and exceeding the 2 percent inflation targets for an extended period.

It is a very flexible policy and we welcome the reluctance shown to go no further. But why this discrepancy between the words and actions of the federal government? We think it’s a mixture of politics and economics. As for the first, Mr Powell wants to look for politicians who are willing to spend more money in the event of a pandemic. In his afternoon press conference, the president welcomed this willingness to go beyond his political mandate once again to pass any expenditure law proposed by Congress.

Nevertheless, Fed officials have again revised their economic forecasts towards stronger growth and lower unemployment. The median growth forecast for the year 2020 as a whole for Fed Governors and Landesbank Presidents improved from minus 3.7% in September to minus 2.4% in June, compared to minus 6.5%. Their estimate of unemployment at the end of this year also fell to 6.7%, compared to 7.6% in September and 9.3% in June.

Fed economists have clearly misjudged the resilience of the economy in the event of a pandemic. Mr Powell is now planning a series of inspections of Covid 19 in a few months. But the Fed has also raised the median growth forecast for 2021 to 4.2%, up from 4% in September. Experts predict that the unemployment rate will rise from 6.7% today to 5% in 2021.

These figures mean that, although there is growth momentum in the first quarter, the economy will not recover until the population has been sufficiently vaccinated and regular trade and travel resume. This is good news and another reason to believe the economy doesn’t need another $900 billion from Congress.

The Fed’s forecasts also confirm that the Treasury Sec.

Steven Mnuchin

has rightly said that the convention should be held on the 31st. In December, as planned, support for the Fed’s extensive credit facilities ended(3) . Powell advocated keeping the $429 billion that the Fed did not use and could be used to increase loans tenfold. The Fed also exposed the disagreement by leaking information to the press in a way that allowed the strongly pro-fascist press to strike Mr. Mnuchin.

At his press conference on Wednesday, Powell dodged a question about his desire to see the next Chancellor of the Exchequer return money to the Fed. He had to say that the financial markets were healthy and no longer needed support.

Hopefully, Congress will reallocate this money to finance Covid’s final expenditure implication, so that at least the political moral hazard will not be available to Biden’s Treasury to manage for political purposes through the Fed. In the event of a new crisis, the Treasury can always ask Congress for new money.

The Fed plans to keep interest rates close to zero and continue buying long-term bonds despite a potentially booming economy next year and until 2022. There is no widespread consumer price inflation, but asset prices are rising and the dollar is falling. The test for the Fed will come when the post-pandemic tree arrives and there are signs of financial overkill.

Wonderland: Does politics have a more important goal than the division of power into different categories? Images : Getty Images Composite : Mark Kelly

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Published in the printed edition of 17. December 2020.

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