Jerome Powell Sends a Warning About Tea Party Redux

(Bloomberg Opinion) -- Federal Reserve Chair Jerome Powell sent a not-so-subtle message to Republican senators who might revert to their thrifty ways if they retain control of the chamber under a Joe Biden presidency: You’ll be to blame for a weak economic recovery.

As expected, the Federal Open Market Committee decided unanimously to leave the fed funds rate unchanged in a range of 0% to 0.25% and keep its asset purchases steady. It also came as little surprise that Powell fielded a flurry of questions about the need for additional fiscal aid, which he and his colleagues have been championing for months to no avail. 

Whether or not it was because of the potentially new composition of the federal government (Powell acknowledged the election came up but wasn’t a central focus), he had an interesting answer to a question about the importance of fiscal policy:

“Fiscal policy can do what we can’t, which is to replace lost incomes for people who are out of work through no fault of their own. What we can do is we can obviously support financial stability through our lending programs and we can support demand through interest rates and asset purchases and that sort of thing. We’re going to take the economy as it comes, including all external factors.

All of us lived through the experience of the years after the global financial crisis. And for a number of years there in the middle of the recovery, fiscal policy was pretty tight, and I just would say that we’ll have a stronger recovery if we can just get at least some more fiscal support, when it’s appropriate and in the size Congress thinks is appropriate.  And by the way, you see a lot of discussion on both sides of the aisle, on both sides of the Hill, that suggests generally that there will be something.”

What happened in the middle of the last recovery, of course, was the rise of Tea Party Republicans and their demands for fiscal austerity. As I noted in a column previewing this Fed meeting, they brought the U.S. to the brink of default under President Barack Obama in 2011 and forced the federal deficit to narrow in each of the four years after that. Several of them remain in the Senate though largely stood aside as President Donald Trump blew out the budget.

Powell seems to have about as much influence as any Fed chair on Capitol Hill. He’s won praise from both Democrats and Republicans alike for steering the economy through the Covid-19 pandemic and even appeared on the cover of the Nov. 2 issue of Barron’s magazine, which called him “THE WINNER” in bold type. “No matter what happens on Election Day, count on Fed Chairman Jerome Powell as the stabilizing force for the economy and the markets,” the cover read.

The problem is that the Fed doesn’t have the right tools for what needs to be done now. State and local governments need money, but Powell balks at opening up the Municipal Lending Facility. Any number of U.S. small businesses could use funds to get them through the colder months, when coronavirus outbreaks could worsen, but the Fed has experienced low demand for Main Street loans of less than $1 million. Short-term interest rates are already near zero and 30-year mortgage rates continue to set record lows. Without fiscal policy, the Fed seems stuck.

One reporter asked Powell if he feels as if he’s “being heard” among lawmakers, or if his pitch for fiscal aid is falling flat. He maintained that Democrats and Republicans alike see things the way he does:

“I just know from the experience of the last cycle, it helps to have the whole government working on these things, and this one is particularly that way. I don’t want to say whether I feel like I’m being heard or not, but sure, I think there are plenty of people on Capitol Hill on both sides of the aisle, on both sides of the Hill, who see a need for further fiscal action and understand perfectly why that might be the case.”

That’s probably true. Even Mitch McConnell seemed open to coming back to the table and reaching a compromise after being re-elected to the Senate. As my Bloomberg Opinion colleague Karl Smith noted, Nancy Pelosi and other Democrats also have an incentive to strike a deal now to get a possible Biden presidency off to a strong start. The complicating factor there, of course, is Trump. Scott Minerd, chief investment officer at Guggenheim Partners, warned on Bloomberg TV that Trump could “dig in” and refuse to compromise with Democrats if he has no path to another four-year term.

Plus, while members of both parties might agree that more fiscal aid is needed, they have to deal with political calculations in a way the Fed doesn’t. If Powell held all the fiscal power, he would most likely send federal funds to strapped states and cities, extend federal unemployment insurance benefits while also providing return-to-work incentives and extend grants (rather than loans) to small businesses. But he can’t and has said time and again that he doesn’t see it as his place to prescribe exactly what Congress should do.

But with yet another Fed meeting in the books without another round of fiscal support, Powell appears to at least consider it fair game to say what Congress shouldn’t do: Kneecap an economic recovery for the sake of scoring political points. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

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