The Federal Reserve this week will hold its last policymaking meeting before the elections as the central bank’s calls for further coronavirus relief fail to shake Congress out of a deepening stalemate.
Close coordination between bank officials and lawmakers helped dampen the initial blow of the pandemic in March, but Fed leaders have since become increasingly alarmed at the lack of progress toward another rescue package.
Despite broad areas of agreement and a shared desire to approve more fiscal aid, congressional Democrats and Republicans remain deeply divided over the scale and scope of another economic relief bill and have all but ruled out a breakthrough before the election.
Fed Chairman Jerome Powell and top bank officials have warned that a failure to bridge those divides could be catastrophic for millions of already struggling Americans and harmful to the long-term recovery from the coronavirus recession.
While the Fed is not expected to announce any major policy changes after its two-day meeting wraps up on Wednesday afternoon, Powell will likely face questions during a subsequent press conference about how much more the bank can do to support the economy while Congress is mired in partisan bickering.
“There is pretty widespread agreement on both sides of the aisle that something needs to be done,” Powell told NPR in a recent interview. “Certainly I think more will be needed.”
His remarks came after the August jobs report showed employers adding just 1.4 million jobs last month while the unemployment rate came down to 8.4 percent. The pace of job gains slowed significantly last month, and the economy has yet to recover more than half of the jobs lost when the pandemic took hold in the spring.
Few economists — including Fed staff — had expected the jobless rate to fall so quickly after peaking at a post-Great Depression high of 14.7 percent in April. Members of the Federal Open Market Committee, the Fed’s policymaking arm, expected the unemployment rate to drop only to 9.3 percent by the end of the year, according to a June composite of their individual projections.
The decline in the unemployment rate was coupled with an increase in labor force participation, which can send the jobless rate back up if new job-seekers are unsuccessful in securing employment.
Overall, the August jobs report flashed several warning signs of a slowing recovery. The total number of jobs gained declined for a third consecutive month, while the number of permanent job losses increased after a brief plateau.
Powell has urged Republicans to set aside their concerns about mounting debt that have impeded another bipartisan deal on coronavirus aid, saying instead that the government needs to take bold steps.
Some of Powell’s colleagues at the Fed have been less diplomatic.
Charles Evans, president of the Federal Reserve Bank of Chicago, said “partisan politics” posed an increasing risk to a U.S. economy that desperately needs more fiscal support, particularly for state and local governments.
“A lack of action or an inadequate one presents a very significant downside risk to the economy today,” Evans said this month.
The Fed’s own response to the crisis, however, is coming under increasing scrutiny.
Near-zero interest rates and trillions in available emergency loans from the Fed has helped financial markets and major corporations recover far faster than cash-strapped local governments and struggling small businesses. That dynamic has prompted backlash from lawmakers in both parties, who’ve raised concerns about the Fed’s true priorities and capabilities.
Both Democrats and Republicans have pressed the Fed to expand the eligibility requirements and lengthen the term of loans offered through its Municipal Liquidity Facility for local governments and Main Street Lending Program for businesses.
Each of those programs are backed up with billions of dollars in credit protection authorized by Congress through the record $2.2 trillion CARES Act signed into law in late March. But with limited demand for both programs and a lack of direct fiscal support from Congress, local governments and many businesses are struggling to stay afloat as the Fed and lawmakers trade blame for who should move first.
“Despite the light usage of the emergency lending facilities, Fed officials see the facilities’ availability as a backstop that is key to help sustaining market functioning and keeping financial conditions accommodative,” wrote Kathy Bostjancic, chief U.S. financial economist at Oxford Economics, in a Friday research note.
The Fed is also facing political scrutiny over its new approach to inflation and questions about how it plans to drive the rate of price and wage increases higher. Powell announced in an August speech that the Fed will move toward aiming for an average of 2 percent annual inflation and no longer hike interest rates without direct evidence that inflation is rising too quickly.
The new policy is intended to prevent the Fed from cutting economic expansions short when unemployment falls below levels once believed to spur inflation. But after years of failing to reach its 2 percent target, the Fed is under pressure to prove it can meet its new range.
“We expect Chair Powell to spend a significant amount of time during the press conference discussing the Fed’s conclusion of the strategy review announced in August,” wrote economists from investment bank Nomura in a Thursday research note.
“Powell may also face questions on what type of magnitude and for how long the Committee is willing to tolerate inflation above 2 percent,” they added.