Federal Reserve Board chairs do not often comment on U.S. fiscal policy, so it was unusual last week when the current chair, Jerome Powell, said in a press conference, “This is the time to use the great fiscal power of the United States to do what we can to support the economy and try to get through this with as little damage to the longer run productive capacity of the economy as possible.”
Powell was speaking favorably of the nearly $2.5 trillion (at least) in new deficit spending Congress and the president have approved so far to support the economy, which has been largely shut down to constrain the spread of the COVID-19 pandemic.
The comment was even more significant because, as Powell noted, he has long “been an advocate for the need for the United States to return to a sustainable path from a fiscal perspective at the federal level.” But, he noted, “This is not the time to act on those concerns.”
Instead, Powell said, “It is worth remembering that the measures we are taking to contain the virus represent an investment in our individual and collective health. As a society, we should do everything we can to provide relief to those who are suffering for the public good.”
The Federal Reserve has taken numerous actions to support the economy through its control of monetary policy and Powell’s comments were a reminder that monetary policy alone will not be enough to get through the crisis. As Powell observed, “Of course, lowering interest rates cannot stop the sharp drop in economic activity caused by closures and other forms of social distancing. And low rates will not effectively spur the economy if those rates do not feed through to broader financial conditions or if households and businesses are unable to get credit.”
How much more fiscal support the federal government should provide to the economy and how that should be done are crucial questions that will confront Washington policymakers in the coming months. Battlelines are taking shape with congressional Democrats insisting on a large influx of aid to state and local governments while President Trump is insisting on a payroll tax cut.
For his part, Powell suggested “policies that protect workers, businesses, and households from avoidable insolvency, that keep businesses going so that they're able to produce goods in it and to either hold on to their employees or quickly rehire them.”
“They'll come with a hefty price tag,” he said “but we would come out of this event eventually with a stronger economy and with less long-run damage to the economy.”
Even assuming further fiscal support, Powell did not paint a rosy scenario. In his view, the economy likely “won't go right back to where we were because people will, until they’re confident that the virus is well and truly under control, then they will be somewhat, probably reluctant to undertake certain kinds of activity…. It probably will take some time for us to get back to...a more normal level of unemployment and ultimately the maximum employment.”
Powell noted the great economic uncertainty that comes from not knowing how long it will take to get the virus under control, whether there will there be additional outbreaks, and when there will be treatment or a vaccine. He also expressed concerns about the possibility of “damage to the productive capacity of the economy” if high unemployment levels extend for a long period. Workers, he warned, ”can lose the skills that are needed, can lose touch with the labor force, and have difficulty restarting his or her career.”
Similarly, Powell warned that a wave of “unnecessary insolvencies” among medium and small businesses “could be damaging to the performance of the economy over time.”
Looking ahead, Powell included a reminder that the fiscal road was already a bumpy one before the pandemic hit. “The U.S. really hadn't gotten back to where we needed to get on fiscal policy,” he said. “We have an already high level of debt to GDP and rising quickly.”
“The time will come, again, and reasonably soon, I think, where we can think about a long-term way to get our fiscal house in order. And we absolutely need to do that. But this is not the time to be, in my personal view, this is not the time to let that concern, which is a very serious concern, but to let that get in the way of us winning this battle.”
Balancing historic short-term spending demands with long-term fiscal consequences is not an easy task, but Powell’s common sense approach to the trade-offs are worth careful consideration by fiscal policymakers at all levels of government.