Jay Powell has mounted an increasingly forceful case for more fiscal stimulus in the US economy, sending a clear yet politically tricky message to Congress and the White House that the recovery could be in danger of faltering.
Mr Powell has been making some of the strongest arguments in favour of a deal, as Donald Trump’s administration and congressional Democrats try to forge a last ditch pre-electoral compromise to deliver a new economic rescue package worth about $2tn.
The Fed chair’s willingness to press openly for additional spending began several months ago, but it has taken on new importance as the US economy faces an inflection point.
Although the bounceback from the initial coronavirus shutdowns has been faster than expected, some key indicators — including in the labour market — have been showing signs of a slowdown, and the rebound is far from being complete, with millions still unemployed.
Without fiscal aid in the coming months, it is unclear that the economy can avoid stalling, or even suffering a new downturn, heading into 2021. This leaves the Fed to shoulder the entire burden of the US crisis response with imperfect tools.
If the government delivered “too little support” to the recovery, it would bring “unnecessary hardship”, Mr Powell said last week in a speech that offered some of his most detailed thinking on fiscal policy. “By contrast, the risks of overdoing it seem, for now, to be smaller,” he added.
Mr Powell’s appeals for a fiscal deal have a social dimension: he has noted that additional stimulus would be crucial to saving low-income and minority households disproportionately affected by both the virus and the recession. This would prevent the “tragic” risk of exacerbating existing disparities, he said last week, using emotionally loaded language unusual for the central bank.
“He’s pleading the case for the American public,” said Diane Swonk, chief economist at Grant Thornton in Chicago. “The economic conscience of Washington right now is coming out of the Fed,” she added.
There is a long history of Fed chairs opining on government policy. In the early 1970s, Arthur Burns pressed for wage and price controls, to the chagrin of Richard Nixon. Throughout most of their tenures Paul Volcker and Alan Greenspan advocated deficit reduction and balanced budgets, even though the latter gave guarded approval to George W Bush’s tax cuts.
Ben Bernanke was more reticent, but did back fiscal support and passage of financial rescue legislation at the outset of the financial crisis. He later told Congress to increase the debt limit or risk a damaging sovereign default.
There are plenty of international parallels, including in advanced economies with independent central banks, says Roberto Perli, a Fed-watcher at Cornerstone Macro.
“It’s not unusual for central banks to try to push fiscal authorities to do their part. [Mario]Draghi did and [Christine] Lagarde is doing it constantly,” he said, referring to the former and current presidents of the European Central Bank.
“The overarching point is that Powell realises that monetary policy is not all-powerful, especially under the circumstances, and fiscal policy can help a lot. So he feels an obligation to incentivise people in Congress,” he added.
The Fed wants to avoid a scenario like the one that unfolded in the aftermath of the financial crisis, when an initial bout of stimulus was followed by a quick move towards fiscal retrenchment, prolonging the pain of the recovery.
But delving into fiscal matters — even delicately — exposes the Fed to criticism that it is overstepping its boundaries and unduly taking sides. While Mr Powell has noted that small businesses, the unemployed, and state and local governments would benefit from more stimulus money, he has refrained from any specific prescriptions in terms of timing, size or details.
The Fed chair was once asked to join a call with Nancy Pelosi, the Democratic House speaker, and Steven Mnuchin, the Treasury secretary, to discuss aspects of the stimulus talks, in an episode first reported by Politico, but has otherwise steered clear of any involvement in the negotiations.
Mr Powell has been able to stake out the Fed’s position vigorously, however, partly because he is in good political standing across the spectrum at the moment.
Donald Trump was last year attacking him for being an even greater foe than Xi Jinping, the Chinese president. But after the Fed unleashed massive monetary stimulus this year the US president used a baseball analogy to call Mr Powell the “most improved player”.
Some Republicans have been wary and even critical of the Fed chair’s stimulus message, but there has been no strong backlash.
On the Democratic side, there is some concern that Fed policies have mainly benefited rich investors and companies. However, most lawmakers have been pleased with Mr Powell’s dovish strategy shift embracing greater tolerance for inflation and a stronger commitment to full employment.
“He has really close relationships on the Hill . . . going up and talking and being very deliberate in reaching out to both sides of the aisle, even before the crisis,” says Don Kohn, the former Fed vice-chair, now a senior fellow in economic studies at the Brookings Institution, a think-tank.
So far the biggest criticism of Mr Powell’s interventions has not come from any powerful politicians but from the Wall Street Journal’s conservative op-ed page. “The Chairman is taking the Fed into uncharted waters, and the toast of the town one day can become the scapegoat the next,” it wrote last week.
In making the case, Mr Powell has also been joined by many fellow Fed officials, some of whom have spoken about the need for a fiscal deal in even stronger terms than the chair.
“We definitely need it and the sooner that we get significant fiscal stimulus, the better,” Eric Rosengren, president of the Boston Fed, told the FT this week. “I’m very supportive of the vocal message [from Mr Powell] that this is the time for fiscal policy to have an impact,” he added.
Whether Mr Powell’s words will be heeded remains unclear. Mr Trump has this month called for a big stimulus deal, then reversed course and pulled out of the talks, then jumped back in again.
Ms Pelosi was expected to continue negotiations with Mr Mnuchin on a fiscal package, but the chances of a deal before the election were seen as small.
“The [Fed chair’s] pulpit is not as powerful as the ballot box. Everything is viewed through the prism of the election coming in less than four weeks,” Mr Kohn said.
He added however that Mr Powell was still “doing the right thing” and his message might be picked up again after November 3.
“The congregation is there, they’re just preoccupied with something else,” he said.