DECISIONS, DECISIONS: IMPORTANT U.S. FISCAL AND MONETARY POLICIES FOR LATE 2020 AND EARLY 2021

 

The U.S. Congress and the members of the Federal Open Market Committee (FOMC) of the Federal Reserve Bank (Fed) had important economic decisions to make as the year 2020 draws to a close.  The Fed announced last week that it would continue to purchase bonds to keep interest rates low.  This week, MSNBC and likely others reported that Congress approved an additional package for COVID-19 coronavirus relief.  Will it receive Presidential approval and if so, when?

At least a few sources such as a Bloomberg article by Craig Torres and Misyrlena Egkolfopoulou have noted that Jerome Powell, chair of the FOMC, has argued for more fiscal policy to try to stimulate the economy.  Might Powell be concerned that monetary policy, over which the FOMC has much more influence, will not be as effective as in the past given that interest rates are already close to zero and the Fed is already experimenting with unconventional monetary policies, for example, purchasing mortgage-backed securities (rather than only buying previously issued U.S. federal government debt)?

For those not familiar, money supply levels or money supply growth rates and interest rates, particularly the discount rate and the federal funds rate, comprise the tools of monetary policy.  The discount rate is the rate that banks borrowing directly from the Fed must pay to the Fed, while the interbank rate for an overnight loan is the federal funds rate.  All other things equal, increases in debt purchases by the Fed wind up increasing the money supply.  Fiscal policies consist of taxes and government expenditures.

What factors could have influenced these important fiscal and monetary policy decisions?  On Wednesday (Dec. 16) morning, the U.S. Census Bureau announced that estimated U.S. retail sales (including food and beverages) decreased in November 2020 from the previous month.  My understanding is that this decrease in U.S. retail sales was greater than expected.  Further, estimated U.S. retail sales for October 2020 were revised from showing a small increase to a small decrease on a month-to-month basis.  On a more positive note, the November 2020 estimate for retail sales shows growth compared with the estimate from November 2019. 

However, the U.S. bond market may have been forecasting back in the year 2019 that the U.S. economy was headed for a recession at that point, as evidenced by inverted yield curves at times in the year 2019 based on data shown on CNBC.  Readers should realize that many view the bond market as being much better at forecasting recessions that the stock market.  Also, readers should recall that based on quarterly data from the U.S. Bureau of Economic Analysis (but accessed from the St. Louis Federal Reserve FRED website), U.S. real GDP started decreasing (possibly indicating a recession) in the first quarter of 2020.

Another factor could be that after months of trending downward, weekly initial jobless claims jumped somewhat and have exceeded 860,000 for the last two weeks, according to data from the U.S. Employment and Training Administration. The data show that initial jobless claims have been more than 700,000 each week starting around the time of the shutdowns earlier this year, with a few weeks tallying more than 3 million jobless claims (and two weeks with the total more than 6.5 million during each of those two weeks).  The previous weekly record for the greatest number of claims was less than 700,000.

Further, an Associated Press article appearing in the Atlanta Journal-Constitution today (Dec. 22) at least implied that in deciding whether or not to pass legislation, Congress may have been thinking about unemployment compensation for millions of people that would have expired without action.  The article also pointed out that the poverty rate in the U.S. has increased in recent months.

Has anyone been paying attention to the velocity of money in the United States, particularly the velocity of the U.S. M1 money stock?  The velocity of money measures how many times on average a unit of currency such as the U.S. dollar trades in GDP transactions in a time period, for example a year.  M1 in the U.S. consists mainly of currency, coins, and funds in checking accounts with no limit on check writing other than a sufficiency of funds.  (Dollars part of M1 must be in the control of the general public and not the banking system.)  Although data from the Board of Governors of the Federal Reserve section of www.economagic.com note a rebound in U.S. M1 velocity in the third quarter of 2020, the rebound was rather small percentagewise so that U.S. M1 velocity is still lower than any time since the early 1960s.  I called attention to the alarming drop in U.S. M1 velocity that started in the year 2008 in my 2015 book, It’s Velocity, Stupid! (short title), and in some of my earlier blog entries.  More about money velocity will probably appear in my forthcoming book.

These developments above that could signal macroeconomic weakness in the U.S. are some of the factors that could have led to the continuation of expansionary monetary policy and Congressional approval of additional expansionary fiscal policy.  Unfortunately, the COVID-19 coronavirus pandemic appears to be worsening.  Some vaccines for COVID-19 have arrived, and more are likely on the way.  But many believe that the stimulus funds will be necessary to provide money to households and small businesses likely to face continued difficulties as the year 2021 begins.  All else the same, the more shutdowns may be necessary in an effort to reduce the spread of COVID-19, the greater and perhaps the longer the difficulties may be.  Is it possible for the economy to recover completely without conquering COVID-19?

Time will tell if the recent fiscal and monetary policy decisions will be sufficient to prevent further deterioration in macroeconomic conditions.  I agree with those who have said that in a situation like the one the U.S. has (and probably also other countries have), it is preferable to make a mistake on the side of too much expansionary policy rather than not enough.  But, at least the expansionary policy decisions would be a start or a continuation.  I may have more soon in another blog post.

 

The following sources were used in preparing this blog entry. Note that future data revisions could change the analysis above.

Associated Press. “More Help Likely Needed Soon.”  Atlanta Journal-Constitution, December 22, 2020, pp. A9-A10.

FOMC Statement. December 16, 2020 accessed online December 22, 2020 at https://www.federalreserve.gov/newsevents/pressreleases/monetary20201216a.htm

Torres, Craig and Egkolfopoulou, Misyrlena.  “Powell Says More Fiscal Policy Needed While Recovery Stuggles.”  July 29, 2020.  Accessed online December 22, 2020 at https://www.bloomberg.com/news/articles/2020-07-29/powell-says-more-fiscal-policy-needed-while-recovery-struggles

www.census.gov/retail/marts/www/marts_current.pdf

www.economagic.com

U.S. Bureau of Economic Analysis, Real Gross Domestic Product [GDPC1], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GDPC1, December 22, 2020.

U.S. Employment and Training Administration, Initial Claims [ICSA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/data/ICSA.txt, December 22, 2020.