Fed Out of Firepower? More Stimulus Needed: Economists

Vito J. Racanelli

Last week an ex-FOMC member stole the spotlight, although likely at least partially at the behest of the current Federal Reserve Chairman Jay Powell, who seems to have kicked off an economist-run pro-stimulus messaging campaign a few weeks ago at the National Association of Business Economists (NABE).  Former New York Fed Governor William Dudley penned a provocatively and ominously titled Op-Ed in Bloomberg; "The Fed Is Really Running Out of Firepower." The message to policymakers is clear. 

The article's gist is that while there are still some tools that the Fed has left unused, like yield-curve control or more asset purchases, even the most extremely dovish of these is unlikely to move the needle on the economy without significant fiscal stimulus. The Fed's lending power doesn't work very effectively without complimentary spending power. As Mr. Dudley put it, "Easy money encourages people to buy houses and appliances now rather than later. But when the future arrives, that activity is missing [without fiscal stimulus]." 

Last Wednesday, a current Fed Governor and the whispered-name for Biden's Treasury Secretary, should the ex-vice president win the upcoming elections, also echoed the clear message the nation's professional economist-class is sending to its political class; do your job now or risk serious harm to the economy. Governor Lael Brainard spoke even more unequivocally than Powell did at NABE, saying that Congress not coming through with timely fiscal support was the most "significant downside risk" to a robust economic recovery. 

The Fed, whose current Chairman has a bi-partisan resume and, in fact, was crucial to a campaign against using the debt ceiling as a political tool, has repeatedly said  just about as loudly as it can that the economy needs a lot of stimulus and now. 

Essentially, economists are telling Congress to buy the dip on debt and communicating a key fact that we have pointed out in these pages: it is likely that even given the extraordinary levels of spending in response to COVID-19 because of exceedingly low interest rates; the interest expense on US debt is likely to stay about the same or will even be lower when all is said and done.

This is why economists are speaking in such uncharacteristically direct and clear terms; because not only is it not an option to deny stimulus if you want to stave off a depression, it is also a unique opportunity to do it on the cheap. In other words, the result, because of low rates, will not dramatically crowd-out private sector activity. At least that’s what the economists say.

Separately, the Fed and Financial Crimes Enforcement Network (FinCEN) issued a Request For Comment on a widely considered proposal that could be a step toward recognizing virtual currency as a legitimate currency. However, this is just the first step in the process. 

Asset purchases remain steady around $40 billion worth of MBS and $80 billion of Treasuries every month. The Fed balance sheet is at its all-time high of about $7.2 trillion.  Wow. The yield on the benchmark 10 year is 0.87%, up from 0.84% last week.

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Vito J. Racanelli
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