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When you see Congressional and presidential administration officials commenting on fiscal policy, and Federal Reserve officials commenting on monetary policy, that's normal. But when you see Fed officials commenting on fiscal policy -- something they never do -- that's not normal and is indicative of extraordinary times.
San Francisco Federal Reserve Bank President Janet Yellen has done the latter, stating in no uncertain terms that the U.S. economy needs a fiscal stimulus package to deal with its most serious economic slump in her career.
"The current downturn is likely to be far longer and deeper than the 'garden-variety' recession," Yellen said, in a speech. "If ever, in my professional career, there was a time for active, discretionary fiscal stimulus, it is now." Yellen said the global financial crisis and economic recession pose a serious risk of a prolonged period of stagnation.
"It's worth pulling out all the stops to ensure those outcomes don't occur," Yellen added.
The Obama Administration is expected to call for a $700-850 billion fiscal stimulus package later this month, and economist David H. Wang said it won't be a moment too soon.
"Now we have a Federal Reserve president pointing out the need for a fiscal stimulus. It is rare for even the chairman of the Fed to comment on fiscal policy in testimony before Congress, let alone a Fed district bank president, because fiscal policy is a political matter," Wang said. "So that just tells me the Fed is seeing all the bad data we're seeing, probably even worse data that we don't see, which points to the need for a large fiscal stimulus package." Wang favors a stimulus package of $1.2 trillion, preferably with at least $800 billion in the first tranche.
Economic Analysis: Economist Wang added that the bias toward fiscal stimulus must, if anything, err on the high side, as opposed to the low side. If it's too low, the U.S. economy will remain in its longest recession since the 1950s. Conversely, if it's too high, growth resumes at an adequate rate, and inflation increases, Congress can always pass a tax increase to cool the economy. But investors should not worry about the U.S. having to cool its economy any time soon, he said.
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