The role of the Federal Reserve in the midst of the Covid-19 economic crisis : a renewed mandate?

Finance

  • Author Dr. Christophe Aubin-Nury De Malicorne
  • Published August 24, 2021
  • Word count 549

The role of the Federal Reserve in the midst of the Covid-19 economic crisis : a renewed mandate for the Central Bank of the United States?

In the past decades, notably since its Chairman Paul Volcker (1979-1987), the Federal Reserve has already proven throughout various crisis that it was able to act rapidly and effectively. This is especially true more recently, with the redefinition of its role when the FED was confronted to the very severe financial crisis of 2007-2011 and today, in the midst of a worldwide economic meltdown due to the virus Covid-19.

Indeed, contrary to the "Free Market Economic Theory" of Adam Smith and its non interventionist policy during the Great Depression of 1929-1939 in particular, the Federal Reserve has recently been able to provide at times seemingly "unlimited" financing and stabilize the economy, acting not only as a lender but peculiarly as a "savior" of last resort. Therefore, in light of the current economic crisis due to the dramatic effects of Covid-19, the impact of inflation in the US should be moderated by the gradual actions taken by the Federal Reserve, in accord with its mandate: "maximum employment, stable prices, and moderate long-term interest rates" (Federal Reserve Act in 1977).

While reaffirming constantly his commitment to realize the mandate of the Federal Reserve, Jérôme Powell, its actual Chairman is also contributing to change the way of communicating with financial markets operators and economic forces, differentiating further from past behaviors of central bankers. In fact, following the steps of Ben Bernanke (Chairman of the Federal Reserve, from 2006 to 2014) during the 2007 crisis, J. Powell is not acting and communicating as a central banker focusing merely to sanction any excesses. He is "working and exchanging" very openly and proactively with these forces, in order to provide solutions to the crisis, along with a thorough and predictable road map of measures to be implemented.

For now, the bond market is not speculating an imminent surge of inflation. From a yield of 1.70% in early March 2021, the 10-year Treasury Note yield is currently sitting at historically low level, hitting 1.16% on july 20. Moreover, from the "whatever it takes" approach and the reality of current high inflation reports due to a strong pent up demand of goods and services after an extreme global "economic suppression" in 2020, the Federal Reserve is gearing its efforts to manage the most realistic scenario of a rapid "V shape" economic recovery. However, the current relatively high inflation (above 5%) shall be transitory. It is likely to decrease to the FED sustainable and desirable level around 2% (pre-pandemic level), once this abnormal growth of economic demand logically recedes over the next 12 months (The Federal Open Market Committee (FOMC) judges that "inflation rate of 2 percent over the longer run, as measured by the annual change in the price index for personal consumption expenditures, is most consistent with the Federal Reserve’s mandate").

Finally, despite an understandable short term high level of volatile reading of inflation, the trending strategy of "don't fight the FED" is more valid than ever. Specifically, the endeavors of the Federal Reserve to do "everything" to support the economy in regards to its renewed mandate are being nowadays transparently and concretely forwarded farther. It gives subsequently, a comprehensive pathway to overall economic forces and undoubtedly to financial markets institutions.

Dr. Christophe AUBIN-NURY de Malicorne

Senior manager in international banking and financial services, specialized in investment,

private equity and economic development advisory. Consultant Specialist in finance &

economics at ARS, a US government agency and member of CEDIN, Research Center in

International Law.

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