The year the Fed changed forever

WASHINGTON – When Federal Reserve Chairman Jerome H. Powell called in 2020 in Florida, where he was celebrating his son’s wedding, his working life seemed to be in a period of relative calm. President Trump’s public attack on the central bank was eased after 18 months of constant criticism, and the trade war with China appeared to have cooled and brightened the prospects for markets and the economy.

Yet the earliest signs of a new – and far more dangerous – crisis appeared about 8,000 miles away. The new coronavirus had been discovered in Wuhan, China. Sir. Powell and his colleagues were facing some of the most trying months in Fed history.

By mid-March, when markets crashed, the Fed had lowered interest rates to near zero to protect the economy. By March 23, to avert a complete financial crisis, the Fed had rolled out almost the entire 2008 menu of emergency lending programs, while announcing with the Treasury Department programs that had never been tried – including plans to support lending to SMEs and buy corporate debt . In early April, it adopted a plan to obtain credit for states.

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

The Fed’s task in normal times is to help the economy operate with an even keel – to keep prices stable and jobs plentiful. Its sweeping pandemic response pushed its forces into new territory. The central bank restored calm in the markets and helped keep credit available to consumers and businesses. It also led Republicans to try to limit the enormous set of tools for the politically independent and non-elected institution. The Fed’s emergency loan programs became a fixed point in the negotiations on the government spending package approved by Congress this week.

But even in the midst of setbacks, the Fed’s work to save a pandemic-affected economy is still unfinished, with millions of people without jobs and businesses suffering.

The Fed is likely to keep interest rates down for years, driven by a new monetary policy-making approach adopted this summer aimed at slightly higher inflation and testing how low unemployment may fall.

And the Fed’s extraordinary actions in 2020 were not just aimed at keeping credit afloat. Sir. Powell and other top US officials pressed for more government spending to help businesses and households, an uncharacteristically bold stance on an institution trying to avoid politics. As the Fed took a more far-reaching view of its mission, it weighed climate change, racial equilibrium, and other issues its leaders had typically avoided.

“We have often referred racial equality, inequality, climate change to mere social issues,” Mary C. Daly, president of the Federal Reserve Bank of San Francisco, said in an interview. “It simply came to our notice then. They are economic issues. ”

In Washington, reactions to the Fed’s greater role have been swift and divided. Democrats want the Fed to do more and show attention to climate-related financial risks as a welcome step, but only a beginning. They have also pushed the Fed to use its emergency lending powers to draw cheap credit to state and local governments and small businesses.

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

Patrick J. Toomey, a Republican senator from Pennsylvania, spearheaded efforts to include language in the aid package that could have forced future Fed emergency lending programs to stick to calming Wall Street instead of also trying to directly support Main Street. , as the Fed has done in the current downturn.

Republicans fear the Fed could use its power to support biased goals invokes its legislative power over banks, for example, to treat oil and gas companies as financial risks or by supporting financially troubled municipalities.

“Fiscal and social policy is the realm of justice for the people who are accountable to the American people, and it is us, it is Congress,” Mr. Toomey, who could be the next chairman of the banking committee and thus one of Mr. Powell’s chief supervisor said last week from the Senate floor.

Mr. Toomey’s proposal was diluted during the congressional negotiations and paved the way for a broader relief deal: Congress prevented the central bank from restoring the exact facilities used in 2020, but it did not cut off its power to help states and businesses in the future.

Democrats said the new language was limited enough for the Fed to still be able to buy municipal bonds or provide business loans through emergency powers; Mr. Toomey told The New York Times it would require congressional approval to do so. The split suggested that the extent of the Fed’s powers could remain a point of debate.

Da Mr. Powell, 67, faces pressure from all sides in 2021, he could find himself auditioning for his own job. His term expires in early 2022, meaning President-elect Joseph R. Biden Jr. chooses whether he will judge him.

Sir. Powell, a Republican who was named Fed governor by President Barack Obama and raised to his current position by Mr. Trump, has not yet announced whether he will be reappointed.

His chances could be affected by the Fed’s coronavirus crisis response, which is credited so early and quickly. Sir. Powell was at the group of 20 meetings in Riyadh, Saudi Arabia, in late February when it began to become clear to him that coronavirus is unlikely to remain regionally isolated. He checked in 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, the stock dropped. He opened his phone for many missed calls and emails. From that point on, the central bank’s response kicked in gear.

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

Some analysts warned that the Fed’s rush to meet the lower interest rate economy may be poorly targeted. What could interest rates do in the face of a pandemic?

It looks a lot in hindsight. The Fed’s interest rate cuts set the stage for a refinancing boom and recently a rush to buy houses.

The decision by Penny Achina, a first-time home buyer just outside Houston, shows how Fed policy can cascade through the economy. After thinking about buying a house for four years, Ms. Achina, a 31-year-old medical technologist, took the plunge in 2020.

“I said – it’s either you sink or swim, and the interest rate really entices me,” she said, and she’s ready to close next week. With 3 percent down, she was approved at an interest rate of 2.5 percent on a 30-year mortgage.

When people like Mrs. Achina buy houses, they often spend money on new sofas and refrigerators to fill them. Higher consumer demand is asking companies, which are also attracted to low rates, to borrow money to invest in equipment to produce more.

The central bank’s rescue could still have side effects. While most economists believe that current inflation is unlikely, a minority warns that price increases that have been quiet for years could be ignited by huge public spending and an economic rise after the pandemic. Politicians have been looking for signs of financial surplus as their tools have helped stocks rise and companies to issue debt at a fantastic pace.

Jobs remain the Fed’s biggest challenge. While low rates help many employees like Mrs Achina, millions of others are out of work. Lower-wage workers, women and minorities have been particularly likely to lose their livelihoods.

The Fed’s low interest rates and bond purchases may not be able to help people who rent, own a few stocks and find their jobs eliminated much at once.

Many economists say that the aid package of 900 billion. $, Adopted Monday, needs to be followed up by more. Some of its key provisions, such as extended jobless benefits, expire before spring.

“We have a tough time getting through,” Loretta Mester, president of the Federal Reserve Bank of Cleveland, said Friday, pointing out that businesses and households need help in the next few months as coronavirus cases swell. before vaccines are widely distributed.

Even after the recovery picks up, the Fed is likely to be slow to raise interest rates – and this is where those left in the pandemic may feel the more widespread benefits of its policies.

If its policies work, the Fed could pave the way for the kind of stable, inclusive growth that was about to take hold in early 2020. Sir. Powell has repeatedly called job losses “heartbreaking” and has vowed to use the Fed’s powers to try to restore the job market to its former strength.

“We think this could be another long expansion,” he told a news conference in mid-December, promising to boost the economy “until the expansion is well under way.”