WASHINGTON (Reuters) – For the past 17 years the Federal Reserve has been a central player in the U.S. economic system, throwing a safety net of billions of dollars under the financial system, providing nearly a decade of extremely cheap money, jump-starting. during the COVID-19 pandemic, and to explore more in areas such as equity and climate change.
But the additional work is slowing down to one of the policy proposals, the meat-and-potatoes debate over interest rates, the decline in bond yields, and the growing possibility that Fed Chairman Jerome Powell could be considered the man who got the money. The US is going through an economic crisis caused by the pandemic and the one that caused central banking to die again.
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In recent years “we’ve had to go back to the type of aggressive inflation that’s reminiscent of the old days when you didn’t worry about zero interest rates, you didn’t worry about budget policy,” Bullard said. “This is plain vanilla. Times have changed.”
Bullard, who is the dean of the Mitch Daniels School of Business at Purdue University, will deliver the opening address on Monday at a conference in Washington on the Fed’s monetary policy and its plan to fulfill its mission of promoting price stability and job growth. .
In addition to all the possible debates about the Fed brought about by the victory of Donald Trump in the election of Nov. 5 – it shows, for example, that the president-elect of America can revive his first debate with Powell by trying to burn him or burn him – there is another possibility that the discussion of the system will show: That with inflation coming under control, the economy growing, and interest rates in their long history, the bank The central bank may be moving slowly, with its steady focus on inflation now a key factor for the incoming administration to continue.
Trump’s first picks for his economic team have been more conventional than not. The meeting in Washington, which was organized by the American Institute for Economic Research, includes a special talk with the Governor of the Fed Christopher Waller, appointed from the first term of Trump in the White House who, like the Governor of the Fed Michelle Bowman, would give the house. the election of a new administration when Powell’s term as central bank chief ends in May 2026.
With Powell, Waller has been a leading force in the fight against inflation and steering the Fed system away from issues such as climate change that are outside the direct scope of monetary policy and that have raised tensions with some Republicans in Congress.
Waller may have a strong voice, too, in revising the Fed’s current policy framework, which upon its adoption in 2020 took the central bank into a new position that many now see as inconsistent with the current economic climate.
The outbreak of the pandemic that year caused unemployment and made labor market recovery a priority for central bankers determined not to see a repeat of the post-crisis slowdown of 2007-2009 that many feel led to losses. 10, harming the working class. Uncontrollable deficits and low interest rates have also fueled concerns about stagnation.
The 2020 plan attempted to address all of these issues with a new commitment to “broad and inclusive work” amid expectations that interest rates will remain low and eventually reach the zero level “more often than before.”
The “zero lower bound” is the central banker’s existential problem: When interest rates reach zero, only bad and politically difficult choices remain to continue supporting the economy. Interest rates can be pushed into negative territory, meaning taxing people to save, or other unusual measures can be taken, such as buying large bonds to suppress long-term rates and guarantee keeping rates low for a long time.
The 2020 Fed response was to guarantee periods of high inflation to offset periods of weak rates, which its policy makers hoped would keep inflation at the central bank’s 2% average.
What followed, for various reasons, was the worst inflation in 40 years, which led the Fed to aggressively raise interest rates in 2022 and 2023. Whatever else it meant for the US economy and political situation, it could have been all juiced. economy from its problems and put money and other policies back in the driver’s seat.
“The economy and the stock market don’t need high rates,” said David Russell, global head of markets for TradeStation. “Trade and tax policy will probably be more important than monetary policy going forward.”
‘MUST’ FRIENDLY EVENTS
Fed officials now see residual inflation higher than before the pandemic, with rates set far enough above zero that they can achieve their goals by raising and lowering them, just as central bankers did before the “Great Recession” began to use unconventional methods. years ago.
Those tools remain, and a major shock could see their return.
Some economists argue, for example, that the Trump administration’s plan, by simultaneously raising the price of imported goods and taxes, reimbursing money through low taxes, and controlling the pool of existing workers by limiting immigration, could affect the economy that the Fed feels now. everything is healthy and moderate.
But there is an emerging consensus that the central bank’s current policy is too geared to the conditions and risks of the decade after the 2007-2009 crisis and pandemic period, and wants to return to some caution about inflation.
Research by Fed staff has shown that the structure provides a better job market though, and a return to the old-school wisdom of suppressing inflation before it takes hold has gained popularity.
“Introductory financial measures are not only appropriate, but necessary,” economists Christina Romer and David Romer wrote in research for a Brookings Institution conference in September. The Fed “should not deliberately pursue a hot job market,” they wrote, since vague adjustments to monetary policy “cannot … reduce poverty or counter rising inequality.”
Powell seems to have expected changes ahead, and not unwelcome ones given the indications that the US has run away from the need for Fed support, something he was not entirely comfortable with in his early years as central bank governor.
After pushing the Fed’s power to its limits during the pandemic, he may leave his successor with a more focused position.
“Twenty years of low inflation ended a year and four months after we put the plan in place,” Powell said last month in Dallas as he hinted at a return to a more “traditional” central bank approach. “Shouldn’t we change the system to show higher rewards now, so that some of the changes we made … don’t have to be a bottom line issue again?”
(Reporting by Howard Schneider; Additional reporting by Chuck Mikolajczak; Editing by Dan Burns and Paul Simao)
