As the Biden administration works to implement a new slate of fiscal and monetary policies to counter the economic downturn of the COVID-19 pandemic, one trend that has long preceded the current crisis seems likely to continue – the intent of the Federal Reserve to set the federal interest rate at a near-zero level.
In this week’s meeting of the Federal Open Market Committee, the first under the new administration, officials committed to keeping rates at their historic lows and continuing to engage in bond purchases in order to shore up the monetary supply. With the winter months bringing an uptick in infections, and a parallel swath of closures in businesses across the country, the federal government is looking for options to provide economic relief beyond the more politically contentious fiscal stimulus packages being considered in Congress.
Jerome Powell, the Chairman of the Fed, noted that “The virus resurgence was weighing on economic activity and job creation… the economic outlook hinged on the pandemic and remains highly uncertain.”
Both the White House and Democrats in Congress are (rightly) more concerned with a stagnant recovery, driven to a large extent by long-term unemployment, than with the risk of inflation (Powell also stated “Frankly, we’d welcome slightly higher inflation”). Given the slow economic growth in the wake of the Great Recession, this mindset seems justified. At the end of 2008 and beginning of 2009, the Targeted Asset Relief Program (TARP) amounted to around $700 billion, and the Federal Reserve took action to cut rates to their current record lows. Since then, prices have remained relatively stable. President Biden has recently proposed a relief package that amounts to over double that amount.
The broader concern is that interest rates have remained at near-zero levels over the last thirteen years as well. Without the potential instrument of lowering interest rates at their disposal, monetary options in the face of economic crises are extremely limited, leading to an overwhelming reliance on fiscal stimulus. The Fed has committed to buying about $120 billion in government-backed bonds in order to stabilize markets and booster the economy, but for the average American it is unclear how much benefit can be gained through this process. In the meantime, record low interest rates have the potential to exorbitantly boost stock prices, leading to bubbles and riskier decision-making among Wall Street investors seeking higher returns – and when has that ever been problematic for the economy?
Ultimately, given the unprecedented nature of the pandemic, and the fact that the downturn has been largely outside of government or private sector control, the Fed’s move is likely the right one. Until we reach herd immunity through mass vaccination, a return to “normalcy” will remain out of reach. In the meantime, both fiscal and monetary instruments should be used to maximum effect without overt concern over inflation or the national debt. However, the question is what will happen once the economy recovers. If the last thirteen years have taught us anything, it is that we cannot expect stable growth indefinitely, and that the next crisis is always around the corner. With this in mind, the Fed should aim to eventually boost rates, regardless of whatever anguish Wall Street may express. The era of easy credit cannot and should not continue indefinitely.