COVID-19

What can the Federal Reserve do to help the economy?

Mitchell Hartman May 20, 2020
Heard on: Marketplace
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Federal Reserve Chairman Jerome Powell testifies before Congress in 2018. Powell has been urging Congress to provide more fiscal support during the pandemic. Chip Somodevilla/Getty Images
COVID-19

What can the Federal Reserve do to help the economy?

Mitchell Hartman May 20, 2020
Federal Reserve Chairman Jerome Powell testifies before Congress in 2018. Powell has been urging Congress to provide more fiscal support during the pandemic. Chip Somodevilla/Getty Images
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During his appearances on TV and Capitol Hill over the past week, Federal Reserve Chairman Jerome Powell has been hammering the message that Congress should do more to help the economy recover from the damage the pandemic is causing.

He’s asking Congress to do more fiscal stimulus — appropriate money — to prop up businesses and households and state and local governments.

But he also thinks the central bank he heads needs to do more.

In prepared testimony to the Senate Banking Committee Tuesday, Powell said the Fed is “committed to using our full range of tools to support the economy in this challenging time.” So what exactly does that mean?

Think of the Fed like a plumber. Its job is to make sure money keeps flowing through the U.S. financial system. When the system gets clogged —- by, say, a pandemic — the Fed whips out its monetary policy wrenches and drain reamers to unclog the flow of money and make it cheaper and less risky to borrow and lend.

That’s what the Fed did in mid-March, when it cut interest rates to zero, said Brad McMillan, chief investment officer at Commonwealth Financial Network.

“And that was really key to preventing panic because of what it said, which was that the central bank was not going to let a crisis happen,” McMillan said.

Since then, the Fed’s kept money flowing by adjusting banking rules, buying up Treasury and mortgage bonds — and the list goes on, said Mark Zandi, chief economist of Moody’s Analytics.

“So the stock, bond markets, credit markets broadly are functioning well, and they still have some more room to maneuver here if they need to,” Zandi said. He added that the Fed could backstop the mortgage market as more homeowners delay monthly payments, and it could buy more and riskier corporate bonds to keep credit flowing. 

And the Fed is about to get money out to small and midsize businesses through its new “Main Street Lending Facility.”

But one thing the Fed can’t do, Zandi said, is pump money directly into the economy. 

“To get things going again, now that people have lost a lot of jobs, people are very nervous, a lot of uncertainty,” Zandi said. “And that’s more difficult for the Fed.”

The central bank could try to help Americans more directly, said Deborah Lucas, professor of finance at MIT.

“What’s called ‘helicopter money’ — they could print money, and they could distribute it to households,” Lucas said.

But she said that would be risky and would require the Fed to manipulate the money supply and banking system in ways it never has before.

COVID-19 Economy FAQs

What’s going on with extra COVID-19 unemployment benefits?

The latest: President Donald Trump signed an executive action directing $400 extra a week in unemployment benefits. But will that aid actually reach people? It’s still unclear. Trump directed federal agencies to send $300 dollars in weekly aid, taken from the federal disaster relief fund, and called on states to provide an additional $100. But states’ budgets are stretched thin as it is.

What’s the latest on evictions?

For millions of Americans, things are looking grim. Unemployment is high, and pandemic eviction moratoriums have expired in states across the country. And as many people already know, eviction is something that can haunt a person’s life for years. For instance, getting evicted can make it hard to rent again. And that can lead to spiraling poverty.

Which retailers are requiring that people wear masks when shopping? And how are they enforcing those rules?

Walmart, Target, Lowe’s, CVS, Home Depot, Costco — they all have policies that say shoppers are required to wear a mask. When an employee confronts a customer who refuses, the interaction can spin out of control, so many of these retailers are telling their workers to not enforce these mandates. But, just having them will actually get more people to wear masks.

You can find answers to more questions on unemployment benefits and COVID-19 here.

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