Alan Blinder says the Fed’s interest-rate cuts are unlikely to have much impact until the coronavirus pandemic eases and people are willing to spend in more-normal ways.
Photo: brendan mcdermid/ReutersAlan Blinder knows a thing or two about the Federal Reserve, having served as vice chairman from 1994 to 1996 and as a member of President Clinton’s Council of Economic Advisers before that.
He approves of how the Fed is responding to the economic and financial havoc wrought by the coronavirus. But, says Mr. Blinder, people must understand that the U.S. central bank alone can’t solve the current crisis.
The Fed can prevent lending markets from collapsing, but it can’t now create jobs for people. That’s a job for fiscal policy, says Mr. Blinder, who has taught economics at Princeton University since 1971.
The Fed’s interest-rate cuts are unlikely to have much impact until the coronavirus pandemic eases and people are willing to spend in more-normal ways, Mr. Blinder says. He supports negative interest rates, but doesn’t think the Fed will go there.
In an interview with The Wall Street Journal, Mr. Blinder shares his views on the roles of the Fed and, more broadly, the federal government in the current effort to sustain and at some point refloat the U.S. economy. Edited excerpts of the conversation follow.
WSJ: How well do you think the Fed has responded to the economic/financial crisis?
MR. BLINDER: First, people need to understand that while the Fed is extremely powerful, it has a limited domain. Fiscal transfers are needed in vast amounts and aren’t within the Fed’s domain.
It has vast lending power, but is supposed to make loans of very high quality. I worry that some people in the government and financial markets turn too much to the Fed for solutions.
Within its domain—basically large dollar lending, not small loans to small businesses—the Fed is extremely powerful and skilled. You can see already that the commercial-paper market won’t crumble, that the market for high- and even medium-grade corporate bonds won’t tumble, and that the Treasurys market won’t have difficulties, except fleeting ones. If there’s a lack of liquidity almost anywhere in the financial system, the Fed can fix it.
But that won’t put millions of people back to work or keep paychecks flowing to people out of work.
WSJ: Do you think that ex-Fed Chairman Ben Bernanke and his colleagues, with their own extraordinary actions in response to the 2008-09 financial crisis, offered a blueprint making this Fed’s job easier?
MR. BLINDER: Yes, this Fed is doing much more, but it’s helpful having the precedents. There were legal documents and term sheets that weren’t on the shelf for Bernanke. In this case, some of that was on the shelf already.
But there are some things you never would have dreamed of. This is a much worse situation. In any case, the Fed put up facilities in six days that took the Bernanke Fed six months. It’s a huge difference when a blueprint is sitting there.
WSJ: It seems this Fed also isn’t facing criticism that its policies will spark high inflation, like the Bernanke Fed did.
MR. BLINDER: I get a few emails here and there that there will be an inflation problem. But that’s a much smaller slice of opinion than in 2009-10. I point them to that earlier episode, when inflation didn’t rise.
The problem since then is that inflation has been too low. That goes some way to explain the muted reaction. This thing is too new, and most people are focused on the pandemic and unemployment.
WSJ: Is there anything you think the Fed might do differently?
In the earlier crisis, unemployment followed financial ruin. First we got financial ruin, and then later we got a terrible recession. This time we got massive unemployment up front, and the Fed is preventing financial ruin.
MR. BLINDER: There is a huge problem in getting loans to small businesses. In the Fed’s Main Street Lending Program, so far all the loans have been $1 million or more. That was pretty inevitable.
When it comes to large dollar amounts, the Fed knows what to do. But I don’t think the Fed is the right institution for lending to small businesses. The Fed is good at wholesale lending, but not so much at retail. That’s another illustration of the fact that you can’t look at the Fed to do everything.
WSJ: What do you think of the possibility that the Fed might buy municipal bonds?
MR. BLINDER: I think some support is crucial, because municipalities are incurring gigantic unanticipated costs and large shortfalls of revenue. It’s appropriate for the Fed to do something as a backstop. But what in the world do you buy? There are thousands of municipal bonds.
WSJ: How do you view the Fed’s approach to interest rates, cutting them quickly to almost zero?
MR. BLINDER: I don’t think it matters much now. The typical thing is for central banks to stimulate the economy by cutting interest rates. But when people are afraid to go to an auto dealership because of a disease, a lower auto-loan rate isn’t much of an inducement.
Rate cuts will be more important when we get on the upside, when things come back to life, with people going back to auto showrooms.
The Cares Act [the $2 trillion Coronavirus Aid, Relief and Economic Security Act] is often called a stimulus package in the media. But it’s really a relief package—relief of misery and hardship.
At some point, there’s a need for stimulus to boost the economy out of the deep recession. The Fed already has put its package in place. There’s a need, down the road, for more conventional [fiscal] stimulus.
WSJ: Do you think there’s a chance the Fed will move to negative interest rates?
MR. BLINDER: I think the chance is slim. During the last financial crisis, I repeatedly urged the Fed that they ought to go negative, and they never did.
It’s still on my list, but I think it’s the last thing they would do. Everything in their behavior says they won’t. But it’s not that important if they’re at zero rather than say, negative 40 basis points [0.4 percentage point].
Mr. Weil is a writer in West Palm Beach, Fla. He can be reached at reports@wsj.com.
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