Fed, Treasury Spar Over How Much COVID-19 Relief Needed
Fed, Treasury Spar Over How Much COVID-19 Relief Needed
Is the Fed from Venus and the Treasury from Mars?
The battle between U.S. Treasury Secretary Steve Mnuchin and Federal Reserve chairman Jerome Powell was in full view last week as the two testified before Congress. The two offered different visions about the U.S. economic outlook, with the Administration—facing an election in a few months—offering a more upbeat view of a “V”-shaped recover, unsurprisingly.
Basically, the Treasury offered a more hesitant approach to new federal aid while Powell again suggested that more relief would be needed, given his much less sanguine view of how long it will take the country to emerge from the coronavirus induced shutdown. This too should be no surprise, as the Fed can effectively print money while the Treasury has to go out and raise it and then convince the taxpayers to pay for it. For example, the Treasury seeks to borrow $3 trillion in the second quarter to help finance the aid that Congress has passed.
These differences reflect the Administration’s belief (which I agree) that the biggest danger to the economy is waiting too long to restart activity after two months in which millions of Americans have sheltered in their homes to slow the spread of infections and many millions have lost their jobs. The President has said that he wants to wait and see about how the economy does before providing more aid to businesses, households and state and local governments. House Democrats approved a $3 trillion relief package last week. It likely won’t pass in the Senate. For more see page 11.
Powell once again suggested additional spending from Washington could be needed to prevent long-term damage from high unemployment and waves of bankruptcies. The Fed doesn’t see the economic rebound that the Administration does and is concerned the relief measures so far might not be sufficient to help bring the economy out of the coronavirus shock, even with interest rates at zero, effectively. The Fed believes that allowing businesses to reopen without slowing the spread of the virus risks making the economy worse.
Separately, the minutes from the April Federal Open Market Committee were released and the most important nugget was that the Fed is discussing the difficulty officials could face in boosting growth when rates are effectively zero. In 2019, officials conducted a policy review to plan for such a scenario, and the minutes said that review was on track to be completed later this year.
Fed staff economists laid out a baseline scenario in which restrictions on social interactions would gradually ease, boosting economic growth and reducing unemployment. But they also said their more pessimistic projection was no less plausible than the baseline forecast.”
Even after social-distancing restrictions end, some business models “may no longer be economically viable,” Fed officials said, and spending in sectors such as entertainment and travel that demand greater human interaction could remain weak. The minutes also said that greater fiscal support might be necessary if the downturn persists. Once again there was no discussion of negative interest rates.
The yield on the benchmark 10-year U.S. Treasury note was 0.66% vs 0.64% one week previous.
Upcoming FOMC meeting on June 9-10.
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