WASHINGTON, Jan 24, 2021 (BSS/AFP) – With a new year and a new
administration in the White House, the US central bank nonetheless faces an
unprecedented challenge in guiding the post-pandemic economic recovery.
One thing Federal Reserve Chair Jerome Powell is unlikely to face from
President Joe Biden is the barrage of Twitter attacks he was subject to,
sometimes daily, under former president Donald Trump.
White House spokeswoman Jen Psaki last week said Biden “clearly has a
great deal of respect and value for the Federal Reserve and role they play.”
But even absent political pressures, the outlook is daunting.
The initial rollout of Covid-19 vaccines has raised hopes companies will
be able to open for business and shoppers will open their wallets, improving
the economy’s prospects.
But the historic nature of the job losses during the pandemic — more than
10 million US workers remain unemployed — coupled with the likelihood
inflation in some sectors could spike once the recovery takes hold, will test
the Federal Reserve’s limited toolkit.
These challenges could be discussed when the Fed’s policy-setting Federal
Open Market Committee (FOMC) opens its first two-day policy meeting of the
year on Tuesday.
After slashing the benchmark lending rate to zero early in the coronavirus
crisis, and massively increasing bond purchases to pump cash into the
economy, the FOMC has signaled will not change policy in the near future.
“I think they’ve set their course pretty clearly,” Stephanie Aaronson, a
vice president at the Brookings Institution and former Fed research
economist, told AFP. “I would be surprised if that really changed throughout
the spring.”
– Unprecedented scenario –
Business shutdowns imposed to contain the spread of the virus caused
immediate, massive job losses in 2020, and at the end of the year, four
million people had been unemployed for six months or more, comprising 37
percent of total unemployment.
The expectation for more government aid under the Biden administration —
which has proposed a massive $1.9 trillion rescue package — will give the
central bankers hope for a more solid rebound and improved hiring, Aaronson
said.
Still, so much about the pandemic-induced recession has been historic, and
the recovery too will present policymakers with scenarios they have never
encountered.
When the recovery does begin, the Fed’s main nemesis — inflation — is
likely to flare up in areas that bounce back first, like hotels, restaurants
and air travel.
“There are many aspects of our current economy that are still
unprecedented. And that means that their job is incredibly challenging,”
George Washington University economist Tara Sinclair said in an interview.
The Fed last year announced a new framework that gives officials
flexibility to address the situation.
The central bank pledged to allow inflation to exceed its two percent goal
for a time to ensure the unemployment rate drops from its 6.7 percent level
at the end of 2020.
That is a radical shift from the past, when central bankers would raise
rates early to head off inflation.
“They can see the whites of inflation’s eyes before they need to be
necessarily thinking about really changing policy” under the new framework,
Sinclair said.
But Aaronson noted that Powell will have to communicate clearly to both
Wall Street and small businesses to calm concerns.
Overshooting on inflation “shouldn’t induce a loss of credibility, as long
as they are able to convince people say that it’s transitory and that this is
absolutely part of what they’re aiming for,” she said.
The Fed’s preferred inflation measure, the PCE price index, is running at
just over one percent as of November.