Do We Really Need More Stimulus?

As we speak, Republicans and Democrats are still wrestling over another coronavirus stimulus package. Everyone wants one, we’re told, and the economy needs one.

Don’t start spending that stimulus check just yet.

Despite what they claim, Democrats don’t really want a deal, no matter how big, at least not until after the election. Do you really believe that Nancy Pelosi and Chuck Schumer want to allow President Trump to play Santa Claus and send out $1,200 checks to American voters right before the election? Needless to say, the president would just love to have his name on those checks.

So don’t count on another stimulus package until after the election, if then. It’s a valid question of whether the country really needs another one. But never fear, the Federal Reserve will step in where Congress fears to tread.

At its September 15-16 monetary policy meeting – the last one before Election Day – the Fed updated and revised its prognosis upward for the U.S. economy, finally catching up with many other analysts and some of its own regional banks who are forecasting a much brighter picture than Fed Chair Jerome Powell and many other Fed officials have been painting over the past couple of months.

The Fed now expects U.S. economic growth to be negative 3.7% for this year, a big upgrade from its negative 6.5% projection in June. It also expects positive growth of 4.0% next year (down from 5.0%), 3.0% in 2022 and 2.5% in 2023. Regarding unemployment, it expects the jobless rate to fall to 7.6% this year from its June projection of 9.3%, declining further to 5.5% next year, 4.6% in 2022, and 4.0% – i.e., full employment – in 2023.

Some of the Fed’s own regional banks are a lot more optimistic. The New York Fed is calling for 15.6% annualized growth in the third quarter and 7.3% in Q4, while the Atlanta Fed is forecasting a 31.7% jump in Q3.

At the same time, the unemployment rate has dropped by nearly 60%, to 8.4% last month from 14.7% in April, while new weekly jobless claims appear to have plateaued at less than 900,000, indicating that lots of people are being rehired. Retail sales rose another 0.6% in August, their fourth straight monthly increase. That was below expectations, but perhaps we can’t expect huge increases going forward as monthly sales are already back above where they were in February before the economy was shut down.

Yet, Powell felt compelled to dial down the enthusiasm at his post-meeting press conference. “The recovery has progressed more quickly than generally expected,” he acknowledged. “Even so, overall activity remains well below its level before the pandemic, and the path ahead remains highly uncertain.” In its official statement after the meeting, the Fed warned that “the ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.”

So the Fed is prepared to continue stimulating the economy through monetary policy even if the politicians can’t get it done with fiscal policy. At the meeting, the Fed basically promised to hold interest rates at or near zero until at least the end of 2023 and said it is willing to tolerate inflation “moderately above 2% for some time,” leaving vague what exactly “moderately above” and “for some time” mean. I guess we’ll find out when the Fed decides it has reached that point.

Granted, the Fed’s monetary policies and the government’s stimulus programs have had a lot to do with the economic rebound and keeping struggling people’s necks above water. Still, many of those programs – such as the $600 a week unemployment booster and the Paycheck Protection Program – have already expired without having any deleterious effects on economic and employment growth. Which begs the question – why do we need even more stimulus?

Because now, it seems, the Fed just can’t let go. It likes being Santa.

While the Fed doesn’t – yet – have the authority to send out stimulus checks to every American, it can do lots of other things within its ever-expanding power, like nearly eliminating interest rates as a cost of doing business for the foreseeable future and flooding the financial markets with money, which makes investors happy.

And the beauty of it is that it can do it all without ever having to get people angry by raising taxes to pay for it as legislators must occasionally do – which is why they’re happy to leave this job to the Fed. It simply buys more Treasuries, mortgages, and corporate bonds and lowers interest rates by executive decree.

Of course, the Fed can make people mad by raising interest rates and tightening monetary policy when it feels it has accomplished what it set out to do. But that’s one thing Powell has seemed to learn from his predecessors. Once you ease monetary policy, don’t ever stop.

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George Yacik
INO.com Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.