The year the Fed changed forever

WASHINGTON – When Jerome H. Powell, president of the Federal Reserve, called in 2020 in Florida, where he was celebrating his son’s wedding, his professional life seemed to be entering a period of relative calm. President Trump’s public attacks on the central bank subsided after 18 months of constant criticism, and the trade war with China appeared to be cooling, illuminating the outlook for markets and the economy.

However, the first signs of a new – and much more dangerous – crisis were emerging about 8,000 miles away. The new coronavirus has been detected in Wuhan, China. Powell and his colleagues were about to face some of the toughest months in the history of the Fed.

In mid-March, as the markets crashed, the Fed cut interest rates to almost zero to protect the economy. On March 23, to avoid a total financial crisis, the Fed launched almost its entire 2008 emergency lending program menu, while joining the Treasury Department to announce programs that had never been tried – including plans to support loans for small and medium-sized businesses and buy corporate debt. In early April, he launched a plan to get credit flowing to the states.

“We crossed many red lines that had not been crossed before,” Powell said at an event in May.

The Fed’s job in normal times is to help the economy operate in balance – to keep prices stable and jobs plentiful. His broad response to the pandemic pushed his powers into new territory. The central bank restored the markets’ calm and helped keep credit available to consumers and businesses. It also prompted Republicans to try to limit the vast toolkit of the politically independent and unelected institution. The Fed’s emergency lending programs have become an obstacle in negotiations over the government spending package approved by Congress this week.

But even in the midst of the backlash, the Fed’s work to save a pandemic-stricken economy remains unfinished, with millions of people out of jobs and businesses suffering.

The Fed is likely to keep bottoming rates for years, guided by a new approach to defining the monetary policy adopted this summer, which aims at slightly higher inflation and tests how unemployment can fall.

And the Fed’s extraordinary actions in 2020 were not just about maintaining the flow of credit. Powell and other senior Fed officials pushed for more government spending to help businesses and families, an unusually bold stance for an institution that is powerfully trying to avoid politics. As the Fed took a broader view of its mission, it pondered climate change, racial equality and other issues that its leaders normally avoided.

“We often relegate racial equality, inequality and climate change to simply social issues,” said Mary C. Daly, president of the Federal Reserve Bank of San Francisco, in an interview. “This is a mistake. These are economic issues. “

In Washington, reactions to the Fed’s larger role were swift and divided. Democrats want the Fed to do more, portraying attention to climate-related financial risks as a welcome step, but only a start. They also pressured the Fed to use its emergency lending powers to channel cheap credit to state and local governments and small businesses.

Republicans worked to restrict the Fed to ensure that the role it played in this pandemic does not survive the crisis.

Patrick J. Toomey, a Republican senator from Pennsylvania, led the effort to insert language in the aid package that could have forced the Fed’s future emergency lending programs to limit itself to calming Wall Street instead of trying to also directly support the Main Street, as the Fed has done in the current crisis.

Republicans fear the Fed may use its power to support party objectives – for example, invoking its regulatory power on banks, for example, to treat oil and gas companies as financial risks or supporting municipal governments with financial problems.

“Fiscal and social policy is the legitimate realm of the people who are accountable to the American people, and it’s us, this is Congress,” Mr. Toomey, who could be the next chairman of the banking committee and therefore one of the most of Powell, he said last week from the Senate floor.

Toomey’s proposal was watered down during Congressional negotiations, paving the way for a broader relief deal: Congress banned the central bank from restoring the exact facilities used in 2020, but it did not cut its power to help states and businesses in the future .

Democrats said the new language was limited enough that the Fed could still buy municipal bonds or make commercial loans through emergency powers; Toomey told The New York Times that this would require Congressional approval. The division suggested that the scope of the Fed’s powers could remain a point of debate.

As Powell, 67, faces pressure from all sides in 2021, he may find himself auditioning for his own work. His term expires in early 2022, which means President-elect Joseph R. Biden Jr. will choose whether to rename him.

Powell, a Republican who was named Fed governor by President Barack Obama and raised to the current position by Trump, has yet to say publicly whether he wants to be renamed.

Your chances may be affected by the Fed’s response to the coronavirus crisis, which has been credited as early and rapid. Powell was at the Group of 20 meetings in Riyadh, Saudi Arabia, at the end of February, when it began to become clear to him that the coronavirus would probably not remain isolated regionally. He checked with his colleagues in Washington to see what emergency powers the central bank and the Treasury Department had at their disposal.

When his 14-hour flight landed at Dulles International Airport on Monday, February 24, stocks were plummeting. He opened his phone to several missed calls and emails. From that point on, the central bank’s response came into play.

That Friday, the 28th – the same day that Trump called coronavirus concerns a “new scam” spread by Democrats – Powell issued a statement conveying the Fed’s concern. On March 3, the following Tuesday, the Fed made its first emergency rate cut since the global financial crisis 12 years earlier, the first of many measures the Fed would take to prevent a catastrophic market meltdown.

Some analysts have warned that the Fed’s rush to accommodate the economy with lower interest rates may be misdirected. What could interest rates do in the face of a pandemic?

A lot, it looks in hindsight. Fed rate cuts set the stage for a refinancing boom and, more recently, a race to buy homes.

The decision by Penny Achina, who bought a house for the first time outside Houston, shows how the Fed’s policy can spread across the economy. After thinking about buying a home for four years, Achina, a 31-year-old medical technologist, took the leap in 2020.

“I said – you either sink or nothing, and interest rates really attracted me,” she said, and is scheduled to close next week. With a 3% reduction, it was approved for a 2.5% interest rate on a 30-year mortgage.

When people like Achina buy houses, they usually spend money on new sofas and refrigerators to fill them. Higher consumer demand leads companies, also attracted by low rates, to borrow money to invest in equipment to produce more.

The central bank bailout may still have side effects. While most economists believe that rampant inflation is unlikely, a minority warns that price increases, which have been quiescent for years, can be caused by huge government spending and a post-pandemic economic increase. Policymakers are on the lookout for signs of financial excess, as their tools help stocks to skyrocket and companies to issue debt at an impressive pace.

Jobs remain the Fed’s biggest challenge. Although low rates are helping many employed people like Mrs. Achina, millions of others are unemployed. Lower-paid workers, women and minorities are particularly likely to lose their livelihoods.

The Fed’s low rates and bond purchases can do little to immediately help people who rent, own few shares and have their jobs cut.

Many economists say the $ 900 billion assistance package approved on Monday will need to be followed by more. Some of its main provisions, such as extended unemployment benefits, will expire before spring.

“We have a difficult time ahead,” said Loretta Mester, president of the Federal Reserve Bank of Cleveland, on Friday, pointing out that businesses and families will need help in the coming months as coronavirus cases increase before vaccines widely distributed.

Even after the recovery takes hold, the Fed is likely to be slow to raise interest rates – and that is where those left behind in the pandemic can feel the broader benefits of its policies.

If its policies work, the Fed could pave the way for the kind of stable and inclusive growth that was taking place in early 2020. Powell repeatedly called job losses “painful” and promised to use the Fed’s powers to try to restore the market to your previous strength.

“We are thinking that this could be another long expansion,” he said at a news conference in mid-December, promising to boost the economy “until the expansion is well underway.”