Imagine you are Jerome Powell in early 2020
In understanding the Fed’s thinking, it’s important to remember monetary policy is an iterative process.
The Federal Open Market Committee members never get a blank slate. They can’t wipe the economy clean and start over. Choices their predecessors made years and even decades ago govern what they can do now.
For example, the Fed’s decisions in 2008–2009 to drop short-term rates to near zero and then launch quantitative easing bond buying programs were unprecedented at the time.
But they “worked” well enough to keep the wheels on. The economy survived. That being said, correlation is not causation. I maintained then and I believe now that the recovery was due to businesses, both small and large, adapting to the new climate. Federal Reserve policy was a distant second.
But the problem is, Fed officials thought their policies were responsible for the recovery.
Imagine, then, you are Jerome Powell in early 2020. You’re already struggling to deal with massive debt, bond market liquidity issues, and stagnant growth. Then you get hit with simultaneous global supply and demand shocks.
But that’s not all. To keep the wheels on, you need Wall Street banks to cooperate and help you finance the government’s large and growing debt. Otherwise, rates will spiral higher. Even worse will follow. In theory, you are their regulator, but it’s not entirely clear who has more power. The Fed can force money into the system. It can’t force banks to buy Treasury debt or lend to consumers and businesses.
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