Don’t count on the Fed for a rescue

The Federal Reserve can’t prop up the economy much longer, said Bill Dudley. After the pandemic hit this spring, quick action by Federal Reserve Chair Jerome Powell was credited with helping to stave off the worst effects of the downturn. The Fed committed to extraordinary lending programs for businesses, and slashed interest rates, which helped the stock market return to record highs. Those moves have kept the economy from falling off a cliff even though key provisions of the $2 trillion stimulus package expired in August. However, the Fed will soon be “out of firepower.” The Fed can jump-start the economy by “bringing future activity into the present: Easy

money encourages people to buy houses and appliances now rather than later.” But eventually the benefit of lower interest rates wears off. “The rate on a 30-year mortgage stands at about 3 percent. If the Fed managed to push that down by another 0.5 percent, what difference would it make? Hardly any.” At some point, reducing rates any further could actually become counterproductive. Returns lower than inflation force savers to increase their reserves for expenses such their kids’ education, and so can actually prompt people to cut spending. The Fed “should still commit to using all its tools to the fullest.” But it’s up to legislators to give the economy what it needs.