In response to Federal Reserve Chairman Jerome Powell's comments today, University of Notre Dame Professor of Economics Eric Sims offers the following comments. Sims is also a research consultant for the Federal Reserve Bank of Cleveland. Professor Sims can be reached directly at [email protected] for further comment.
"The Powell Fed has provided extensive and swift support to aid the US economy through the pandemic and lay the groundwork for a sustainable recovery. At the same time, there are limits to the Fed's powers, and in his statements today the Chairman calls on fiscal authorities to provide more support. The Fed can provide liquidity to promote the free flow of credit, but the virus is likely to be with us for some time, and will almost certainly induce changes in consumption patterns that will pose unique challenges for American businesses. Propping up firms or even whole industries facing insolvency is beyond the purview of a central bank's powers.These are ultimately fiscal questions, and fiscal policymakers can and must step up to the challenges to ensure a robust recovery.
One thing of note today is Powell's continued insistence that the Federal Reserve does not wish to venture into the area of negative policy rates. I agree with this stance -- economic activity is depressed not because interest rates are too high and credit is unavailable, but rather as a consequence of the virus itself. The surest path to recovery is for the federal government to invest significant resources in testing and tracing. Only with enhanced testing, tracing, and tracking capabilities will American consumers and business be comfortable in going back to work."