The man absent from the State of The Union address

Notably absent from the guests of honor attending President Trump’s State of the Union address was the one man responsible for the most significant U.S. economic achievements of the past two years. His name was not even mentioned during the speech, though the first and most significant topic in the president’s SOTU address was how well the economy has been doing.

Take the accomplishments in the areas of inflation, growth and employment highlighted in the SOTU speech. Since this man was confirmed on January 23, 2018, inflation has hovered around 2 percent and spurred growth through increasing consumer spending on real estate and many other goods and services. Such low inflation also propelled many Americans to move their low-yielding savings to the booming stock market and made them wealthy, which increased their optimism about the future as well as their demand for products and services.

Likewise, economic growth has been reasonable, and the associated wage growth put consumers in a spending mood, which in turn grew the economy further. As a result, employment continued to go up, and unemployment down — from 4.1 percent when he was confirmed in 2018 to 3.5 percent in January 2020, or a 15 percent decline. As the president stated in the SOTU address, unemployment among minorities, and especially among young blacks, is the lowest it has ever been.

So who is this man? You guessed it. The man is none other than Jerome Hayden Powell, chairman of the Federal Reserve Board, whose monetary policies made many of the economic achievements mentioned in President Trump’s SOTU address possible. 

Since taking office, Powell and his capable team have been on top of their game. Except for a notable misstep, raising the funds rate in December 2018 then reversing course quickly, they have maintained an appropriately low Fed funds rate, which ensured low inflation and brought about solid economic growth. In effect, the Fed has been the primary economic policymaker since Powell took over in 2018.   

The Fed achieved all of this growth, low inflation and record-high employment using only one set of economic policy tools available to them — the monetary policy tools, which affect the amount of money in the economy. The other set of tools – the more robust fiscal policy tools, which directly affect total demand for goods and services in the country – are directed by both the executive and legislative branches; they were sparsely used, most famously in the Tax Cuts and Jobs Act of 2017, and produced modest and fleeting economic growth. 

One might argue that the administration’s trade agreement with Mexico and Canada and the trade wars with China are fiscal policy measures that contributed to economic growth, but this is yet to be demonstrated. In fact, on the contrary, the high levels of uncertainty and anxiety brought by the trade wars may have contracted the economy, not expanded it. 

But steering the economy using only the rudder of monetary policy tools could be dangerous and ineffective and ultimately sink our economic boat. The Fed can lower the funds rate, hoping the resulting low interest rates will increase consumer and business demand, and thus result in growth. But there are no guarantees whatsoever that such growth would materialize, because consumers and businesses may choose not to increase their spending. The same logic goes for quantitative easing. (The U.S. was lucky that the Fed’s rate reduction did induce growth in the past two years.)

Of course, the Fed could lower the discount rate to zero and below and somehow force growth. Such a drastic measure had been encouraged by President Trump in his Davos speech in January. But negative rates may affect investment and economic decisions in ways that could produce economic decline rather than growth, when, for example, the uncertainty produced by negative rates reduces consumer and business demand.   

The Fed is aware of the limits of its tool box and has been looking for additional ways to help navigate the economy under different conditions. For example, it has initiated Fed Listens — tours to different communities to identify ways for the Fed to realize its dual mandate of low inflation and unemployment. And it has floated the idea of capping yields on treasury securities to combat recessionary forces if they emerge.  

The fiscal policy tools available to the executive and legislative branches are much more powerful and reliable in producing economic prosperity than the monetary tools. 

President Trump should concentrate on using the sure fire of the fiscal policy tools if he wants a second term. And if he does win, Trump would do well to thank Powell for his help.

Avraham Shama is the former dean of the College of Business at the University of Texas, The Pan-American. He is a professor emeritus at the Anderson School of Management at the University of New Mexico. His book about stagflation, “Marketing in a Slow-growth Economy,” was published by Praeger Publishing.