Digitize That

By Nicholas Jasinski |  Wednesday, May 13

Seeking Stimulus. Speaking with the Peterson Institute for International Economics President Adam Posen this morning, Federal Reserve Chairman Jerome Powell reiterated his view that more support may be needed to help the U.S. economy out of its coronavirus-induced recession. But he threw cold water on the recent speculation about negative interest rates, which futures markets had begun to price in. Powell said that there was unanimous opposition on the Fed's rate-setting committee to adopting such a policy.

The implications of negative benchmark interest rates in the short term and the long term are still debated among economists, and there are plenty of good reasons not to resort to them. Powell instead pointed to other tools in the Fed's arsenal such as forward guidance and quantitative easing.

But he also warned that more fiscal policy action could be required and effectively called on Congress to spend more to prevent the recession from dragging on. Powell said he worries that unemployed workers would be less able to rejoin the workforce the longer they are out of a job, and that more small businesses would fail, further limiting the recovery and extending the recession.

“It’s important to remember, the Fed has lending powers but not spending powers,” Powell said.

All fair points, but less than the "we'll do whatever it takes" tone that some traders were clearly hoping for. And telling Congress that the ball is in their court in terms of support for the recovery requires a level of faith in bipartisan compromise that not many in the U.S. hold today.

Putting aside differences to push through a fiscal support bill at the height of an unfolding crisis in early March was an entirely different thing than getting Congress to agree on another round in May will be. Senate Republicans called House Democrats' latest $3 trillion bill "dead on arrival" today.

"Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery," Powell said. "This trade-off is one for our elected representatives, who wield powers of taxation and spending."

Stocks futures fell as Powell spoke, and the Dow Jones Industrial Average ended down for a third straight day, off 2.2%. The S&P 500 lost 1.7% and the Nasdaq Composite fell 1.5%. The more economically sensitive small-cap Russell 2000 index lost 3.3%, as is down more than 7% this week.