- The Federal Reserve has all but exhausted its policy ammo, and it’s up to Congress to pick up some slack, Bill Dudley, a former president of the New York Fed, said Wednesday.
- The central bank was praised for its creative and rapid response to the coronavirus outbreak’s economic fallout. But Fed policy has been largely unchanged for months, and officials have repeatedly urged Congress to pass a new stimulus bill.
- “No central bank wants to admit that it’s out of firepower. Unfortunately, the US Federal Reserve is very near that point,” Dudley wrote in a Bloomberg opinion column.
- Additional monetary easing would do little to aid the economic recovery, and the Fed should “make it abundantly clear” that Congress and the White House need to implement fiscal support, he added.
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All the tools in the Federal Reserve’s toolbox aren’t quite enough, Bill Dudley, a former president of the New York Fed, said in a Bloomberg opinion column published Wednesday.
The Fed has garnered nearly unequivocal praise for its handling of the coronavirus outbreak’s economic fallout. The central bank slashed rates to close to zero in March, introduced several novel lending programs, and began buying assets at an extraordinary pace to flood the economy with cash.
The accommodative stance has been in place for months, and Fed policymakers continue to emphasise the importance of fiscal relief in combination with monetary easing. While central-bank officials have signalled there’s more the Fed can do to support the US economic recovery, the ball is truly in Congress’s court, Dudley said.
“No central bank wants to admit that it’s out of firepower. Unfortunately, the US Federal Reserve is very near that point,” Dudley wrote.
To be sure, there is more the Fed can do. It could push interest-rate hikes further into the future, despite already signalling that near-zero rates will last through 2023. It could increase its pace of asset purchases from $US120 billion a month. The central bank could even implement yield-curve control for the first time since World War II to further hold near-term borrowing costs at historic lows.
Still, such actions “would not provide much additional support to the economy,” Dudley said. The Fed’s efforts tremendously aided much of the economy, but other areas untouched by monetary easing require fiscal relief. Fed Chair Jerome Powell has repeatedly made that point in press conferences and other appearances, saying the central bank can only act as a lending power.
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“Easy money encourages people to buy houses and appliances now rather than later. But when the future arrives, that activity is missing,” Dudley said, adding that low-rate policy could even become “counterproductive” if left in place for too long.
The Fed should keep accommodative policy in place for as long as necessary, but officials should also “make it abundantly clear” that fiscal support needs to pick up the slack, the former Fed president said. Congress and the White House must give the economy the “considerably greater fiscal stimulus” it needs before the US recovery grinds to a halt or possibly reverses course, Dudley said.
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