In this way, they form a potent one-two punch against stagnation. The Fed makes sure the credit backdrop supports growth; Congress and the president make sure families and businesses have enough money in their pockets.
As its chair, Jerome Powell, has recently stressed, the Fed has “lending powers, not spending powers.” The Fed can’t send out checks to households, increase unemployment payments, stay evictions or provide grants to small businesses on the verge of shuttering. These are jobs for Congress and for the Trump administration.
Until August, Congress had actually been quite a strong partner to the Fed’s work. The situation now — congressional inaction in extending fiscal support — is reminiscent of a similar period after the last recession.
At the start of 2011, unemployment was still elevated at just over 9 percent. The Fed had lowered interest rates to around zero. But Congress allowed fiscal support to lapse, worried more about deficits than all those still unemployed. The Fed chair at the time, Ben Bernanke, summarized the problem well when he said, “With fiscal and monetary policy working in opposite directions, the recovery is weaker than it otherwise would be.”
With inflation as low as it is, servicing the debt required by the one-two punch of aggressive monetary and fiscal policies is relatively inexpensive.
So why, then, are we back here again? Why is Mr. Powell having to make the same pleas to Congress that Mr. Bernanke did and why is a Fed chair being ignored again?
We weren’t in the room, so we don’t know exactly why congressional negotiations broke down or what it will take for them to restart. But we could not be more confident that our economic prescription is the right one. The Fed stepped up. Once again, it’s Congress’s turn.
Janet Yellen, a former chair of the Federal Reserve, is a distinguished fellow at the Brookings Institution. Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities.
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