To Reduce Unemployment, The Fed Should Focus On Credit Policy Over Monetary Policy
With unemployment still over ten percent, Americans and their elected officials want jobs. Federal Reserve Chair Jerome Powell appears to be listening. He regularly speaks about the importance of reducing unemployment, and last week he announced a policy change that has been touted as helpful for workers. Years from now, it might be. But while the Fed was fine-tuning its approach to monetary policy, it was ignoring a more pressing policy question: Just what is the Fed’s approach to credit policy? The Fed has used only a fraction of the $454 billion allocated by Congress to enable loans in multiples of that amount. The Fed could have a far more immediate impact on unemployment by providing a clear framework for when and how it will support lending to the real economy.
One in ten Americans who wants a job cannot find one. That unemployment was at 3.5 percent, a fifty-year low, when the pandemic hit only rubs salt in the wound. Reducing unemployment is one of the two roles given to the Fed. Fed officials have cited its commitment to unemployment as a core rationale for many of their actions since the Covid crisis took hold. In speeches and testimony before Congress, Chair Powell evinces genuine compassion for those who are struggling. He appears deeply concerned about high unemployment, the individual and social costs of sustained periods of unemployment, and the particular hardships that the Covid crisis has imposed on Blacks and other marginalized groups.
The Fed’s actions last week seem to support this narrative. Last Thursday, Chair Powell announced that the Fed had revised its monetary policy framework to give the Fed more flexibility to sometimes exceed its inflation target—price stability being the Fed’s other mandate—and to delay raising rates even in when the job market is running hot. Writing for The New York Times NYT , Jeanna Smialek heralded the move as a “major shift in how the central bank guides the economy,” one that signals that the Fed “will make job growth pre-eminent.” The Wall Street Journal account, from Nick Timiraos, described the shift as a “milestone” that commits the Fed to “to stay off the brake pedal for longer.”
The flexibility built into the revised statement may eventually prove helpful, and it does more accurately capture the Fed’s recent approach to monetary policy. But it does almost nothing to improve the near-term prospects of the ten percent of Americans who remain unemployed. Inflation has been below the Fed’s 2% target for most of the last decade, and no one expected the Fed to increase rates anytime soon even without the change. This was clear from the muted market response to the announcement.
Meanwhile, the Fed has failed to provide any cohesive policy framework in a far more pressing domain—credit policy. In March, Congress gave the Fed, working with Treasury, $454 billion to backstop emergency loans to businesses and other organizations. Even before Congress passed the CARES Act, the Federal Reserve had signaled that it was ready and willing to play a central role providing credit directly to the real economy. It had announced its intention to create an array of emergency lending facilities, including ones that would new buy bonds issued by large companies and another that would support fresh loans to the smaller companies that occupy “Main Street.”
The Fed has made some progress on this commitment. It has created three Main Street lending facilities, along with facilities for nonprofits and municipalities. But the total amount of lending enabled by these programs remains only a small fraction of what was envisioned when the CARES Act was passed. The total value of the loans held through the Municipal Liquidity Facility is a mere $1.65 billion. The value of the Fed’s exposure in the Main Street Lending Program is even smaller, $855 million. And there is no indication that any debt has been issued into the Primary Corporate Credit Facility, or that any nonprofits have accessed Fed loans.
The Fed is using an emergency facility backed by CARES Act funding to buy up corporate bonds and ETFs in the secondary market, but there is little to indicate that these acquisitions are increasing net credit. Nor does the Fed appear to be looking for ways to do more. The flurry of creativity that burst forth in the spring seems to have petered out. For example, even though small businesses are critical employers and three-quarters report that having been adversely affected by the pandemic, the Fed has yet to create and does not appear to be contemplating an lending facility targeted to helping these companies. Just as significant as the mishmash of the Fed’s efforts, is its failure to articulate what it is trying to achieve and how. No clear animating or the limiting principles have been provided, nor can any be readily inferred from what the Fed has done and what it has failed to do. If anything, administrative ease seems to be playing a far bigger role than any first principles explaining what the Fed has done and who it has benefitted in the process.
When it comes to monetary policy, the Fed already had a well-articulated framework in place. Last week’s policy change served only to revise its existing policy statement. Similarly, when it comes to providing short-term liquidity support, there is a framework—Bagehot’s dictum—that the Fed at least purports to invoke to determine who should receive support and on what terms. In both instances, the frameworks enhance accountability and help Congress and the public understand what they can expect from the central bank. When it comes to credit policy, by contrast, the Fed has never provided a coherent framework explaining what it is trying to achieve and how.
The Fed’s failure to use the funds allocated by Congress despite the ongoing economic challenges may indicate that the Fed is just not well suited to make loans directly to businesses and others. There are some real advantages to limiting the functions of the central bank to monetary policy and the provision of liquidity to the financial system. But if this is all that the Fed feels it can or should do, it should say so, and far more clearly than it has. It should concede that contrary to the signals it sent in March, it’s not up to helping implement credit policy. It should tell Congress to give the remaining funds to another agency that actually wants the job.
The harms inflicted by the Covid crisis are great and far from evenly spread. As Chair Powell has emphasized in testimony before Congress: “The rise in joblessness has been especially severe for lower-wage workers, for women, and for African Americans and Hispanics.” The Fed’s rhetoric and its approach to monetary policy throughout the crisis suggest that the Powell Fed wants to protect these and other workers. In contrast, its sputtering attempts at credit support have primarily benefitted shareholders and creditors of large corporations. If the Fed really wants to demonstrate its support for workers and its commitment to accountability, it should be spending less time ironing out what monetary policy might look like years from now, and far more articulating whether it wants to play a role in credit policy, and what it aims to accomplish if it does.