Let’s face reality: It is likely that no further economic relief is coming from Congress before the election. For months, negotiations between Democrats and Republicans over a follow-up package have alternated between stopping, starting and stalling.
Congress and the White House became mired in partisan politics as soon as a tenuous recovery from the worst of the pandemic began. Congress started strong this March, passing the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act. The measures taken, though imperfect, worked. But we are now the victims of that success, as Congress has lost the will to do more. The outcome is as predictable as it is tragic: as soon as the crisis stabilized enough for partisan inaction to not be political suicide, legislative paralysis returned.
In the meantime, coronavirus deaths continue to mount and normalcy remains elusive. It was far too soon to end relief but Congress did it anyway. Temporary job losses have become permanent. Through no fault of their own, businesses have closed their doors forever. Communities have laid off even more teachers.
That leaves the Federal Reserve — gatekeeper of the world’s reserve currency, America’s central bank and lender of last resort — as the only game left in town. And its game is not good enough.
As with Congress, the Fed acted boldly in March. Financial markets were seizing up and stock prices plunged. The Fed stepped in and pumped trillions of dollars into credit markets to put them back in sync. They offered to lend vast sums to financial institutions and corporations temporarily short on cash. However, shortly after, the Fed fell prey to politics and, perhaps most crucially, to its own longstanding technocratic obsessions and misconceptions.
The first signs of the Fed walking away from this crisis began with its two failed lending facilities: one meant for middle-sized businesses and the other meant for municipalities with gaping budget shortfalls. As I wrote in April, these new programs were a watershed; the Fed was poised to support Main Street, for once, not only Wall Street. Even so, these two innovative facilities, authorized in the CARES Act, were rolled out too slowly and months later have made only a handful of loans, largely because the terms of the loans are needlessly onerous.
Why is politics to blame? Both Democrats and Republicans took aim at the facilities. Democrats chastised the Fed for making midsize oil companies eligible, and Republicans scoffed at the idea of a “blue state bailout.” In turn, the Fed decided to essentially do nothing.
They shifted responsibility to the Treasury and claimed victory with the lending facilities; a victory few strapped businesses or municipalities can see. With financial markets stabilized and stocks rising again, the Fed, in essence, appears to see its job as done.
That mistaken view of a mission accomplished doesn’t stem from any malice among the Federal Reserve’s staff or leadership. Rather it comes from expertise that remains out of touch and stubborn fears of inflation that were bred during the crises of the late 1970s and early 1980s.
A little over 40 years ago, it took the Fed raising interest rates into the double digits to fight the double-digit inflation that was stifling the economy. No one wants that level of inflation again. But no serious person thinks the economy is in danger of such a precipitous rise in prices. Still, the current leaders of the Federal Reserve, who came of age as students of that inflation crisis, remain chastened by it and continue to overcorrect for it.
Even after the central bank was given a “dual mandate” by Congress to fight for more job creation, and not just stabilize prices, it has fought to keep prices stable at the expense of promoting maximum employment.
“The Making of Hawks and Doves: Inflation Experiences on the Federal Open Market Committee,” a research study by Ulrike Malmendier, Stefan Nagel and Zhen Yan, tracks how the lived experiences of Fed officials with inflation decades ago has sustained a hawkish culture in American monetary policy in which inflation prevention has always overshadowed employment.
In fact, the word “maximum employment” did not appear in an official Fed statement until September 2010. Four months later, the Fed adopted an explicit inflation target of 2 percent. Yet, to this day, it refuses to define full employment.
To its credit, in recent years, the Fed has wrestled with whether they have the right tools and if they’ve made the right decisions. They surveyed academic research and reflected on the efficacy and room for improvement in its policies following the Great Recession. They also did something new and scary for the Fed: they talked with people.
The Fed held listening sessions across the country to understand what people thought it should be doing. Again and again, people said we need more good jobs, said they thought inflation is not a big deal and scoffed at the notion that the nation might already be at “full employment,” as many powerful economists thought. For one, unemployment for people of color, those without a college degree, and in many rural areas remained high several years into the expansion after the Great Recession.
I was there for much of this self-evaluation — which we labeled a framework review — including the Fed Listens events, as a section chief in the Division of Consumer and Community Affairs. And I saw how hard change would be. (I heard, for instance, condescending remarks about the tour from some senior staff.)
In the end, the Fed was better at holding events than listening or truly reforming itself.
In August at the Fed’s annual, exclusive retreat, Fed Chair Powell unveiled the outcomes of the framework review. The supposed big reveal was that the Fed would now try to achieve inflation that averages 2 percent, instead of exactly 2 percent annually. Wall Street and Fed watchers heralded it as a sea change in monetary policy. In reality, it did nothing about the here and now. It only promised it would not overreact to inflation in the future. Yet inflation has rarely reached its modest 2 percent target since 2008. Why should we believe it will be any different after this severe recession?
Nevertheless, we cannot give up on the Fed, especially now, as it has consistently been the most effective, stable force in the Covid-19 crisis. And because it appears to be the last bastion for hope of further remedies. The Fed must combine the urgency of its response in March with the creativity of its world-saving actions in the Great Recession.
What more can the Fed do? First, it must get its Main Street and Municipal Lending facilities truly working for medium-sized businesses and state and local governments: Lowering the interest rates on the loans, which are currently above market rates, and extending the repayment time to five or more years.
The Fed must also be willing to make loans to businesses and communities that might not be able to repay in full. Generous loan forgiveness would effectively turn the loans into grants — a helping hand that the Fed has been willing to lend to struggling large firms in the recent past.
Second, the Fed must think big. As trouble was brewing in financial markets in 2007, Ben Bernanke, then Chair of the Fed, sent an email to senior staff with the subject line “Blue Sky.” They needed new thinking — new ways to calm markets and support the overall economy. They used obscure emergency powers in 2008 and later purchased over one trillion dollars in mortgage-back securities after the housing bubble imploded. Tools that were new and untested in the United States at the time.
The same goes for 2020. We need blue sky ideas, and they exist. One example, a proposal by former Fed economists Julia Coronado and Simon Potter, is that the Fed could get money directly to people, using digital currency not unlike a direct deposit. To avoid politics, this emergency support would be tied to macroeconomic conditions, like the unemployment rate. Such policies would blur the line between fiscal and monetary policy, but if done well, the independence of the Fed from Congress could be preserved.
Finally, the Fed must get serious about exorcising its hawkish demons. It must commit — not simply promise — to meet its dual mandate. They must define maximum employment with numbers not good intentions. They must explain, in detail, what hitting their new average inflation target will look like. Then they need a plan to get it done.
Yes, to take some of the boldest measures under consideration — like sending money directly to people — the central bankers would need more authority from Congress. But Congress has been more than happy of late to delegate economic policy to Fed officials. So they should ask for it.
Much like the Constitution, the Federal Reserve Act of 1913, which created the central bank, is a living document that Congress can change. Even without more explicit guidance from Congress, there is much that the Fed can and needs to do for Americans. The U.S. economy will eventually recover from this crisis. Getting the country back on track within months, not years, and doing so equitably, is the Fed’s mission.
Claudia Sahm, an economist at the Federal Reserve from 2008 to 2019, is the architect of the Sahm Rule, a recession indicator.
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