September 27, 2020

How the Fed’s Quick Action May Have Given Congress Cover for Inaction

While congressional Democrats and Republicans agree on some aspects of a new economic assistance bill, negotiations have broken down over extending those programs further. It now appears unlikely there will be any large-scale economic package at least before the November elections. While there are many reasons for this, including election-year politics and some improvement in economic data, the fact that financial markets have largely recovered since March made for a very different backdrop to the negotiations than those that took place in the spring.

On the day the CARES Act passed, March 27, the SP 500 closed about 25 percent below its February high. On Monday, it closed at 0.07 percent below that high.

Unless something breaks the logjam, the economy is in the same predicament that made the years following the last recession so frustrating for so many. After the 2009 Obama fiscal stimulus legislation, congressional appetite for more spending to try to strengthen the economy waned — and the chances were obliterated once Republicans took control of the House at the start of 2011.

That left the Fed as the only game in town, as it repeatedly turned to quantitative easing and other unconventional strategies to keep the expansion on track. It worked: The expansion would be the longest in American history, ending only when the pandemic-induced recession began this year. But it was an unequal and unbalanced expansion, with weak growth in workers’ wages and a glacial decline in joblessness even as financial markets boomed.

Hypothetically, the Fed could take a more aggressive approach, holding back on its own stimulus unless Congress moves in concert. But having unelected technocrats tank financial markets in pursuit of their preferred fiscal policy would be decidedly undemocratic.

“It’s not a very small-d democratic way to operate,” said Sarah Binder, a George Washington University professor who has written extensively on the interplay between the Fed and Congress. “The dilemma here is that Congress created the Fed to perform this role, and expects the Fed to act. The Fed can’t decide: ‘Let’s make things worse, let’s not do whatever it takes, in hopes that Congress will step up to the plate more quickly.’”

Instead, Mr. Powell has used his bully pulpit to try to encourage Congress to act to help the economy directly, without weighing in too specifically on what those actions might consist of.

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