Despite Persistent Concerns over Lackluster Inflation, Powell Urges Fiscal Action

While disinflationary forces still cast doubt on the Fed’s new monetary regime, the chairman pushes for more fiscal relief in the wake of the coronavirus

The COVID-19 pandemic continues to wreak havoc throughout the U.S. as reported cases have recently reached 16 million and virus-related hospitalizations are hitting record numbers across the country. However, with vaccine developments providing widespread optimism, and with vaccinations beginning across the U.S., many people have begun to see the light emerging at the end of the tunnel. Although this is great news for the eventual eradication of the virus within the next year, many questions remain about the economic recovery, and specifically how the Federal Reserve and other fiscal authorities should continue to respond.

On Dec. 16, Fed Chairman Jay Powell spoke again on the state of the economy, detailing the central bank’s macroeconomic outlook and how the Fed will continue to conduct policy to ensure a robust recovery. In an unsurprising turn of events, the statement of Powell and the Federal Open Market Committee remained largely unchanged from the FOMC’s last meeting; Powell and the FOMC again committed to use their “full range of tools to support the U.S. economy . . . thereby promoting its maximum-employment and price-stability goals.” As the trajectory of the economy remains tied to the course of COVID-19 and the vaccine’s effects, the FOMC also announced that it will resume increases in Treasury and mortgage-backed securities holdings by at least $80 billion and $40 billion a month, respectively, for the foreseeable future. In conjunction with maintaining the interest-rate target range at 0% to 0.25%, the Fed has pledged to keep these actions in place until the recovery is consistent with its goals: maximum employment and an average inflation rate of 2%.

However, the Fed’s newly instituted average inflation targeting regime continues to cast doubt on the FOMC’s credibility and its ability to remain committed to the central bank’s dual mandate. Consistent with Powell’s statement during the last meeting, the FOMC released its Summary of Economic Projections jointly with its statement on Wednesday, including numerous new figures outlining the distribution of participants’ projections for gross domestic product, unemployment and inflation. These projections continue to paint an inflation picture that seems inconsistent with Powell’s and the Fed’s commitment to maintaining inflation at or above their stated 2% average target. In fact, the median distribution of inflation projections for the next few years remains at or below 2% until at least 2023, even with several FOMC participants estimating inflation above 2% from 2021 onward.

During the Q&A period, the Fed chair explained that significant disinflationary pressures persist throughout the economy. Even with a high level of monetary accommodation, and if the projections are a reliable guide, it may take some time before inflation can recover to a level of 2% or higher. This seems to send mixed signals regarding Powell’s guidance, as he has suggested in recent months that the Fed is doing whatever is necessary to achieve higher inflation. Nevertheless, Powell has maintained that market practitioners have found these FOMC assurances credible. He has reiterated that markets have moved in a direction that suggests inflation will recover to the Fed’s desired target range.

Regardless, there is only so much the Fed can do to ensure that the economy resumes a path toward a robust recovery. As Powell also noted during his press conference, even though the Fed will continue to provide necessary lending and monetary stimulus to support the macro economy, a lack of short-term fiscal stimulus remains a core problem. This is a point he has echoed since the last stimulus package, the CARES Act, was passed by Congress and signed into law by President Trump back in March. However, after many months of negotiating, it appears that congressional leaders are finally nearing a deal for an additional $900 billion in relief. Whether this assistance will be enough for struggling individuals and businesses is the subject of rigorous debate, but Powell has made sure to stress that a strong recovery is only possible with a healthy mix of monetary and fiscal aid. And as a tumultuous 2020 comes to an end, it is more important than ever that our economic and governmental institutions continue working in tandem to repair and rebuild a U.S. economy that has been ravaged by the COVID-19 pandemic.