Thoughts From The Divide – Changes Afoot

“Lending Powers, not Spending Powers”

This week’s FOMC meeting showed that the Committee could walk the walk following their talking the talk at Jackson Hole, with new projections from the Fed Governors and “very strong, very powerful guidance”. But while one might expect some fanfare as the latest Five-year plan Statement on Longer-Run Goals and Monetary Policy Strategy rubber meets the road, there were, to mix metaphors, some chinks in the armor as even some of the journalists appeared to be concerned that the emperor may not be wearing any clothes.

There was push back on the dot plot, with Steve Liesman wondering if the Committee was not confidant it could “hit its goal of being above 2 percent”.  Michael McKee cut to the chase, wondering if the Committee was concerned that their balance sheet actions “are more likely to produce asset price inflation than goods and services inflation? In other words, are you risking a bubble on Wall Street?”. However, perhaps even more telling were Chris Condon’s questions regarding the MSLP. Condon wondered “what exactly is wrong with the design or function of the Main Street Lending Program”, which has used less than 0.25% of its allotted $600 billion (as we discussed here). Powell assured Condon that “we’ll be making some changes”, and the Fed has since followed up, releasing an updated FAQ on the MSLP.

Nonetheless, though Powell may have valiantly defended the Fed’s ability to do more with its variety of tools, “I certainly would not say we’re out of ammo”, underneath the bravado was, as Liz Ann Sonders wrote, “a clear message for Congress”. While it may be a stretch to imagine the Fed is coming to terms with its role as the toddler in the back seat of a car driven by Congress (a metaphor from Warren Mosler), Powell appears to be aware of the limitations of monetary policy. He repeatedly pointed to parts of the economy where “direct fiscal support may be needed” and admitted that though “the fiscal policy actions that have been taken thus far have made a critical difference to families, businesses, and communities across the country”, “my sense is that more fiscal support is likely to be needed”.

The entire press conference is worth watching or reading for those interested in the nuances, and Adam Tooze offers a historical perspective on “What comes next” here.