WASHINGTON (Reuters) – For most of the past 17 years, the Federal Reserve has been a key player in the U.S. economy, throwing a multi-billion-dollar safety net under the economy, and providing nearly a decade of ultra-low interest rates, skipping redlines. during the COVID-19 pandemic, I am focusing on areas such as climate change and climate change.
But that broader role has now been eclipsed by policy, a meat-and-potatoes debate over interest rates, bond yields, and the growing possibility that Fed Chairman Jerome Powell will be remembered as the man who got the money. The US through a financial crisis that was triggered by the pandemic and which also made central banks boring.
Former President of St. Louis Fed’s James Bullard was part of the policymaking team that saw the central bank’s role expand during the 2007-2009 financial crisis, saw it expand again during the pandemic and sees it now reverting to something else.
In recent years “we’ve had to go back to the fight against heavy inflation that harks back to the old days when you didn’t worry about zero inflation, you didn’t worry about monetary policy,” Bullard said. “It’s plain vanilla in this case. Times have changed.”
Bullard, who is now dean of the Mitch Daniels School of Business at Purdue University, will deliver the opening address on Monday at a conference in Washington about the Fed’s monetary policy and its approach to its mission of promoting price stability and more employment. .
Of all the possible controversies around the Fed that lead to Donald Trump’s victory in the Nov. 5 – signs, for example, that the president-elect of the US can resume his first debate with Powell by trying to shoot him or shoot him – there is another possibility that the fundamental discussion shows: That inflation will begin to be controlled, the economy will grow, and interest rates in their long-term history , the central bank may be moving slowly, with its constant focus on inflation now a key factor for the management of the economy to continue.
VERY LESS IS NOT NEEDED
Trump’s first decisions on his economic team have been more routine than not. The meeting in Washington, which was organized by the American Institute for Economic Research, includes a keynote speech by Fed Governor Christopher Waller, chosen from Trump’s first term in the White House who, like Fed Governor Michelle Bowman, will give the house. the election of a new leadership after Powell’s term as head of the central bank ends in May 2026.
With Powell, Waller has been leading the fight against inflation and steering the Fed’s policy away from issues such as climate change outside of the monetary policy agenda, which has caused friction with some Republicans in Congress.
Waller is also expected to have a strong voice, in changing the Fed’s current policy, which in its implementation in 2020 took the central bank into a new role that many see as out of step with the current economic situation.
The outbreak of the epidemic that year caused unemployment and made the healing of the labor market a priority for central banks who were determined not to see the slow recovery of work after the crisis of 2007-2009 that many consider lost. ten years, destroying a generation of workers. Prolonged inflation and low interest rates in the past also raised concerns about stagnation.
The 2020 plan tried to solve all these problems with a new commitment to a “widespread and inclusive” work amid the expectation that interest rates will remain low and will come close to zero “less often than before.”
“Zero below” is the problem with the existence of central banks: When interest rates reach zero, bad decisions and political pressures remain to support the economy. Interest rates can be pushed into the wrong areas, essentially taxing people to save, or other unconventional measures can be taken, such as buying large bonds to offset long-term rates and promising that rates will fall for a long time.
The 2020 Fed’s answer was to promise higher rates to end a period of weak inflation, which policymakers expect will keep inflation at 2% of the central bank’s average.
What followed, for a variety of reasons, was the lowest rate in 40 years, which encouraged the Fed to raise interest rates in 2022 and 2023. Whatever it meant for the US economy and politics, it may have also made the world less profitable. The economy moved away from its problems and put investment and other policies back in the driver’s seat.
“Finances and the stock market no longer need very low prices,” said David Russell, chief market officer at TradeStation. “Trade and tax cuts may be more important than monetary policy going forward.”
FIRST ACTIVITIES ‘REQUIRED’
Fed officials now see that inflation is still higher than before the pandemic, fixed rates enough to exceed zero to meet their goals by raising and lowering them, just as central banks did before the “Great Recession” began to use unconventional measures 17 years ago.
Those weapons are still around, and a major shock could see them return.
Some economists argue, for example, that the policies of the Trump administration, by simultaneously raising the price of imported goods and tariffs, raising income through lower taxes, and restricting the available workers by reducing immigration, can shake the economy that the Fed considers it to be. both healthy and sustainable.
But there is an emerging consensus that the central bank’s stance has been more aligned with the conditions and risks of the decade after the 2007-2009 crisis and pandemic, and that they should return to more caution on deflation.
A survey of Fed staff has suggested that the stance has better market outcomes, and a return to the old-school philosophy of suppressing inflation before it happens is gaining favor.
“Fiscal action is not only necessary, but necessary,” economists Christina Romer and David Romer wrote in research at a Brookings Institution conference in September. The Fed “must not deliberately seek a hot labor market,” they wrote, since the vague tools of monetary policy “cannot … reduce poverty or counter rising inequality.”
Powell seems to be waiting for a change in the future, and not the unpopular ones that indicate that the US has escaped the need to be supported by the Fed, which he did not enjoy in his first years as the governor of the central bank.
After pushing the Fed’s power to the end of the pandemic, he may leave his successor as more conservative.
“Twenty years of deflation ended a year and four months after we did the framework,” Powell said last month in Dallas where he spoke of a return to central bank “culture.” “Shouldn’t we change the policy so that interest rates are higher now, so that some of the changes we made … shouldn’t be a problem anymore?”
(Reporting by Howard Schneider; Additional reporting by Chuck Mikolajczak; Editing by Dan Burns and Paul Simao)
