By Howard Schneider
WASHINGTON (Reuters) - The U.S. government has a $3 trillion bulge of debt coming through the pipeline because of the coronavirus pandemic. It also has perhaps 30 million or more freshly unemployed Americans to support, tens of thousands of businesses on the ropes, and a possibly extended battle with a virulent disease to underwrite.
Given the choice between leaving the economy without a lifeline and making that debt load even bigger, Federal Reserve Chair Jerome Powell on Wednesday sent a not-so-subtle message to U.S. elected officials: Spend whatever you need in this crisis.
"There's a degree of concern at the Fed that the bipartisan energy behind fiscal support seems to be flagging," at a time when the fight against the virus is incomplete and expectations for a weaker recovery have grown, said Krishna Guha, vice chairman of Evercore ISI and a former New York Fed official.
With the U.S. central bank able if necessary to buy the massive new amounts of U.S. Treasury debt that spending by Congress might generate, Powell "is not saying 'you spend 10 we buy 10 ...' but is saying that the central bank will have your back in this environment ... not because the Fed is kowtowing to elected officials. It is what is required."
It is an unprecedented moment. Early in the crisis, Congress allocated about $3 trillion to expand unemployment benefits, make loans to small businesses, help local governments, and take other steps to help companies and families stay afloat as restrictions on movement and commerce were imposed to fight the spread of the novel coronavirus.
But the core legislation freeing up the funds was approved in late March, and some of the programs are reaching their expiry dates - a fact that Guha noted poses a series of "mini-fiscal cliffs" that could see some programs start to shrink in coming weeks.
Congress has begun debating further fiscal measures, with Democrats in the U.S. House of Representatives suggesting another $3 trillion to fight the crisis and Republicans bucking over issues like how much help to give local governments. The White House has said it wants to first see how events develop as more states reopen for more types of business and social interaction.
LIFE DURING WARTIME
Yet the economy remains in an uncertain state, its fate tied to the direction of a health crisis that has lead to more than 82,000 deaths but with no clear evidence the daily accumulation of new cases and new fatalities has plateaued.
Thursday is expected to bring another round of new unemployment benefit claims in the millions, with more than 30 million requests filed since late March. The peak of pandemic-related unemployment may be near, but economists now anticipate joblessness to remain elevated through the end of 2020 at least.
As a result, Fed officials, and Powell in particular, are hunkering down for a longer fight than they first expected, and are suggesting a level of cooperation between fiscal and monetary policy that is more reminiscent of wartime.
"Now, when we are facing the biggest shock that the economy has had in modern times, is for me not the time to prioritize considerations like that," Powell said when asked on Wednesday in an interview with the Peterson Institute for International Economics if he was worried the United States might borrow too much to help individuals, companies and local governments.
That might whittle away at boundaries normally considered sacrosanct. "Monetary finance" - a central bank rolling over and expanding a government's debts without limit - is often associated with bad outcomes, and with central bankers being made subservient to the whims of elected officials.
That's something the Fed disavows and says it will not do.
But a pledge to buy government bonds as needed to keep interest rates low and markets stable differs largely in the intent - in this case, Powell may be both encouraging the spending as a matter of national necessity, and offering a hand to make sure it remains sustainable
There's little option. As a fellow at the Washington-based Bipartisan Policy Center before joining the Fed, Powell worked on mainstream efforts to help tame U.S. deficits, an issue he took up after serving at the U.S. Treasury Department.
William Hoagland, senior vice president at BPC, said the coronavirus outbreak has shifted the consensus on that discussion, and Powell is right to recognize it.
"The separation between monetary and fiscal policy has become a lot less clear ... The current situation has forced this drift and it is understandable," Hoagland said. "He is right that it is necessary to have an economy that is performing."