Powell’s whatever-it-takes pledge puts limits of Fed’s reach in spotlight
By Lindsay Dunsmuir
WASHINGTON (Reuters) – Federal Reserve Chair Jerome Powell’s message in announcing a barrage of monetary policy and liquidity actions was clear: The U.S. central bank will use all the tools at its disposal to keep credit flowing through the U.S. and global financial system.
The Fed slashed interest rates to near zero on Sunday, the second rate cut in as many weeks in another emergency move as the coronavirus pandemic tightens its grip on societies across the world, forcing widespread lockdowns of large populations and upending the global economy.
The Fed also pledged hundreds of billions of dollars in asset purchases and backstopped foreign authorities with the offer of cheap dollar financing.
“We really are going to use our tools to do what we need to do here,” Powell said, adding that the Fed has gone in “strong” and could increase bond-buying and use other means to support the economy.
But its actions also put a renewed focus on what little monetary policy can do to save the economy from a unique health crisis that requires a large-scale fiscal response.
U.S. and global stock markets continued to haemorrhage on Monday, an implicit rebuke that whatever desperate measures the Fed can take, for now at least, look ill-suited to stem the tide.
Wall Street plunged once more, again triggering automatic trading halts. Through Friday, the S&P 1500 supercomposite index, among the broadest measures of the U.S. stock market, had lost nearly $6.3 trillion since its record closing high in mid-February, with Monday’s losses certain to add to that tally.
To many observers, Powell, a mild-mannered Republican with a background in private equity but no formal economics training, who became head of the world’s most powerful central bank two years ago, has acted quickly and decisively.
“These are forceful and huge steps. The Fed is doing whatever it takes,” said Mark Sobel, a former senior U.S. Treasury official now U.S. chairman of the London-based OMFIF think tank, evoking a phrase used by former European Central Bank President Mario Draghi who famously pledged in 2012 to “do whatever it takes,” an action credited with saving the euro.
It is doubtful though whether Powell’s actions can have the same power to calm panic among investors who fear a precipitous slide into a U.S. and global recession, a fact Powell acknowledged.
“We don’t have the tools to reach individuals and particularly small businesses and other businesses and people who may be out of work…we do think fiscal responses are critical,” said Powell, who added he would not be surprised to see a contraction in activity in the second quarter.
Analysts noted the Trump administration has so far been the opposite of the Fed: slow-footed, muddled and with few sweeping concrete actions.
On Saturday, the U.S. House passed a bill that would provide free testing for the virus and paid sick leave, but it has yet to be passed by the Senate, even as the spread of the virus intensifies. The current provisions for sick leave in the bill also exempts a broad swathe of companies from providing it.
“The Fed can no longer be accused of not doing the most it can to help the economy. The same cannot be said of the fiscal policy response so far…the Fed is now effectively out of the picture. They did what they could do but they can’t do much more,” said Michael Feroli, an economist at JPMorgan, in a note to clients.
On Monday, leaders of the Group of Seven most industrialized countries pledged to mobilise a full range of instruments to address the crisis, including monetary and fiscal measures.
The Fed does still have some firepower at its disposal but it is more limited. Its tools are primarily geared to making sure the plumbing of the U.S. financial system does not seize up and keeping credit flowing.
Harry Broadman, managing director of Berkeley Research Group and a former senior U.S. trade official, said “a real abyss” loomed if the executive and legislative branches did not soon do “something economically meaningful on the fiscal side, from where the real defence must come.”
And the Fed’s decision to cut rates to the bone are set to have a more marginal impact in a situation where people stay indoors and are afraid to spend. To that end, at least some observers criticized Powell for pulling the trigger too soon.
The Fed “should have been more laser-like focused on areas of market failures … and then followed up with more general interest rate cuts when that can have an impact,” Mohamed El-Erian, chief economic advisor at Allianz, said on CNBC.
(Reporting by Lindsay Dunsmuir; Additional reporting by Andrea Shalal; Editing by Dan Burns and Andrea Ricci)