US Fed holds first policy meeting with Biden administration

WASHINGTON (AFP) – With a new year and a new administration in the White House, the United States (US) central bank nonetheless faces an unprecedented challenge in guiding the post-pandemic economic recovery.

One thing Federal Reserve Chair Jerome Powell is unlikely to face from US President Joe Biden is the barrage of Twitter attacks he was subject to, sometimes daily, under former president Donald Trump.

White House spokeswoman Jen Psaki last week said Biden “clearly has a great deal of respect and value for the Federal Reserve and role they play”.

But even absent political pressures, the outlook is daunting.

The initial rollout of COVID-19 vaccines has raised hopes companies will be able to open for business and shoppers will open their wallets, improving the economy’s prospects.

But the historic nature of the job losses during the pandemic – more than 10 million American workers remain unemployed – coupled with the likelihood inflation in some sectors could spike once the recovery takes hold, will test the Federal Reserve’s limited toolkit.

These challenges could be discussed when the Fed’s policy-setting Federal Open Market Committee (FOMC) opens its first two-day policy meeting of the year tomorrow.

After slashing the benchmark lending rate to zero early in the coronavirus crisis, and massively increasing bond purchases to pump cash into the economy, the FOMC has signalled will not change policy in the near future.

“I think they’ve set their course pretty clearly,” Stephanie Aaronson, a vice president at the Brookings Institution and former Fed research economist, told AFP. “I would be surprised if that really changed throughout the spring.”

Business shutdowns imposed to contain the spread of the virus caused immediate, massive job losses in 2020, and at the end of the year, four million people had been unemployed for six months or more, comprising 37 per cent of total unemployment.

The expectation for more government aid under the Biden administration – which has proposed a massive USD1.9 trillion rescue package – will give the central bankers hope for a more solid rebound and improved hiring, Aaronson said.

Still, so much about the pandemic-induced recession has been historic, and the recovery too will present policymakers with scenarios they have never encountered.

When the recovery does begin, the Fed’s main nemesis – inflation – is likely to flare up in areas that bounce back first, like hotels, restaurants and air travel.

“There are many aspects of our current economy that are still unprecedented. And that means that their job is incredibly challenging,” George Washington University economist Tara Sinclair said in an interview.

The Fed last year announced a new framework that gives officials flexibility to address the situation.