Boston - The week before the Memorial Day holiday began with two high profile appearances from Federal Reserve (Fed) Chair Jerome Powell, starting off with Sunday's interview on CBS News program 60 Minutes and following up with Tuesday's testimony before the US Senate Banking, Housing and Urban Affairs Committee.
On 60 Minutes, Powell reiterated that the Fed has not exhausted its power to help the economy get through the coronavirus pandemic. "We're not out of ammunition by a long shot," Powell said, adding that there was "no limit" to what the Fed can do to lend money to financial markets.
Fiscal stimulus and labor markets
In multiple remarks over the past several weeks, Powell had been pushing for more fiscal stimulus. He was a little more restrained when presenting to Congress, as these types of topics tend to be very politically charged. Still, Powell has gone on the record warning of the consequences of not doing enough to achieve its two primary goals of keeping the markets functioning and providing bridge financing to get us through to the other side of the current pandemic.
This concern is particularly acute for the labor market, because the longer a large segment of the workforce remains unemployed, the more skills and confidence are lost as these workers become increasingly detached from the labor markets. We saw this happen during the period following the financial crisis of 2009 and in other periods of high unemployment. Clearly, Powell would like to avoid this ensuing drag on the economy.
Cautiously confident about the future
I generally think Powell's message is to try to be realistic — call it cautiously confident — about how bad things are in the short term and how much better they can get once we begin to solve the health situation, whether that's with a vaccine or with a kind of precautionary opening as the infection rates continue to improve. Powell has been clear that the problems we face today are a health issue, not an economic issue. While we are experiencing an economic crisis, it is almost entirely a byproduct of decisions about the need for quarantining and social distancing.
By the same token, Powell is expressing confidence that in a year or two, things will be significantly better. I think that's important from a market perspective. As Fed chair, Powell is forced to straddle a line between being so pessimistic that he conveys negative confidence, and being overly optimistic so that he could be seen as not credible and wouldn't be the best advocate for more stimulus.
More help on the way
It was noteworthy that Chair Powell suggested that the Fed could potentially provide more help to state and local governments, whose employees comprise 13% of the entire US workforce. The Fed would want to avoid the potential for layoffs in the wake of revenue shortfalls, given the balanced budget requirements for many states. That's obviously another significant political issue.
But broadly speaking, Powell is being cautious yet open-minded, inspiring confidence that the Fed will continue to tinker with programs. It's quite possible that the Main Street Lending Program will get changed or expanded. The Municipal Liquidity Facility has recently been enhanced with pricing information, but the Fed will continue to tweak that program until it meets its objectives.
When the economy starts to reopen, we'll get to what they should do to get growth higher and get inflation expectations up. We're not there yet, but at some point we will be. And with respect to negative rates, Chair Powell has pushed back strongly against negative rates over the past week or so, which is consistent with what I've been thinking. That said, if someone replaces Powell, say someone like Kenneth Rogoff, then negative rates may be on the table but it's not likely to happen under Powell.
Bottom line: At least for now, the Fed continues to use all the tools at its disposal to bring us back to a sense of normalcy.