The Fed warned of ‘tragic’ consequences if the US didn’t do more to support its economic recovery. Hours later, Trump killed talks about more stimulus.

The Fed warned of ‘tragic’ consequences if the US didn’t do more to support its economic recovery. Hours later, Trump killed talks about more stimulus.



Donald Trump wearing a suit and tie talking on a cell phone: President Donald Trump and Federal Reserve Chairman Jerome Powell. Reuters


© Reuters
President Donald Trump and Federal Reserve Chairman Jerome Powell. Reuters

  • Federal Reserve Chair Jerome Powell on Tuesday made his most pronounced call yet for additional relief spending, saying that the risks of passing too little stimulus far outweighed the risks of overspending and that a diminished rebound would be “tragic.”
  • Hours later, President Donald Trump said in a tweet that he was abruptly ending stimulus negotiations and that he would enact a spending bill if he is reelected in November.
  • The move shocked investors, economists, and even other Fed officials. With millions of Americans still unemployed, the absence of new government support threatens to curb the already slowing economic recovery.
  • Leaving the economy to move forward without help is like “letting the forest fire just rage,” Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, said on CNBC, adding that the downturn could become “much, much worse.”
  • Some hope remains for near-term aid. Trump tweeted on Tuesday night that he’d still approve standalone measures for emergency airline aid, Paycheck Protection Program funds, and another round of direct payments.
  • Visit Business Insider’s homepage for more stories.

Tuesday morning saw Federal Reserve Chair Jerome Powell make his most pointed call yet for additional relief spending.

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The plea seemed to go unheard, as President Donald Trump said hours later that he was abruptly putting stimulus negotiations on ice. Revived hopes for a new bill were dashed, and investors dumped stocks in preparation for prolonged economic pain.

Experts fear that the absence of a new bill will hinder the US’s economic recovery. With Democrats and Republicans still far from a compromise, Trump’s decision means the nation must push forward without crucial government support.

Powell’s plea and Trump’s surprise tweet

The day began simply enough. Powell gave a keynote address at the National Association of Business Economics’ annual meeting, and most expected the chair to play his cards characteristically close to his chest.

But Powell took a step further in calling for additional fiscal aid.

The risks of using additional stimulus “are still asymmetric,” he said. Too little fiscal support would yield a “weak recovery” rife with unnecessary layoffs, bankruptcies, and slowed growth. The risks associated with overspending “seem, for now, to be smaller,” he said, adding that any extraneous funds wouldn’t go to waste.

Failing to keep the economic recovery on track would also reverse years of progress and exacerbate inequities in the US economy, Powell said.

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“That would be tragic, especially in light of our country’s progress on these issues in the years leading up to the pandemic,” he added.

Recent guidance from experts has largely mirrored Powell’s comments. Over the past few weeks, major banks including JPMorgan, Goldman Sachs, and Morgan Stanley have lowered their fourth-quarter gross-domestic-product forecasts, citing diminished odds of a near-term stimulus deal. Even Treasury Secretary Steven Mnuchin said in late September that fresh aid was “still needed.”

And four days ago, Trump himself called for a new spending package. During his brief stay at Walter Reed medical center, the president tweeted that the nation “NEEDS STIMULUS” and that Congress should “WORK TOGETHER AND GET IT DONE.”

Trump and Powell’s checkered history

But in an about-face unexpected by economists, investors, and policymakers, Trump said in a tweet at 2:48 p.m. ET that he told his representatives “to stop negotiating until after the election when, immediately after I win, we will pass a major Stimulus Bill.”

Days of negotiations between Mnuchin and House Speaker Nancy Pelosi were rendered useless, and the $2.2 trillion proposal that House Democrats recently passed was stopped in its tracks.

It wasn’t the first time Powell and Trump had failed to see eye to eye. The president has repeatedly criticized the central bank and accused its policymakers of undermining his own economic policies. Each time, the Fed held its ground and refrained from hitting back, preserving its role as an independent entity.

But on Tuesday, a wide range of experts denounced Trump’s decision. With millions of Americans still unemployed and a larger share of job losses turning permanent, many households are likely to suffer significantly from the canceled negotiations, experts said.

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“This is incredibly cruel and also just terrible economics,” said Heidi Shierholz, the director of policy at the Economic Policy Institute.

Many Americans living through the pandemic without work relied on bolstered unemployment benefits for necessary purchases. But the expansion dried up, leaving jobless people to stretch their dollars even further.

“It’ll mean more people dropping into poverty and people making terrible choices between rent, medicine, and food on the table,” Shierholz added.

‘Letting the forest fire just rage’

In terms of the broader recovery, leaving the economy to recover without congressional support is like “letting the forest fire just rage,” Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, said on CNBC on Wednesday.

“Eventually it’ll burn itself out, and meanwhile all the animals are dead,” he said. “I mean, there are enormous consequences if we just let things go, and the downturn will end up being much, much worse.”

The billionaire investor Bill Ackman joined in on the criticism late Tuesday. The hedge-fund manager called on Pelosi and Trump to enact Mnuchin’s $1.6 trillion counteroffer as a partial buffer and reconsider additional spending after the election. Doing so would help Americans in need and give both sides a bill they can stomach, he said in a tweet.

Some promise remains for near-term aid. Trump tweeted on Tuesday night that Congress should approve $25 billion in emergency funding for airlines and $135 billion for the exhausted Paycheck Protection Program. That could help airlines avoid tens of thousands of layoffs and help keep small businesses afloat through the long economic rebound.

The president later backed another round of $1,200 direct payments to Americans, saying he would be “ready to sign right now” if a standalone bill were to reach his desk.

Democrats’ $2.2 trillion proposal included airline aid, Paycheck Protection Program funding, and another round of stimulus checks. With the election looming and indicators pointing to a slowed economic recovery, some elements of the killed-off stimulus bill may still reach struggling Americans.

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