Last Thursday, Federal Reserve Chairman Jerome Powell emphasized that the U.S. economy needs more fiscal and monetary policy support. He pledged that the Fed would take whatever actions are necessary to protect the economy and sustain our recovery. While the housing market has recovered and consumer spending remains strong, the pace of improvement has moderated.
For several months, Powell has stated that a sustained economic recovery is dependent upon a coronavirus vaccine and another stimulus package. He has urged additional government spending because of his belief that monetary tools alone cannot keep our economy healthy.
In regard to a monetary boost to the economy, the Fed plans to keep interest rates near zero for three more years. The Fed has been buying huge quantities of government-backed bonds and mortgage-backed securities to (1) keep interest rates low (2) provide liquidity to the banking system and (3) keep markets functioning. Such actions have increased its balance sheet to $7 trillion in June from $ 4trillion before the pandemic. Fed officials have discussed targeting longer-term securities to force down their interest rates, especially 30-year mortgages. Their efforts have benefitted the housing market because low mortgage rates have incentivized buying.
Powell highlighted two major economic risks: (1) The rising number of COVID-19 cases. The U.S. recently reported 121,000 new infections in one day, an all-time high. Increasing COVID-19 cases could pose a threat to job gains if consumers become more cautious and more states impose restrictions. (2) Households will “run through savings” generated from the previous government spending relief efforts.
Why does Powell feel we need another stimulus infusion? The government can target sectors in the economy that are languishing. By contrast, monetary policy impacts overall business expansion rather than pinpointing our most vulnerable enterprises and needy populace.
The Labor Department believed that our economy has cooled in large part because of the surge in virus cases. To date, we have recovered about 12 million jobs. This represents approximately half of the total that were lost earlier in the year.
Zip Recruiter economist Julia Pollak expressed concerns that holiday hiring will be particularly weak in 2020. Fewer people are making travel plans. They are cutting back on shopping at brick and mortar stores.
The Federal Open Market Committee wrote “economic activity and employment have continued to recover but remain well below their levels at the beginning of the year. The ongoing public health crisis will continue to weigh heavily on economic activity, employment, and inflation in the near term. It poses considerable risks to the economic outlook over the medium term.”
The size and scope of another stimulus bill remains questionable because of political gridlock. Sen. Mitch McConnell supports a $650 billion proposal. Speaker of the House Nancy Pelosi wants a $2 trillion package. McConnell said, “I think we need to do it, and I think we need to do it before the end of the year … we need to sit down (with Democrats) and work this out.” McConnell wants a targeted aid package. Pelosi would like to include state and local government aid, enhanced unemployment insurance and liability protections for business.
The need for another stimulus package reflects the pain felt by tens of millions of Americans who have lost their jobs because of the pandemic. Blacks, Hispanics, millennials, mothers and low-wage earners in the service industry have been adversely impacted.
When her starving French subjects demanded bread, Marie Antoinette callously responded, “Let them eat cake.” Her exasperated subjects subsequently beheaded her.
A lot of water has passed under the bridge since the French Revolution, but being tone deaf remains a cardinal error for politicians. Given our social unrest, I strongly advocate our political leaders pass a compromise stimulus package.
Originally published in the Sarasota Herald-Tribune
