With a new year and a new administration in the White House, the US central bank nonetheless faces an unprecedented challenge in guiding the post-pandemic economic recovery.
One thing US Federal Reserve Chair Jerome Powell is unlikely to face from President Joe Biden is the barrage of Twitter attacks he was subject to, sometimes daily, under former US president Donald Trump.
White House spokeswoman Jen Psaki last week said Biden “clearly has a great deal of respect and value for the Federal Reserve and role they play.”
However, even absent political pressures, the outlook is daunting.
The initial rollout of COVID-19 vaccines in the US has raised hopes that companies would be able to open for business and shoppers would open their wallets, improving the economy’s prospects.
However, the historic nature of the job losses during the COVID-19 pandemic — more than 10 million US workers remain unemployed — coupled with the likelihood inflation in some sectors could spike once the recovery takes hold, would test the Fed’s limited toolkit.
These challenges could be discussed when the Fed’s policy-setting Federal Open Market Committee opens its first two-day policy meeting of the year tomorrow.
After slashing the benchmark lending rate to zero early in the coronavirus crisis, and massively increasing bond purchases to pump cash into the economy, the committee has signaled it would not change policy in the near future.
“I think they’ve set their course pretty clearly,” Stephanie Aaronson, a vice president at the Brookings Institution and former Fed research economist, told reporters. “I would be surprised if that really changed throughout the spring.”
Business shutdowns imposed to contain the spread of the virus caused immediate, massive job losses last year, and at the end of the year, 4 million people had been unemployed for six months or more, comprising 37 percent of total unemployment.
The expectation for more government aid under the Biden administration — which has proposed a massive US$1.9 trillion rescue package — would give the central bankers hope for a more solid rebound and improved hiring, Aaronson said.
Still, so much about the recession has been historic, and the recovery, too, would present policymakers with scenarios they have never encountered.
When the recovery does begin, the Fed’s main nemesis — inflation — is likely to flare up in areas that bounce back first, like hotels, restaurants and air travel.
“There are many aspects of our current economy that are still unprecedented and that means that their job is incredibly challenging,” George Washington University economist Tara Sinclair said in an interview.
The Fed last year announced a new framework that gives officials flexibility to address the situation.
The central bank pledged to allow inflation to exceed its 2 percent goal for a time to ensure that the unemployment rate drops from its 6.7 percent level at the end of last year.
That is a radical shift from the past, when central bankers would raise rates early to head off inflation.
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