Real obstacles to the fiscal stimulus America now needs
On Sunday, the Federal Reserve bowed to the inevitable.
In the face of market turmoil brought on by the rapid spread of the novel coronavirus, the Fed essentially declared a national emergency by slashing the federal-funds rate a full percentage point to 0%-0.25% for the first time since the financial crisis and pledging to buy at least $700 billion of U.S. Treasurys and mortgage-backed securities three days before its next scheduled policy-setting meeting .
Bottom line: Investors don’t think the Fed’s moves are enough. What’s missing is massive fiscal stimulus, which has yet to take place. And there are real obstacles to that — trillion-dollar deficits and intense partisanship that has prevented what used to be slam-dunk bipartisan reforms. Fiscal irresponsibility, toxic politics and a Fed that was too afraid to offend stock investors have combined with the coronavirus, a black swan if there ever was one, to create the current crisis whose resolution right now looks murky.
One crisis after another, plus the persistence of the “Greenspan put,” kept the Fed from raising the federal-funds rate anywhere close to the 5.25% it hit before the financial crisis. It took three years for the FOMC to raise fed funds from 0%-0.25% to a mere 2.25%-2.5%, but only a year to do a round trip back to zero.
Now, as Fed Chairman Jerome Powell pointed out at his press conference, the ball is in the federal government’s court. But its hands may be tied, too. The massive 2017 tax cuts, which primarily helped wealthy taxpayers and big corporations, provided a small, temporary boost to economic growth, but they and the subsequent feeding frenzy of spending increases approved by the Republican Congress have left us with a $1-trillion federal deficit even before the economic effects of the coronavirus epidemic ripple through the economy.