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The Fed Is Choosing Banks Over People

The Fed Is Choosing Banks Over People
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By Thursday, 11 June 2020 09:11 AM Current | Bio | Archive

The U.S. Federal Reserve has two congressionally mandated objectives: maximum employment and stable prices. Yet the central bank’s latest economic projections, released this week, suggest it won’t meet either of those goals in the next year and a half.

The Fed has the resources to do better. It should use them.

The Fed projects that the unemployment rate will fall slowly back to 5.5% by the end of 2022 – still well short of what most economists consider to be maximum employment (which I estimate at 3.5%). Over the same period, it expects inflation to remain below 2%, its definition of stable prices – and Chair Jerome Powell hinted in his press conference that the path back to the 2% target might be very long indeed.

The correct response seems obvious: Stimulate hiring and inflation by reducing interest rates below zero, as other central banks have done. The move would be no panacea, but it would help boost spending and employment in all the usual ways -- by making bonds less attractive to buy, by making borrowing cheaper, by pushing asset values and net worth higher, and by lowering the value of the dollar so that U.S. goods become more competitive overseas. The Fed fully recognizes this: At the October 2019 policy-making meeting, the central bank’s staff noted that cutting interest rates below zero has proven effective in other countries.

So why won’t the Fed act? Officials are worried about “side effects.” In other words, they’re concerned that in a negative-rate world, banks, money-market mutual funds, pension funds and insurance companies will make less money, leaving them with less of a cushion to absorb the losses that the coronavirus crisis will bring. Of course, the government can rescue the financial institutions, as it has in the past. But the Fed is making the (seemingly political) call that Congress won’t choose to be as helpful as the Fed would like.

That’s the trade-off: The Fed can help the American public in a time of obvious and dire need, or it can make sure that shareholders in large financial institutions don’t suffer too much of a loss. Choosing the latter option seems like a clear abrogation of its statutory responsibilities.

Perhaps the Fed will be protected by its independence, and by the opaqueness of its seemingly technical decisions. But in this time of political upheaval, when many much-needed changes are gaining momentum in America, I wouldn’t count on it.

Narayana Kocherlakota is a Bloomberg Opinion columnist. He is a professor of economics at the University of Rochester and was president of the Federal Reserve Bank of Minneapolis from 2009 to 2015.

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The U.S. Federal Reserve has two congressionally mandated objectives: maximum employment and stable prices. Yet the central bank’s latest economic projections, released this week, suggest it won’t meet either of those goals in the next year and a half.
fed, banks, peope, america, mandate
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2020-11-11
Thursday, 11 June 2020 09:11 AM
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