The Fed's image problem: Itself

The Fed speaks and Wall Street jumps. The Fed pumps trillions into financial markets and it jumps higher. So, what about Main Street?

Yesterday, at a hearing about the Fed’s emergency lending facilities, Representative Jim Himes from Connecticut asked a tough question:

“One of the challenges is that these programs are perceived by my constituents and I think by Americans as always benefiting by the corporation or management. Why? Because the proceeds are often used to pay bondholders, and so workers and other are left to say, ‘Wait a minute. Once again you are bailing out the corporation I work for and what do I get?’ And in many instances those workers are laid off. You don’t need to be too far left of the political perspective to say that’s a problem.

How can these programs can be thought of and restructured in ways that at least alters the perception that they are about corporations and businesses servicing their debt than rather standing by their workers.”

I replied that it was a “big step forward” in this crisis that the Fed had two new programs to loan money directly Main Street, that is, one of states and cities and another for medium-sized businesses. Putting those on equal footing with the several other programs for Wall Street would help create more balance. “Getting money directly to Main Street is what people want to see.”

His follow up question:

But what else? And maybe the answer is there is nothing you can do, and you just as an elected official just need to explain to people that when you stabilize Delta Airlines you are doing a good job for the economy even if Delta Airlines turns around and lays off employees. Is there anything we can do to try to address that perceptual issue?

“Fiscal policy,” was my blunt reply.

The laid-off worker at Delta Airlines who can’t pay their bills will never thank the Fed for bailing out their former employer and its shareholders. Nor should they. People in crisis need relief, and the Fed is limited in what it can do directly for those workers.

Congress can do more. The big problem is not that the Fed is helping Wall Street, but that millions of people are still being left behind by economic policy overall. Fine tuning the Fed programs with an eye toward equity is necessary, but it is not sufficient.

The Fed, even when doing its job well, will fall short on its own. The key metric of success as the ‘lender of last resort’ is: are markets working again? Not are the jobs back? That’s as true for the emergency lending to big corporations as to city governments. Can you buy and sell bonds again easily without the Fed? Yes, then mission accomplished.

But, do you really think the school bus driver laid off last year cared that the Fed stabilized the municipal bond market and wealthy investors holding munis can buy and sell easily again within a few months? No, but I bet she cared about her stimulus check and the lack of a paycheck for over a year. Technically, both policy actions — the one by the Fed and the other by Congress —helped her, but it’s not worth trying to argue that point. An even, rapid recovery, regardless of the source would solve many problems.

Stocks are up over 30% since the pandemic began. More than a year and a half later we are still missing 5 million workers. The recovery is neither even nor rapid.

By elevating fiscal policy, I am not giving the Fed a pass. It must use its authorities and tools more equitably and effectively. The other witnesses and I offered various ways to improve the Fed’s lending programs for municipalities and medium-sized businesses. But the Fed will never be enough to save Main Street. Well-functioning financial markets are not the same as well-functioning labor markets. The Fed has the tools to deliver on the first goal, but it’s Congress that must lead on the second.

And let’s be honest, even if Congress took the lead on Main Street—and they did step up at the start of the Covid crisis—the Fed would still have an image problem. And it’s the Fed’s fault.

We saw it again this week at the Fed’s press conference. Now is a pivotal moment in the recovery, and Fed officials trying to figure out what’s going on with inflation and when the missing workers will come back. So what did Fed Chair Jay Powell talk a lot about?

I had worried the dot plot would steal the show. It didn’t. It was worse. The spotlight was on two Federal Reserve Bank Presidents who actively bought and sold securities last year. Here’s Jay said:

So, no, I was not aware of the specifics of what they were doing. So let me just say a couple things about this subject. We understand very well that the trust of the American people is essential for us to effectively carry out our mission. And that's why I directed the Fed to begin a comprehensive review of the ethics rules around permissible financial holdings and activity by Fed officials … The other thing you would say, that it is now clearly seen as not adequate to the task of really sustaining the public's trust in us. We need to make changes, and we're going to do that as a consequence of this. This will be a thorough going and comprehensive review. We're going to gather all the facts and look at ways to further tighten our rules and standards.

In all, three journalists used their time to ask about the that trading activity. As they should have. The Fed would never have cleaned this problem up on their own. That’s depressing. When officials whose decisions directly and predictably move financial markets are actively trading in markets, it doesn’t matter how benevolently you frame the its Wall Street bailouts, people won’t believe that the Fed is fighting for them.

The Fed was created in 1913 so that J.P. Morgan (the man) and his banker friends were no longer picking the winners and losers during a financial crisis. Sometimes, I wonder if anything really changed.

I am not giving up on the Fed nor should you. I am certain the ethics guidelines around trading will tighten considerably, and we might even see a resignation or two. I am encouraged that Representative Himes convened a hearing on how to improve the Fed’s emergency lending facilities. I am thrilled to see the big strides the Fed made during the Covid-19 crisis relative to the Great Recession in supporting Main Street. I expect it to do even better next time, and accountability is key.

Keep asking the tough questions. Fed keep listening!