In the end, the Fed was better at hosting events than listening or really reforming.
In August, at the federal government’s exclusive annual retreat, Fed Chairman Powell unveiled the results of the framework review. The supposed big revelation was that the Fed would now try to achieve average inflation of 2%, instead of exactly 2% per year. Wall Street and Fed watchers heralded it as a sea change in monetary policy. In reality, it did nothing for the here and now. He only promised that he would not overreact to inflation in the future. Yet inflation has rarely hit its modest 2% target since 2008. Why should we believe it will be any different after this severe recession?
Nonetheless, we cannot abandon the Fed, especially now, because it has always been the most effective and stable force in the Covid-19 crisis. And because it seems to be the last bastion to hope for new remedies. The Fed must combine the urgency of its response in March with the creativity of its actions to save the world during the Great Recession.
What more can the Fed do? First, it needs to make its main street and municipal lending facilities really work for midsize businesses and state and local governments: lower interest rates on loans, which are currently above average. market rate, and extend the repayment term to five years or more. .
The Fed must also be willing to make loans to businesses and communities that may not be able to repay in full. Generous loan cancellation would effectively turn loans into grants, a nudge the Fed recently agreed to lend to struggling large corporations.
Second, the Fed needs to think big. As problems loomed in financial markets in 2007, then Fed Chairman Ben Bernanke emailed senior executives with the subject line Blue Sky. They needed new ideas to calm the markets and support the economy as a whole. They used obscure emergency powers in 2008 and subsequently bought over $ 1 trillion in mortgage securities after the real estate bubble imploded. Tools that were new and untested in the United States at the time.
The same goes for 2020. We need blue sky ideas, and they exist. One example, a proposition by former Fed economists Julia Coronado and Simon Potter, is that the Fed could send money directly to people, using digital currency, much like direct deposit. To avoid politics, this emergency support would be tied to macroeconomic conditions, such as the unemployment rate. Such policies would blur the line between fiscal and monetary policy, but if carried out properly, the Fed’s independence from Congress could be preserved.
Finally, the Fed must seriously exorcise its hawkish demons. He must commit and not simply promise to fulfill his dual mandate. They must define maximum employment with numbers and not good intentions. They need to explain in detail what reaching their new average inflation target will look like. Then they need a plan to get there.
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