The Fed Is Right and Trump Is Wrong: Stimulus Can’t Wait

(Bloomberg Opinion) -- President Donald Trump has told his team to stop discussing a new stimulus package until after the election. He should pay closer attention to what Jerome Powell said to the National Association for Business Economics a few hours before. Without additional fiscal stimulus, Powell warned, the economic recovery might very well falter.

What the Federal Reserve chairman called “normal recessionary dynamics” — suppressed up to now thanks to powerful fiscal and monetary support earlier in the year — could easily set in. That means slower growth feeding mounting pessimism, in a vicious circle of contraction. There's no need to take this risk. Partisan squabbling over new fiscal relief has been going on for months. Enough.

In stressing the urgency, Powell drew attention to a crucial but easily forgotten point. The recovery from the pandemic-driven slump was almost as remarkable as the slowdown. Output fell by 31% at an annual rate in the second quarter, and the rate of unemployment soared to nearly 15%. Since then, the economy has bounced back strongly — by no means all the way, but still at an extremely impressive pace. The reason for that fast recovery was the speed and strength of the policy response.

The Fed has provided effectively unlimited liquidity, cut interest rates to zero, embarked on an expanded bond-buying program, and reframed its monetary policy to signal prolonged accommodation. In an unaccustomed display of effective government, Congress swiftly passed the CARES Act and three other relief measures, delivering some $3 trillion of budgetary support. A shocking economic collapse drew forth what Powell called a “truly extraordinary” fiscal expansion.

So the recovery didn't just happen. And it won't automatically sustain itself from now on. The pandemic isn't yet contained, there's little more the Fed can do, and the earlier fiscal support has now largely run out. Recent figures already suggest fading economic momentum. This deceleration could get worse, because household spending is still supported by the boost to savings enabled by the earlier fiscal stimulus. Once this buffer is run down, spending might slow more abruptly. Mounting financial pressure on states and cities will push the same way.

It's true that the long-term fiscal outlook gives cause for concern. Public borrowing and public debt have already surged. Once the pandemic and its economic consequences have subsided, attention will again need to turn to fiscal control. But for the moment, as Powell pointed out, the risks are skewed. Fiscal stimulus that's too meager or too long delayed could tip the economy into slower growth or even outright contraction (which would itself have serious long-term fiscal consequences). Right now, on the other hand, with the government able to borrow for nothing and inflation running lower than target, delivering too much fiscal stimulus poses little if any danger.

Republicans have been mostly to blame for the delay, making offers the Democrats are right to call too small and unserious. But the Democrats, too, have been in no hurry to compromise. Simply stopping the talks is not the answer. The president is just plain wrong. Democrats and Republicans need to strike a deal immediately on a substantial new stimulus.

Editorials are written by the Bloomberg Opinion editorial board.

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