As the pandemic ravaged the US economy in 2020, Jay Powell publicly pushed Congress to approve more government stimulus to support the recovery and complement the central bank’s easy money policies.
But in recent weeks, the Fed chair has switched to a more neutral stance on the need for more fiscal support, just as US President Joe Biden and Democratic lawmakers are trying to approve an additional $1.9tn in government spending.
The shift was apparent as Powell faced two days of questioning from lawmakers on Capitol Hill this week and repeatedly refused to take a position on Biden’s top legislative priority, which is staunchly backed by Democrats and resisted by Republicans.
“It’s not appropriate for the Fed to be playing a role in these fiscal discussions about particular provisions in particular laws,” Powell told John Kennedy, a Republican senator from Louisiana.
When Kennedy pressed him further by asking if the Fed chair would find it “cool” or “uncool” if Congress failed to pass the stimulus bill, Powell did not flinch.
“I think by being either cool or uncool, I would have to be expressing an opinion,” he said.
Powell’s impartiality on Biden’s stimulus marks a return to form for the Fed, whose top officials are loath to wade into tricky political terrain unless a crisis requires it, as it did in 2020 or during the last financial crisis.
“I think Powell knows the train has left the station with regards to fiscal policy and there is no upside for him to involve the Fed any further,” said Tim Duy, an economics professor and Fed-watcher at the University of Oregon.
“Unlike last fall and winter, the Fed doesn’t need to highlight the risks to the economy that require a fiscal response. That bill passed and more is coming,” Duy added.
Throughout 2020, Powell repeatedly signalled that fiscal policy was vital for families and businesses stricken by the pandemic, and that the risks of doing too much were smaller than doing too little.
Those warnings were eventually heeded and absorbed by lawmakers: on top of the $3tn in fiscal relief approved at the start of the coronavirus crisis, Congress passed a further $900bn in support in December. Barring any dramatic last-minute hurdles Biden’s plan is also expected to be enacted.
Powell’s neutrality on the next round of stimulus means he is not actively endorsing Biden’s plan, but it does not mean he disapproves either — just that he is trying to keep the Fed out of the political morass.
“It’s not necessarily that he’s against the current package, it’s that political and market context is more tenuous now that it’s a formal proposal and has a high likelihood of passing, so he now has to be more strictly neutral,” said Ernie Tedeschi, an economist and former US treasury official at Evercore ISI.
During his testimony, the Fed chair dismissed concerns that the $1.9tn package might lead to an unwanted jump in inflation this year. That risk was cited by former US Treasury secretary Lawrence Summers earlier this month and forced White House economic officials to issue a series of sharply-worded rebuttals.
“Inflation dynamics do change over time, but they don’t change on a dime,” Powell told Congress this week. “We don’t really see how a burst of fiscal support or spending that doesn’t last for many years would actually change those inflation dynamics.”
In addition, even though the Fed chair expressed “hope for a return to more normal conditions” later this year, he stressed how far away the US economy remained from reaching full employment, and how successful fiscal stimulus had already been in helping avoid a worse downturn.
But as he spoke to Congress, the Fed chair also suggested that his preference would be for lawmakers to consider longer-term investments at this stage, rather than an instant cash injection into the economy.
“What I always think I would focus on is more what we call the supply side, which is really investing in things that increase the potential growth rate of the United States economy over time and make that prosperity as broadly spread as possible,” Powell told lawmakers.
The Fed’s reluctance to speak explicitly about the need for additional stimulus does stand in contrast to Powell’s stance as recently as last December’s FOMC meeting, when he said “the case for fiscal policy right now is, is very, very strong”.
But even last year when the Fed chair spoke about fiscal policy, Powell steered clear of dictating to Congress the exact size of the stimulus it should be considering, or the specific policies it should include in any package.
This week, Powell also refused to be drawn into one of the most controversial elements of Biden’s stimulus plan: an increase in the federal minimum wage from $7.25 per hour to $15 per hour.
When pressed on the question by Tim Scott, the Republican senator from South Carolina, Powell responded it was “a classic issue that the Fed never takes a position on” and economic consensus was mixed.
“Most of the research still says that there is some trade off between job loss and those whose wages go up, but actually the sort of unanimity of that finding of 30 or 40 years ago is no longer in place. There’s a much more nuanced understanding of it,” the Fed chair said.