Federal Reserve focuses on economic expansion
He was mad as hell and wasn’t going to take it anymore. And he didn’t want you or anyone else to, either.
He was Howard Beale, the fictional television character from the 1976 movie “Network,” whose unhinged rant implored viewers to “get up out of your chairs, open the window, stick your head out, and yell, and say it: ‘I’m as mad as hell, and I’m not going to take this anymore.’”
“This” was just about everything, including a badly damaged economy.
Though President Joe Biden, Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen are distinctly un-Beale-like in their messaging style, the nation’s economic policymakers nonetheless have sent signal that, as regards to decades of subpar growth and stagnant wages, they too are not going to take this anymore.
The result is what’s being called an “experiment” in economic theory, one that mixes overwhelming fiscal relief with negative real interest rates, on top of a willingness to temporarily overshoot the Fed’s long-held (but rarely attained) 2% target for core inflation. As such, prioritizing growth, employment and wages over inflation represents a pendular shift from the intense focus on price stability that began in the wake of the hyper-inflation of the 1970s.
In fact, the inclination to push the economic pedal to the metal — an approach endorsed by nearly three-quarters of all Americans and by 43% of rank-and-file Republicans — harkens to the 1960s, when the American economy ran hot for most of that otherwise turbulent decade.
Going big
The government’s immediate and all-in response to the pandemic recession was informed by lessons from the global financial crisis 11 years earlier.
In February 2009 — a full 14 months after the subprime mortgage recession had begun — Congress finally passed a $787 billion stimulus bill to resuscitate a failing economy. Too little, too late. Economic growth over the following decade averaged just 1.4%, less than one-third the pace of the go-go 1960s.
Largely due to the pandemic, the last four years have been particularly brutal, with the 1% average growth rate tied for the fifth lowest of the 69 rolling fouryear periods since 1947.
But impediments to growth run deeper than mortgages, pandemics or politics. Since 2000, the American economy has expanded at an average annual rate of 1.8%, exactly half the pace of the previous five decades.
The Biden administration’s $1.9 trillion rescue package would push the fiscal response to the COVID recession to $5.6 trillion, more than enough — in theory, at least — to fill the output hole left by the pandemic. Meanwhile, the Fed has created another $3 trillion to drive down interest rates, while pledging to keep borrowing costs at rock bottom indefinitely.
Good trouble?
All that fuel poured onto the U.S. economy has sparked concerns about inflation, which recently triggered selloffs in the stock and bond markets.
Since January, 10-year Treasury yields have jumped by more than half a percentage point, jolting fixed-income investors grown complacent by 40 years of rising bond prices and muted inflation. Those higher yields are a clear signal that investors think efforts to reflate the economy eventually will bear fruit.
Consumer prices are almost certain to spike later this year, although that increase could be transitory as comparisons with mid-2020 levels recede. Still, there is $2.5 trillion in pent-up consumer demand waiting to be spent, in some cases on a reduced supply of services.
In betting the economy can run hot without triggering a sustained burst of damaging inflation, Powell and Yellen often reference the weakened labor market, which has shed 9.47 million jobs, some of which won’t return. Their relatively dovish positions might also contain a tacit acknowledgment that suppressing inflation at the expense of long-stagnant wages may no longer be politically or ethically palatable, that slightly higher inflation may actually be good for the economy, and that previous warnings about inflation’s imminent revival have been proved wrong.
Speaking to a Wall Street Journal webinar last week, Powell implied that the Fed is content to keep rates near zero for an indefinite period, even as some economists see a strong recovery taking shape.
“There’s just a lot of ground to cover before we get to that,” Powell said.
Sounds like a man who is not going to take this anymore.