Yesterday, I tweeted that the Federal Reserve’s just-published statement on its policy plans looked pretty dovish – that is, signaling a continued determination to keep pouring massive amounts of stimulus into the U.S. economy. Most every other student of the economy worth heeding read exactly the opposite into the message and some related materials it issued – including Chair Jerome Powell’s statement at his subsequent press conference that the central bank could start easing off the accelerator as early as November. (One notable exception: CNBC’s Steve Liesman.)
Here’s why I’m right – at least in the most important senses – and why the dovishness I see isn’t great news for the American economy at all over any serious length of time.
The folks reading hawkishness into the Fed’s stance pointed to three main reasons for their conclusion, and I’d be the last person to ignore them. First, the policy statement did declare that “moderation” in the central banks’ bond-buying program, known as “quantitative easing” (QE) “may soon be warranted” if the economy’s progress “continues broadly as expected.” That’s a big change even from the July statement’s analysis:
“Last December, the [Fed] indicated that it would continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward its maximum employment and price stability goals. Since then, the economy has made progress toward these goals, and the [Fed] will continue to assess progress in coming meetings.”
Second, at the press conference, Powell not only hinted at a November start for the so-called “taper” of Fed bond buying. He added that the process could conclude “around the middle of next year.” So although the change is expected to occur gradually, the Fed is indicating it won’t take forever to accomplish.
Third, in a regularly issued graphic summary of their (anonymous) future expectations (called the “dot plot”), fully half of these policymakers made clear they anticipated that next year would also see the interest rate they control begin rising. As Powell told the press, taking this step would mean that these Fed officials had seen much more economic progress than that required for the taper of bond purchases they appear ready to begin.
I actually agree that this evidence adds up to more Fed “hawkishness.” But “more” clears only a very low bar for an institution that’s been super-dovish for the better part of the last decade and a half (since it decided to fight the Great Recession following the 2007-08 global financial crisis by opening up the stimulus spigots to an unheard of extent).
In other words, a Fed that for many more months will be continuing to spur growth and employment by purchasing tens of billions of dollars of bonds every month (only less than the current $120 billion) still looks pretty devoted to easy money to me.
At least as important, Powell in particular made clear that the Fed’s expectations for ending what are, after all, measures taken to counter the Covid-induced economic emergency are so fragile that he and his colleagues could change their minds as soon as the current recovery – which has been strong by most measures – veers off track.
It’s true that at the press conference, the Chair stated that all it would take for him to decide that employment was still improving enough to support a prompt beginning of tapering would be a “reasonably good” and “decent” official U.S. jobs report come out next month – not a “knockout, great, super strong” result. (Powell already believes that the nation’s inflation record – the Fed’s other main “taper test” has already been good enough to warrant reducing those bond purchases.)
But aside from questions about how Powell defines “reasonably good,” etc., his remarks show that he (along with his policymaking colleagues, over whom he wields considerable influence) still believes that a single poor jobs report, or similar discouraging development, would suffice to keep the economy on its exact same monumental levels of literal life support even though the patient has long exited the emergency room.
And these exacting standards for merely reducing current stimulus gradually (which, as the Chair himself noted, would still leave its asset holdings “elevated” and “accommodative”) tell me at least that, however well the economy performs, the Fed will be remaining on a super easy-money course pretty much indefinitely.
The one development that could change this picture significantly: a big, sustained takeoff of inflation.
But if Powell’s right (which I believe he is), then the current burst of higher prices results from “transitory” developments peculiar to the dramatic stop-start dynamics created by the pandemic and its policy and behavioral fall-out. Prices, therefore, should start normalizing before too long.
So what’s the problem? First, if the Fed is afraid that the U.S. economy can’t prosper adequately without what are essentially massive government subsidies, that’s a pretty damning indictment of that economy’s ability to generate satisfactory levels of growth and employment and living standards improvements more or less on its own.
Even more important, even if this Fed judgment is wrong, clearly it’s going to keep the stimulus flowing at historically unheard of rates, and historically, anyway, super easy-money has undermined financial stability – and disastrously – by creating what economists call “moral hazard.” That’s the condition in which over-abundant, dirt-cheap resources produce any number of reasons for using these resources foolishly (i.e., unproductively). After all, they drive down the economic penalties for making these mistakes to rock bottom levels by all but eliminating interest costs.
And an economy that uses resources so inefficiently is bound to run into big trouble before too long and suffer punishing and lingering after-effects. If you’re skeptical, think back to that devastating financial crisis and Great Recession – which weren’t so long ago – and to the slowest U.S. recovery in decades that followed. If that’s not persuasive enough, ask yourself why even the easy-money pushers at the Fed are talking about tapering in the first place.