The Wisdom of Jerome Powell
For the video above: YouTube link; Brookings link; link to full text on the Federal Reserve Board website
Crises often reveal the strengths and weaknesses of leaders. Federal Reserve Board Chair Jerome Powell’s April 9, 2020 speech on COVID-19 and the economy impressed me. Let me highlight some passages in his speech that struck me as especially wise. First:
None of us has the luxury of choosing our challenges; fate and history provide them for us. Our job is to meet the tests we are presented.
According to Rod Dreher, this echoes Gandalf:
A young man once confided to a religious elder his anxiety over the hard times in which he was living. This is natural, said the elder, but such things are beyond our control: “All we have to decide is what to do with the time that is given us.”
In fact, the anxious youngster was no man, but a hobbit, Frodo Baggins; the religious elder was the wizard Gandalf, to whom Frodo disclosed his fear on the road to the evil realm of Mordor.
(From the April 30, 2020 Wall Street Journal op-ed “Courage in the Darkness,” by Rod Dreher.)
Second, both because social-distancing and shutdowns are mandated by the government and because being poor makes every dollar count more, Jerome Powell says we should be conscious of those of low or moderate income who are taking on great burdens as a result of our COVID-19-fighting strategy:
All of us are affected, but the burdens are falling most heavily on those least able to carry them. It is worth remembering that the measures we are taking to contain the virus represent an essential investment in our individual and collective health. As a society, we should do everything we can to provide relief to those who are suffering for the public good.
Third, he emphasizes that the Fed is engaged in lending programs, not spending programs.
Many of the programs we are undertaking to support the flow of credit rely on emergency lending powers that are available only in very unusual circumstances—such as those we find ourselves in today—and only with the consent of the Secretary of the Treasury. We are deploying these lending powers to an unprecedented extent, enabled in large part by the financial backing from Congress and the Treasury. We will continue to use these powers forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery.
I would stress that these are lending powers, not spending powers. The Fed is not authorized to grant money to particular beneficiaries. The Fed can only make secured loans to solvent entities with the expectation that the loans will be fully repaid.
Of course, some of the lending is to lending entities from which the Fed expects repayment only because the US Treasury and Congress are backstopping the solvency of the entity.
[Update, May 17, 2020: Fourth, he both recognizes how hard the pandemic has been on people economically as well as medically, but remains optimistic for the medium- and long-run:
This is a time of great suffering and difficulty and it’s come on so quickly and with such force that you really can’t put into words the pain people are feeling and the uncertainty they’re realizing. But I would just say this: In the long run, and even in the medium run, you wouldn’t want to bet against the American economy.]
There is only one part of Jerome Powell’s speech that to me strikes a false note. He writes of cutting interest rates to zero as if that were a dramatic action. But there is nothing special about zero. The Fed’s target rate could easily go lower. Here is what he says:
The Fed can also contribute in important ways: by providing a measure of relief and stability during this period of constrained economic activity, and by using our tools to ensure that the eventual recovery is as vigorous as possible.
To those ends, we have lowered interest rates to near zero in order to bring down borrowing costs.
Compare that discussion of zero as if zero were special to the discussion the importance of negative interest rates in these two recent posts:
History may judge Jerome Powell in important measure on whether he is willing to use negative interest rates to get us out of the hole our economy is in some months from now. The “how” of negative interest rates is now well-worked out, the President of the United States is supportive of negative rates, and there is a clear legal path to negative rates in the United States. So there is no excuse not to use them if they are needed, as they are likely to be.
But I’ll let Jerome Powell have the last words:
I want to close by thanking the millions on the front lines: those working in health care, sanitation, transportation, grocery stores, warehouses, deliveries, security—including our own team at the Federal Reserve—and countless others. Day after day, you have put yourselves in harm's way for others: to care for us, to ensure we have access to the things we need, and to help us through this difficult time.