The Federal Open Market Committee (FOMC) held back from acting at the conclusion of the July meeting, leaving short-term interest rates near zero. The FOMC acknowledged some of the improvement we saw in May and June but cautioned that employment and economic activity “remain well below their levels at the beginning of the year.” Committee members also stressed that “the path of the economy will depend significantly on the course of the virus.” This latter point is critical. Fed Chairman Jay Powell emphasized that a resurgence of COVID-19 cases has already triggered a pullback in economic activity. High frequency data on credit card usage reveals a reversal in consumer spending in recent weeks.
He is not waiting for a vaccine to save the economy, given the damage that could still happen between now and then. He stopped short of forecasting a double-dip recession but openly worried about the “long tail” of unemployment. Powell emphasized his mantra that the Fed can lend but not spend and pled for additional fiscal support. He underscored that the economy will need continued support from both the Fed and Congress to weather the persistent weakness we are likely to experience as a result of what he called “this natural disaster.” He stressed the high level of uncertainty about the economic outlook and concerns about downside risks going forward.
Powell also said that the committee discussed additional tools that the Fed can use to support the economy. The FOMC is widely expected to provide more explicit “forward guidance” on its decision rule for interest rates. The consensus within the Fed is to hold short-term rates near zero until we overshoot a bit on the Fed’s 2% inflation target. The goal is to allow the economy to run a little hot if that will help the most marginalized workers to regain employment and garner a boost in wages.
The Fed has few tools to level the playing field on inequality. What it can do is allow unemployment to fall low enough to narrow the gap in unemployment, notably between Black and white workers. The Fed could allow wages, especially for low-wage workers, to accelerate and wages, instead of profits, to rise as a share of the economy. We have not seen a major surge in the wage share of the economy since the latter part of the 1990s boom.
Powell talked quite a bit about the gap between the unemployment rate between Black people and whites. He said the Fed is now looking more closely at the need to incorporate that gap into the policy setting process. It’s now more committed to bolstering employment than to worrying about inflation, which has consistently disappointed, when it comes to setting policy.
Powell and his colleagues on the FOMC are clearly more concerned about the economy than they were just a month ago. The resurgence of COVID cases and the impact that has on the economy is spurring their anxiety. Powell is willing to do more but is limited and needs Congress to step up to the plate and provide more aid ASAP.
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