Fed becomes ally to White House in rejecting concerns about stimulus
WASHINGTON — As prominent economists, Republican lawmakers and some market analysts raise alarm bells about the risks of overspending and overstimulating the economy, the Biden administration has found a surprising ally: the Federal Reserve.
The House passed President Joe Biden’s $1.9 trillion coronavirus relief bill early Saturday morning, and the Senate is expected to follow suit shortly. The legislation would pump money into an economy that could blast off as the pandemic settles down.
Federal Reserve Chairman Jerome Powell is waving off concerns about an overtorqued economy producing long-feared inflation, saying the job market has a long way to heal before such fears are justified. In recent weeks, the position has been repeatedly embraced and cited by top Biden officials who make a similar argument when they say Congress needs to “go big” to ensure an economic revival.
As a result, the Fed and the White House appear closely aligned on policy — which can be a risky place for the central bank. With Powell at the Fed, and his predecessor Janet Yellen serving as treasury secretary, neither power center regards the potential dangers of overspending as a top concern.
If this view is right, the economy could be in for Goldilocks period of strong growth, low unemployment and rising wages. But critics argue that if the Fed and the White House turn out to be wrong, it could lead to a cycle of rising prices, higher interest rates and a national debt that is harder to manage.
Indeed, bond yields and interest rates jumped last week as markets assessed that it is likelier that the economy will be far stronger in coming months.
“They all think alike,” said Douglas Holtz-Eakin, former head of the Congressional Budget Office and now the president of the American Action Forum, a center-right think tank, of the Fed and the White House. “They’re just working off the same playbook.”
The situation is tricky ground for the Fed, which has spent decades professing its independence from politics and as a guardian against inflation. Former Fed chairman Paul Volcker famously acted to stem spiraling inflation in the late 1970s and early 1980s, causing a recession but making clear that the central bank would always act to keep prices from rising too fast. That has stood as a bedrock of economic policy for nearly 40 years.