"The Fed Remakes The World"
Axios AM Deep Dive |
By Mike Allen ·Apr 03, 2021 |
Good afternoon and welcome to a Deep Dive by the Axios business team, led by managing editor Aja Whitaker-Moore, on the Federal Reserve — one of the most important economic stories in the world.
Smart Brevity™ count: 1,132 words, or 4 minutes. |
1 big thing: To infinity and beyond |
Photo illustration: Annelise Capossela/Axios. Photo: Stefani Reynolds/Bloomberg via Getty Images |
We're not in the throes of a "Greater Depression," and we're not facing a tsunami of bankruptcies. In fact, the stock market is hitting new record highs, while employment is rising fast. For all of these things, thank one institution above all others: the Federal Reserve, Axios chief financial correspondent Felix Salmon writes. Why it matters: The coronavirus crisis has made abundantly clear the awesome power of central banks in general and of the Fed in particular. The big picture: Most of the time, the Fed is a deliberately slow and quiet agency, keeping a close eye on thousands of economic indicators and trying its best to keep employment high and inflation low.
How it works: The Fed, working hand in glove with the Treasury, announced a long list of programs in March 2020, all of which were designed to stabilize extremely jittery markets and make sure that creditworthy businesses had access to the capital they needed to get through the crisis.
The downside: Businesses are mostly owned by the rich, who got richer even as total employment plunged during the crisis.
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2. Fed takes on race and climate |
Photo illustration: Aïda Amer. Photos: Robert Gauthier/L.A Times, Stephen Maturen/Getty Images |
Historically untouchable issues — like climate change and race — are now on the table for the Fed as it wades further into uncharted territory, writes Axios Closer author Courtenay Brown. Why it matters: The about-face has implications for how one of the world’s most influential economic bodies steers policy and regulates the nation's banks. The Fed recently set up two committees to look at the impact of climate change on the economy and banks.
On climate: The Fed is behind its peers around the globe where climate change is less politicized. On race: Fed officials have implied that the national unemployment rate wouldn’t be the only jobless measure they look at when measuring the health of the economy.
What to watch: Resistance from Republicans.
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3. Everything old is new again |
Chart: Danielle Alberti / Axios Not all instances of easy money cause asset price bubbles — but all asset price bubbles for the past 250 years have been associated with loose monetary policy, Felix writes. In fact, it's almost impossible to find a bubble since 1770 that isn't associated with lax monetary policy.
The big picture: Not all bubbles end in crises, although many do — at which point the very central banks that fueled the bubble are generally tasked with cleaning up the mess. |
A MESSAGE FROM NORTHERN TRUST |
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4. The money spigot |
Data: Yardeni. Chart: Danielle Alberti/Axios "For central banks, I don’t think there is any alternative to what they’ve been doing until now, namely vastly significantly support the economy," former European Central Bank president Mario Draghi told Axios in December. "Support, in my view, will continue for quite a long time." |
5. Bonus poll: Not trusting the Fed |
Data: Axios / Ipsos poll; Chart: Will Chase / Axios For all its impact on the U.S. economy, more than three-fourths of Americans say they know "a little" or less about how the Fed operates and what it does, according to a new Ipsos poll for Axios.
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6. Playing politics with economic policy |
Illustration: Eniola Odetunde / Axios |
The modern Fed is designed to operate free of political pressures, as codified in a 1951 agreement with the Treasury Department. That gives monetary policy to the Fed and fiscal policy to Treasury, writes Axios business editor Dan Primack. Reality check: The president nominates Fed chairs and governors, who don't have lifetime appointments like Supreme Court justices. So politics has always had some influence. What's changed: Former President Trump regularly blistered the Fed and Chairman Jay Powell, who was picked by Trump himself. It raised concerns that Fed politicization would become the new norm.
President Biden appears to be honoring pre-Trump etiquette by not publicly commenting on Fed decisions.
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7. Biden plans for board openings |
Illustration: Eniola Odetunde/Axios. Photos: Frederic J. Brown/Getty Images |
Fed watchers eager to know what President Biden has planned for the agency's top job will likely have to wait until at least this summer, since Jerome Powell's current term as chair doesn't expire until early 2022.
State of play: Reappointing Powell looks logical. But other possible picks include board member Lael Brainard or Raphael Bostic, who leads the Atlanta Fed. The big picture: The administration is considering Michigan State economist Lisa Cook to fill an open seat that’s been vacant since Janet Yellen’s resignation in 2018, Axios' Hans Nichols reported in February.
What's next: Biden will also have the opportunity to fill board member Randal Quarles’ position as vice chair of supervision when his tenure ends in October.
The bottom line: Even without making a change at the top, Biden can steer the Fed's future. |
A MESSAGE FROM NORTHERN TRUST |
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