LONDON (Reuters Breakingviews) - Jay Powell’s job is probably safe whoever wins the U.S. presidential election. The chair of the Federal Reserve is going to stick with ultra-easy monetary policy in the coming years. That will make it easy for either Donald Trump or Joe Biden to nominate him for a second term.
Trump used to tweet complaints about Powell all the time, saying other countries had lower interest rates and the Fed’s slightly tighter monetary policy was holding back the American economy. But he has gone quiet during the pandemic. No wonder: Powell and his colleagues have slashed interest rates to near zero and are backstopping financial markets in an effort to minimise the economic damage.
Biden, the Democratic presidential candidate, wouldn’t quibble with the Fed’s response to Covid-19. And if he wins, he will need to make the most of continuity where he can find it since he may well want to replace many of the officials Trump has installed at the Treasury and in other economic roles.
At the same time, the occupant of the Oval Office will need the Fed to help ensure borrowing costs don’t rise because of heavy federal expenditure to counteract job losses and business pain caused by the pandemic.
Washington ran a $3.1 trillion deficit in the fiscal year to September, according to the Treasury Department, more than doubling the previous record. The nation’s debt-to-GDP ratio was on track to hit 98% in September, the Congressional Budget Office said, and could rise to nearly 200% by 2050. The Fed may have to buy yet more government debt to prevent market indigestion. Powell is on that path already.
Republicans used to favour fiscal discipline, but in the circumstances even Trump might warm to what’s known as Modern Monetary Theory, the idea that governments which print their own money can and should spend whatever they want provided it’s fuelling economic growth and productive employment. Biden is already a partial convert, with Stephanie Kelton, an MMT proponent, on a task force that in July laid out 110 pages of policy recommendations.
If the Democrat wins, there’s one area of fit with the Fed that Trump doesn’t share: a focus on racial equity. Both Biden’s task force and the central bank have put this on the agenda. Powell has indicated the Fed will let the economy run hotter for longer so that improving conditions reach disadvantaged Black workers and other minorities.
It’s part of a new, ultra-supportive model of U.S. central banking that neither Trump nor Biden is likely to want to change.
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