68 Finance & economics The EconomistNovember 21st 2020
B
arack obama’seconomic record is overshadowed by a tortur-
ously slow recovery from the global financial crisis. A pre-
mature turn to deficit reduction left America’s recovery in the
hands of a Federal Reserve that was doctrinally unprepared to en-
gineer a rapid rebound in employment. Mr Obama’s vice-presi-
dent, and now the president-elect, Joe Biden, no doubt took the
lessons of that experience to heart. Ahead of America’s presiden-
tial election on November 3rd, he seemed poised to meet the pan-
demic-induced downturn with fiscal force. If the Democratic Party
does not win a Senate majority, however, an all-too-familiar mess
might ensue. With generous fiscal support seemingly off the
cards, the central bank may again prove ill-equipped to rise to the
challenge of providing needed stimulus. And Mr Biden may strug-
gle to place his stamp on the Fed’s board of governors. The drama
surrounding the nomination of Judy Shelton, a Republican pick
with outlandish economic views, which on November 17th stum-
bled after it appeared she had insufficient support in the Senate,
could become the first of many.
Central banks once required little in the way of fiscal assis-
tance. But they have struggled to cope since a drop in short-term
interest rates towards zero sapped their preferred policy tool of its
potency. None has dared to cut rates deep into negative territory,
fearing the potential risks to banking systems. Massive asset-pur-
chase programmes have provided a modest fillip to demand, and
central bankers in Asia and Europe continue to experiment with
new tools, by expanding their purchases beyond government
bonds and setting caps on long-term interest rates, for instance.
Nonetheless, diminished monetary ammunition has led econo-
mists to advocate that fiscal policy play a much larger role in stabi-
lising the economy.
The Fed has tried to adjust to this new world. In the wake of the
financial crisis it promised to keep interest rates “at exceptionally
low levels...for an extended period”. But that failed to spark a rapid
recovery. Perhaps the public doubted that the Fed would actually
keep rates low, and tolerate the resulting faster price growth, when
the time came. The Fed’s promise may well have been undermined
by its framework, which stipulated an inflation target of 2%. The
need for a new approach—one that would explicitly enable the Fedto accept higher inflation, and so keep interest rates low for lon-
ger—led Jerome Powell, its chairman, to launch a strategy review
in 2019. In August this year he unveiled a revised framework, one
of “average-inflation targeting”. Its premise is simple. If the Fed
wants to hit its 2% target on average, then periods of below-target
inflation, which are expected to be numerous in coming years,
must be offset by corresponding periods of above-target inflation.
The Fed was giving itself permission not to slam the economic
brakes (by raising interest rates) should inflation threaten to rise
above 2%.
A promise not to brake, though, cannot get a stalled car moving.
The Fed did not pair its new strategy with other demand-boosting
measures. It bought roughly $3trn in assets between February and
June, as covid-19 sent the economy into a tailspin, but has since
kept its balance-sheet roughly flat. The Fed’s new doveishness
looks to be opportunistic rather than active: it will accept higher
inflation should someone else kick the economy in that direction,
but is reluctant to try new monetary measures to deliver a kick of
its own. That might explain why market expectations of inflation
in ten years’ time remain well below pre-pandemic levels and have
changed little since the summer.
It seems that, like Mr Biden, Mr Powell placed his hopes in fiscal
stimulus. The chairman has repeatedly urged Congress to provide
more support to America’s pandemic-stricken economy. Now,
though, Democrats must win two difficult run-off races in January
to keep the Senate out of the hands of Republicans, who are unlike-
ly to facilitate Mr Biden’s policies. (A Republican Senate would
continue to be led by Mitch McConnell, who said in 2010 that lim-
iting Mr Obama to one presidential term was his party’s priority.)
Mr Biden’s grand economic plans thus look doomed, shifting chief
responsibility for America’s economic fortunes back to the central
bank. Passive doveishness alone may not suffice.Joe knows
The Fed will do its best to respond. It may soon approve more
monetary stimulus in response to a new covid-induced economic
chill; in a speech on November 16th Richard Clarida, the Fed’s vice-
chairman, hinted that an expanded asset-purchase programme
could be in the offing. But the opportunity to pair new measures
with an attention-grabbing policy overhaul has passed. A revision
to its strategy just months after the last one would undermine the
central bank’s credibility.
A change in its leadership could give the Fed an opportunity to
adjust its message and tactics. But Mr Biden will not find it easy to
remould the central bank. Mr Powell’s term as chairman does not
expire until 2022. His decent record means that Mr Biden is unlike-
ly to depart from the custom of renewing a sitting chairman’s term
(it is one that President Donald Trump departed from when he did
not reappoint Janet Yellen, Mr Powell’s predecessor). Nor is it clear
that a Republican Senate would approve Mr Biden’s nominees,
which could soon become a problem if Lael Brainard, a doveish Fed
governor who is considered to be one of the front-runners to be Mr
Biden’s treasury secretary, vacates her seat. In 2011 the Republicans
blocked Mr Obama’s choice of Peter Diamond, a Nobel-prizewin-
ning economist, and politicians’ interest in monetary policy has
only increased since. As The Economist went to press, Mr McCon-
nell continued to hunt for votes among a quarantine-depleted Re-
publican caucus to approve Ms Shelton’s nomination. Mr Biden
may find that economic ideas have changed since he last walked
the corridors of power. Politics has not. 7Free exchange Tragic rerun
Joe Biden’s economic record will be shaped by the Federal Reserve