As Fed Meets, It May Need to Consider Unusual Options During Pandemic
The Federal Reserve begins its two day meeting today. It's a chance for chair Jerome Powell to give his assessment as to where things stand with our economy and with the Central Bank can do in the future. The menu of options is unusual. Let's focus on what's most important to understand with our chief economics correspondent Nick Tim Rose Good Morning Nick Good Morning Mark. So Nick, we've seen the Fed lower interest rates now to near zero is the Fed. Running out of tools the answer is yes and no. If you look at what they normally do to spur recovery, they certainly don't have the same conventional toolkit that they have in the past and that is to Cut Short term interest rates they've cut interest rates as you said to near zero. So what tools do they have? Well, what they did after after the two thousand eight financial crisis is they can purchase assets government Treasury securities, mortgage backed securities, which they're doing right now they do that to try to drive down long term interest rates. The long term interest rates are already very low. So they still do have tools they can use, but it's possible that there were just reaching a point of diminishing returns with those post-crisis tools. So with those options on the table already being used, what could the chair do or suggest to try to jump start the economy even further Well, the Fed Chair, and a lot of Fed officials have been outspoken about government spending. So called fiscal policy and the reason for that is once you've already lowered interest rates attend your treasury yield is sitting around point seven percent and so when it's that cheap for the US government to borrow. Spending is much more likely to have an impact in terms of boosting demand. The other reason the Fed is more outspoken than they have been in the past about the need for government spending is that the nature of the current downturn is different from the past. So an economics textbook might say that when a downturn hits the Central Bank can. Stabilize the economy by lowering interest rates. This offsets declines spending on demand, but there's research showing that this stabilization tool isn't as effective in boosting spending when certain sectors of the economy aren't able to operate, and it's in those circumstances where if you can boost spending in those sectors or at least replace lost income even if you can't get people to travel. or to spend money in restaurants, then there's a better chance that you're going to limit the kind of the vicious circle of business owners who can't pay rent means their landlords have less money to maintain their staffs. All of those things can lead to layoffs that really don't have anything to do with containing the threat from the virus. This leads to my next question because the Fed just announced they want to see somewhat higher inflation than in the past and that seems a bit strange. Why would you want this to happen? That's right. The Fed doesn't really desire more or higher inflation as a goal in and of itself. But what they're concerned about is that when when households and businesses expect inflation to be lower inflation expectations are an important and the Fed things very important role determining what inflation actually is. So if you look at economies in Europe and Japan which are stuck with lower interest rates, lower inflation and lower growth, it can be a very difficult. Cycle to break to get people expect prices to be higher when they can see that prices are going up and so this isn't so much about boosting inflation. It's about keeping expectations from falling into that trap where you're constantly fighting against this, you're swimming upstream against the current of ever lower inflation expectations, and so the Fed is trying to reset how participants in the economy expect growth to be in the future to influence their decisions now. Chief economics correspondent Nick Tim Rose in Washington. Nick. Thanks for breaking this down for us. Thanks for having me marked.