Some economists argue fiscal policy isn’t a decent substitute for monetary policy when trying to boost economies in the short-term. Harvard University Professor Kenneth Rogoff wrote recently that government stimulus “inevitably involves messy, hard-fought compromises” that limit its effectiveness.
Political Independence
There are dangers for the Fed in collaborating too closely with elected officials because it could undermine its political independence.
Breaking with recent presidential tradition, Trump has repeatedly attacked the central bank for keeping interest rates too high, including posting a tweet on Tuesday that delivered a dig at Powell for his performance on Capitol Hill.
But the president is not alone in seeking favors from the Fed. At Tuesday’s hearing, Democratic Representative Rashida Tlaib from Michigan repeatedly pressed Powell to explain why the central bank hadn’t helped Detroit avoid bankruptcy as it did during the crisis for major U.S. banks.
In the end, economists said there may be no alternative for the Fed in the next contraction but to accept some form of disciplined fiscal-monetary cooperation.
“They are running low on ammunition,” given that they are unlikely to use negative interest rates, said David Beckworth, a senior research fellow at the Mercator Center at George Mason University. “It does seem like they are going to be in a bind in a next recession.”
--With assistance from Max Reyes.
This article was provided by Bloomberg News.