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Straight Talk from the Powell Fed

RFP
The Federal Open Market Committee (FOMC) changed its statement to reflect the dire state of the economy in the wake of COVID-19 closures. “The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world.”

The Fed did not change policy but underscored the “considerable risks to the economic outlook over the medium term [more than a year.]” Committee members did not provide specific metrics for how long they intend to provide support for the economy. It is clear that the Fed is willing to support the economy for “some time” with “as much [QE] as needed.” Powell was hesitant to put a limit on what is now an unlimited commitment by the Fed to buy mortgage-backed securities and Treasuries. They would rather err on the side of keeping policy easy for too long rather than not long enough, given the undershoot we have already seen on inflation.

One other notable shift in what was a direct but brief statement by the Fed was its attention to “international developments.” This is an acknowledgment of the global scope of the crisis and risk associated with the uneven reopening of countries around the world. Emerging markets are in a particularly precarious situation as they teeter on the brink of failure; the spillover to the rest of the world could be substantial.

Fed Chairman Jay Powell went into great detail about the depths of the losses already incurred. He underscored the uncertainty about the duration of the crisis. The outcome is dependent upon how quickly the virus itself is contained as well as the support provided by governments to blunt the blow. Powell made a rare plea for more fiscal support in response to the crisis. He was quite direct in his language that we will be needing more support from Congress. The Fed is limited in that it can lend but not spend. The latter is the purview of Congress. Powell is clearly ready to do more to leverage spending by Congress if needed.

Bottom Line
Powell has been one of the lone voices in Washington, D.C. to underscore that the current crisis is wreaking havoc on businesses and individuals through “no fault of their own.” He has made it the Fed’s mission to keep firms and households solvent through the crisis but it cannot carry the economy alone. More is needed. The consensus among economists is that we will need another $2 trillion in aid and stimulus added to the nearly $3 trillion Congress has already approved.

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