April 17, 2021

The Fed warned of tragic consequences if the US didnt do more to support its economic recovery. Hours later, Trump killed talks around more stimulus.

  • Federal Reserve Chair Jerome Powell on Tuesday made his most pronounced call yet for additional relief spending.
  • He said the risks of passing too little stimulus far outweigh the risks of overspending, adding that a diminished rebound would be “tragic.”
  • Mere hours after, President Trump abruptly ended stimulus negotiations, saying in a tweet he will pass a spending bill if he wins reelection in November.
  • The move shocked investors, economists, and even other Fed officials. With millions of Americans still unemployed, the absence of new government support threatens to curb the already slowing economic recovery.
  • Leaving the economy to move forward without help is like “letting the forest fire burn,” Neel Kashkari, president of the Federal Reserve Bank of Minneapolis said on CNBC, adding the downturn can become “much, much worse.”
  • Some hope remains for near-term aid. Trump tweeted Tuesday night that he’d still pass standalone measures for emergency airline aid, Paycheck Protection Program funds, and another round of direct payments.
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Tuesday morning saw Federal Reserve Chair Jerome Powell make his most pointed call yet for additional relief spending.

The plea seemingly fell on deaf ears, as President Donald Trump abruptly put stimulus negotiations on ice mere hours later. Revived hopes for a new bill were dashed, and investors dumped stocks in preparation for prolonged economic pain.

Experts fear the absence of a new bill will hinder the US’s ongoing economic recovery. With Democrats and Republicans still far from a compromise, Trump’s decision left the nation in a situation where it must push forward without crucial government support.

Powell’s plea, and Trump’s surprise tweet

The day began simply enough. Powell gave a keynote address at the National Association of Business Economics’ annual meeting, with most expecting the chair to play his cards characteristically close to his chest. Yet Powell took a step further in calling for additional fiscal aid.

The risks of utilizing additional stimulus “are still asymmetric,” he said. Passing too little fiscal support will yield a “weak recovery” rife with unnecessary layoffs, bankruptcies, and slowed growth. The risks associated with overspending “seem, for now, to be smaller,” he said, adding that any extraneous funds wouldn’t go to waste.

Failing to keep the economic recovery on its tracks would also reverse years of progress and exacerbate existing inequities in the US economy, Powell said.

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“That would be tragic, especially in light of our country’s progress on these issues in the years leading up to the pandemic,” he added.

Recent guidance from experts has largely mirrored Powell’s comments. Over the past few weeks, major banks including JPMorgan, Goldman Sachs, and Morgan Stanley have lowered their fourth-quarter gross domestic product forecasts, citing diminished odds for a near-term stimulus deal. Even Treasury Secretary Steven Mnuchin said in late September that fresh aid was “still needed.”

And just four days ago, Trump himself called for a new spending package. During his brief stay at Walter Reed Medical Center, the president tweeted that the nation “NEEDS STIMULUS” and that Congress should “WORK TOGETHER AND GET IT DONE.”

Trump and Powell’s checkered history

Yet Tuesday brought an about-face unexpected by economists, investors, and policymakers. Trump said in a 2:48 p.m. ET tweet that he told his representatives “to stop negotiating until after the election when, immediately after I win, we will pass a major Stimulus Bill.”

Days of negotiations between House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin were rendered useless, and Democrats’ recently passed $2.2 trillion proposal was stopped in its tracks.

It wasn’t the first time Powell and Trump had failed to see eye to eye. The president has repeatedly criticized the central bank and accused its policymakers of undermining his own economic policies. Each time, the Fed held its ground and refrained from hitting back, preserving its role as an independent entity.

Tuesday was different and featured a wide range of experts denouncing Trump’s decision. With millions of Americans still unemployed and a larger share of job losses turning permanent, experts say many households will likely suffer significantly from the canceled negotiations.

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“This is incredibly cruel and also just terrible economics,” Heidi Shierholz, the director of policy at the Economic Policy Institute, said. Many Americans living through the pandemic without work relied on bolstered unemployment benefits for necessary purchases. The expansion has since dried up, leaving jobless families to stretch their dollar even further.

“It’ll mean more people dropping into poverty and people making terrible choices between rent, medicine, and food on the table,” Shierholz added.

“Letting the forest fire rage”

In terms of the broader recovery, leaving the economy to recover without Congressional support is like “letting the forest fire rage,” Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said on CNBC Wednesday.

“Eventually it will burn itself out and meanwhile all the animals are dead,” he said. “There are enormous consequences if we just let things go and the downturn will end up being much, much worse.”

Billionaire investor Bill Ackman joined in on the criticism late Tuesday night. The hedge fund manager called on Pelosi and Trump to pass the $1.6 trillion counteroffer Mnuchin offered in late September as a partial buffer and reconsider additional spending after the presidential election. Doing so would help Americans in need and give both sides a bill they can stomach, he said in a tweet.

Some promise remains for near-term aid. Trump tweeted Tuesday night that Congress should approve $25 billion in emergency funding for airlines and $135 billion for the currently exhausted Paycheck Protection Program. Approving such funds could help airlines avoid tens of thousands of layoffs and keep small businesses afloat through the lengthy economic rebound.

The president later backed another round of direct payments, saying he is “ready to sign right now” if a standalone bill for the $1,200 checks reaches his desk.

To be sure, Democrats’ $2.2 trillion proposal included airline aid, Paycheck Protection Program funding, and another round of stimulus checks. With the election looming and indicators pointing to a slowed pace of economic recovery, some elements of the killed-off stimulus bill may still reach struggling Americans.

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