Joe Biden’s economic record will be shaped by the Federal Reserve

Joe Biden’s economic record will be shaped by the Federal Reserve

The president-elect’s power to shape the Fed in turn is likely to be limited

BARACK OBAMA’S economic record was overshadowed by a torturously slow recovery from the global financial crisis. A premature turn to deficit-reduction left America’s recovery in the hands of a Federal Reserve that was doctrinally unprepared to engineer a rapid rebound in employment. Mr Obama’s vice-president, and now the president-elect, Joe Biden, no doubt took the lessons of that experience to heart. Ahead of America’s presidential election, he seemed poised to meet the pandemic-induced downturn with fiscal force. If the Democratic Party does not win a Senate majority, however, an all-too-familiar mess might ensue. With generous fiscal support seemingly off the cards, the central bank may again prove ill-equipped to rise to the challenge of providing needed stimulus. And Mr Biden may struggle to place his stamp on the Fed’s board of governors. The drama surrounding the nomination of Judy Shelton, a Republican pick with outlandish economic views, which on November 17th stumbled after it appeared she had insufficient support in the Senate, could become the first of many.

Central banks once required little in the way of fiscal assistance. But they have struggled to cope since a drop in short-term interest rates towards zero sapped their preferred policy response of its potency. None has dared to cut rates deep into negative territory, fearing the potential risks to banking systems. Massive asset-purchase programmes have provided a modest fillip to demand, and central bankers in Asia and Europe continue to experiment with new tools, by expanding their purchases beyond government bonds and setting caps on long-term interest rates, for instance. Nonetheless, diminished monetary ammunition has led economists to advocate that fiscal policy play a much larger role in stabilising the economy.