I favor fiscal relief for the unemployed and small businesses, but not fiscal stimulus. But what sort of fiscal policy do Fed officials favor? Most people assume that the Fed wants more fiscal stimulus, and perhaps that’s true. But I’m not so sure.
Tim Duy directed me to a curious statement by SF Fed President Mary Daly:
The U.S. economy is likely to slow and perhaps even stall in coming months amid the surge in coronavirus cases, San Francisco Federal Reserve Bank President Mary Daly said on Tuesday, but the central bank should not respond, as it typically does to slowdowns, by pulling out more stops.
“It is not the time to stimulate the economy aggressively and get people out in the economy because that would be unsafe,” Daly told reporters on a call after a talk at Arizona State University, held virtually. “I judge policy as in a good place.”
So an increase in aggregate demand would be unwise because it would be unsafe. And yet on October 15 Daly said this:
Monetary policy, including interest rates and the pace of asset purchases by the Federal Reserve are in a good place, but more fiscal stimulus may be needed to ensure that households and state and local governments are able to recover, San Francisco Fed President Mary Daly said Thursday.
And in a November 10 interview, Steve Liesman asked her, “If the fiscal side does less does that mean the Fed needs to do more?” As in almost every single case where Fed officials are asked this question, Daly didn’t directly answer the question. (BTW, it’s a worrisome sign when policymakers don’t answer questions.) Instead, Daly strongly emphasized that fiscal stimulus was needed to support unemployed workers and small businesses. I.e., fiscal relief was needed, not “stimulus”.
We don’t need to send $1200 checks to professionals making $100,000/year.
She also indicated that the Fed had the option of making policy either more expansionary or more contractionary. That’s also my view.
In a normal recession, Fed officials (or at the very least Fed doves) would favor more monetary stimulus. They are not doing so today because they believe the recession is mostly caused by Covid-19. The virus caused spending to suddenly shift from people-oriented services toward the purchase of goods, creating mass unemployment. Tim Duy points out that other doves such as Charles Evans are also opposed to additional monetary stimulus. Here’s Duy:
Ok, so maybe you don’t trust Daly’s signal. She’s newer. She’s on the west coast. I’m on the west coast too. What do we know about what’s going on? Let’s pull another dove then, this time Chicago Federal Reserve President interviewed after the labor report and via Nic Timiraos at the Wall Street Journal. Evans very clearly says they don’t need to revisit the asset purchase program until 2021:
And then Duy quotes from the WSJ article:
“The risk characterization has improved,” Chicago Fed President Charles Evans said on Friday…
…“As we see progress each and every week and month, that really sets the pace for a better recovery in 2021,” said Mr. Evans. “We’re still looking to see how things are going to work themselves out” before making decisions about whether to provide additional stimulus, he said.
So Evans also sees no current need for additional stimulus. That doesn’t mean he is opposed to fiscal “stimulus” (as in relief), but I suspect his views are closer to Daly’s views than to those who want to goose the economy with a flood of free money.
This post is in response to all those people who tell me I don’t know what I’m talking about, and that all the cool people favor more stimulus. Well, I’d say Mary Daly is pretty cool.
Daly was born in Ballwin, Missouri. Her father was a postal worker and her mother was a homemaker. She said, “we were not poor, but we weren’t very wealthy, either. And at some point my family just, sort of, imploded. And my siblings went to live with my grandparents and I went to live with friends. And I dropped out of high school.” At the time, she was 15 years of age. By age 16, she was living on her own working at doughnut shops and retailer Target, struggling to scrape together a full-time salary.
Daly went on to earn a general educational development (GED) and eventually a bachelor’s degree in economics and philosophy from the University of Missouri-Kansas City in 1985. She later received a master’s degree from the University of Illinois Urbana-Champaign in 1987 and a Ph.D in economics from the Maxwell School at Syracuse University in 1994. She completed a post-doctoral fellowship at National Institute of Aging at Northwestern University in 1996.
PS. Patrick Sullivan directed me to a WSJ article that mentions a Mercatus paper I did back in 2013:
They don’t work. “Why the Fiscal Multiplier is Roughly Zero” is the title of a 2013 paper by Scott Sumner for George Mason University, summarizing the Obama stimulus. The key line is that “estimates of fiscal multipliers become little more than forecasts of central bank incompetence,” meaning the Federal Reserve’s job of maintaining stable monetary conditions should actually require it to fight against stimulus.