How the Fed came through the epidemic

Trillion Dollar Trias: How Jay Powell and the Fed Prevented a President and an Epidemic এবং and an Economic Crisis

By Nick Timiras, Little, Brown & Company, 2022

The first thing people know about Jay Powell is that he is the chair of the US Federal Reserve. The second is that he is not an economist. After Powell joined the Fed, he complained to a colleague: “They talk to me like I’m a Golden Retriever.” Despite his professional appearance, the former corporate lawyer was evident in a building full of PhDs in economics, yet Powell’s outspoken demeanor and evidence-based approach meant he led the world’s largest central bank in a decade. The world economy has faced its toughest challenge in generations. In the acute phase of the COVID-19 epidemic, Powell’s leadership helped stave off a recession, but how did the hiring of an outsider change the most important institution in the economy?

After being tapped by Donald Trump for the role of chairman in early 2018, Powell sought to challenge the notion that central banks are designed for quiet, slow-moving institutions that absorb large amounts of information to make small and gradual changes in economic policy. “Creating the Fed’s brand and turning the organization into a paragon of hardworking, apolitical analysis hit Powell with something he could be uniquely equipped to achieve,” wrote Nick Timiraos, chief economics correspondent. The Wall Street JournalIn his new book on Powell’s Fed, Trillion dollar trillion. He wanted the Fed to talk more and more in a language that everyone understands. He also sought to investigate whether the Fed was providing a stronger economy for ordinary Americans. To do this, he decided on a nationwide tour called “Fed License.”

What Powell has heard is that the Fed is focusing too much on inflation and too little on unemployment. That realization, globalization has changed the economy so that it is able to withstand much lower unemployment without holding back inflation, leading Powell to decide that the inflation target should be truly symmetrical: if inflation is allowed to continue below 2. % For a period, it should be allowed to exceed it for the same period. He shared a draft of his new structure with colleagues in January 2020. Then the plague struck.

The Fed was wary of the severity of the epidemic faster than the administration or Congress. According to Timiraos, it faced two formidable challenges. The first was to make it as easy as possible for families and companies to borrow and repay as much as possible. Powell has launched a turbocharged version of the rate reduction and quantitative easing using former Fed Chair Ben Bernanke’s playbook. The second, and more complex, was to ensure a steady flow of money around the global financial system as the U.S. Treasury market was occupied. This is an issue that the Fed continued to address in the spring of 2020 This drew the bank to more and more new areas Each time it considered expanding its reach to buy corporate bonds, municipal loans, or exchange-traded fund securities, Powell and his colleagues asked the same question: were they willing to do as much as possible to minimize a short-term possibility? -Do not know the long-term consequences of a long-term disaster? And every time, they decided they were.

According to one analyst, Powell’s desire to run a “full-court press in the market” meant that confidence in the economy was restored relatively quickly. As a result, some of the Fed’s most obsolete measures were used sparingly. Timiraus argues that Powell practiced a key principle of crisis management: showing a willingness to do more, he had to do less. The approach has enabled faster economic recovery than many expected. However, this rapid recovery inadvertently led to two major changes by Powell in the Fed – restructuring unemployment against inflation and shaping the shape of its epidemic response.

During the Fed license visit, the central bank spent a decade raising inflation. Powell was concerned that inflation expectations would be permanently low, echoing Japan’s “lost decade.” Keeping interest rates low seems to be a less risky strategy to focus on reducing unemployment. But the Fed did not count on an epidemic-related supply problem to boost inflation. As inflation began to accelerate in mid-2021, Powell repeatedly described it as “transient” and focused on the need to repair the job market. According to Timiraos, “the Fed’s new structure … effectively committed officials to respond too late.” By early 2022, the labor market was rapidly gaining strength, but inflation was at its highest level in 40 years. Powell’s Fed Was it overdone or merely unfortunate?

Timirao’s conclusion that the Fed has been asked to do too much seems to be correct. Long known as the last resort lender, at the height of the epidemic it became the “backup lender of the whole world”. In the Powell era, it took steps to reduce both unemployment and inequality in the United States. The fact that the Fed quickly realized the destructive potential of the epidemic means that it has taken on a larger and larger role in fighting it, as well as trying to correct its past shortcomings. Its financial stimulus has been delayed by government spending and has clashed with huge waves.

Here, a counterfactual can be helpful. What if the Fed didn’t pull every lever it could reach? The gamble of Powell’s lifetime was that the United States would deal with worse consequences than an uncomfortable spike in the cost of living. A year-long depression was avoided. So there was a permanent slump in inflation expectations. The sympathetic study of Timiraos gives Powell much credit for his short-term crisis management. But the long-term challenge, which leads to such reliance on the Fed, is to fix the system.