By contributing to higher wealth inequality and dragging the Fed deeper into “quasi fiscal” funding operations, the central bank also risks its credibility and political autonomy. It would also be reinforcing the markets’ belief that they have been empowered to lead rather than follow the Fed. And, based on the experience of the last few years, whenever the markets get concessions from the Fed, they press for more, even when the concessions exceed their expectations.
Using the phrase coined by Chris Dialynas, my friend and former Pimco colleague, there is also the “no exit” issue — that is, the inability to go back as the risks of doing so appear high. Some already think that the European Central Bank has fallen into a deepening lose-lose-lose situation: Notwithstanding growing signs of the damage being caused, it is unable to get out of the current negative interest rate policy paradigm lest it disrupt market valuations and undermine an already-worrisome economic outlook; it is challenged to go further with unconventional monetary measures given mounting evidence that the potential costs and risks of doing so exceed the likely benefits; and its current situation is uncomfortable, exposing the central bank to a range of political, legal and economic criticisms.
In sum, the Fed would be well advised to ignore the calls for it to do more other than getting its Main Street lending program operational as quickly as possible. This does not mean that there is no need for policy actions, or that the Fed may not need to be more engaged down the road.
For now, the policy priority now rests squarely with Congress and the White House and includes:
• Another round of more focused relief measures to help those segments of the population in considerable economic pain and suffering, reducing the Covid-19 risks involved in economic reopenings through strengthened support for better testing, contact tracing, therapy and vaccine treatments, and equipment for first responders.
• Improving safety nets to reduce the probability that household economic insecurity will undermine consumption in the economic recovery phase.
• Combating the likely downward pressures on productivity and growth potential through infrastructure modernization efforts, labor retooling and retraining programs and expanded public-private partnerships.
None of this means that the Fed’s policy work is done. Central bank officials should continue to monitor carefully the functioning of markets and economic activity, including through the use of an expanded high-frequency data set. They should also be working on two policy scenarios: how to normalize financial conditions in an orderly manner and how to support Main Street without damaging the functioning of markets or elevating asset prices to even higher levels. Beyond that, standing pat is most likely the best call for now.
Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO. He is president-elect of Queens' College, Cambridge, senior adviser at Gramercy and professor of practice at Wharton. His books include "The Only Game in Town" and "When Markets Collide."