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WASHINGTON – As Federal Reserve Chairman Jerome H. Powell rang 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 had abated after 18 months of constant criticism, and the trade war with China appeared to be cooling off, brightening the outlook for markets and the economy.
Yet the first signs of a new – and far more dangerous – crisis were surfacing some 5,000 miles away. The new coronavirus had been detected in Wuhan, China. Mr. Powell and his colleagues were about to face some of the most trying months in Fed history.
In mid-March, as markets collapsed, the Fed cut interest rates to near zero to protect the economy. On March 23, to avert a full-blown financial crisis, the Fed rolled out almost its entire 2008 menu of emergency loan programs, while teaming up with the Treasury Department to announce programs that had never been tried. – including plans to support loans to small and medium-sized businesses and buy corporate debt. In early April, he launched a plan to get credit flowing to states.
“We have crossed many red lines that had not yet been crossed,” said Powell at an event in May.
The Fed’s job in normal times is to help the economy operate on a level playing field – to keep prices stable and jobs plentiful. Its response to a sweeping pandemic has pushed its powers into new territory. The central bank restored calm to the markets and helped keep credit available to consumers and businesses. It also led Republicans to try to limit the broad tool set of the politically independent and unelected institution. The Fed’s emergency loan programs have become a sticking point in negotiations over the government spending package approved by Congress this week.
But even amid the backlash, the Fed’s job to save an economy plagued by a pandemic remains unfinished, with millions of people jobless and businesses suffering.
The Fed is expected to keep rates low for years, guided by a new approach to monetary policy adopted this summer that targets slightly higher inflation and tests how low unemployment can come down.
And the Fed’s extraordinary actions in 2020 were not just about keeping credit flowing. Mr Powell and other senior Fed officials have pushed for the government to spend more to help businesses and households, an unusually bold stance for an institution that is powerfully trying to avoid politics. While the Fed took a broader view of its mission, it weighed in on climate change, racial fairness and other issues its leaders had generally avoided.
“We have often relegated racial equity, inequality and climate change to simple social issues,” said Mary C. Daly, president of the Federal Reserve Bank of San Francisco, in an interview. “It is a mistake. These are economic issues. “
In Washington, reactions to the Fed’s larger role have been swift and mixed. Democrats want the Fed to do more, portraying the focus on climate-related financial risks as a welcome step but just a start. They also pushed the Fed to use its emergency lending powers to funnel cheap credit to state and local governments and small businesses.
Republicans have worked to restrain the Fed to ensure that the role it played in this pandemic does not last longer than the crisis.
Patrick J. Toomey, a Republican Senator from Pennsylvania, spearheaded efforts to insert language into the relief package that could have forced future Fed emergency lending programs to stick to appeasing Wall Street instead of trying to directly support Main Street like the Fed did. done in the current downturn.
Republicans fear the Fed could use its power to support partisan goals – in invoking its regulatory power on banks, for example, to treat oil and gas companies as financial risks, or to support financially troubled city governments.
“Tax and social policy is the rightful domain of the people who are accountable to the American people, and it’s us, it’s Congress,” Mr. Toomey, who could be the next chairman of the banking committee and therefore the one of Mr. Powell’s most important supervisors, said last week from the Senate.
Mr 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 extend business loans through emergency powers; Mr Toomey told the New York Times it would require congressional approval. The divide suggested that the scope of the Fed’s powers could remain a point of debate.
As Mr Powell, 67, comes under pressure from all sides in 2021, he could find himself auditioning for his own work. His term expires in early 2022, which means President-elect Joseph R. Biden Jr. will decide whether or not to reappoint him.
Mr. Powell, a Republican who was appointed Fed governor by President Barack Obama and elevated to his current post by Mr. Trump, has yet to publicly state whether he wants to be reappointed.
Its chances could be affected by the Fed’s response to the coronavirus crisis, which has been credited as early and swift. Mr Powell was at the Group of 20 meetings in Riyadh, Saudi Arabia in late February when he began to become clear to him that the coronavirus was unlikely to remain regionally isolated. He spoke with his colleagues in Washington to see what emergency powers the central bank and the Treasury Department had at their disposal.
By the time her 2-hour flight touched down at Dulles International Airport on Monday, February 24, stocks were plummeting. He opened his phone to many missed calls and emails. From that point on, the central bank’s response accelerated.
This Friday the 28th – the same day that Mr. Trump called concerns about the coronavirus a “new hoax” spread by Democrats – Mr. Powell released a statement expressing 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 steps the Fed would take to prevent a catastrophic market collapse.
Some analysts have warned that the Fed’s rush to accommodate the economy with lower interest rates could be poorly targeted. What could interest rates do in the face of a pandemic?
Much, it appears in hindsight. The Fed’s rate cuts have paved the way for a refinancing boom and, more recently, a rush to buy homes.
The decision of Penny Achina, a first-time home buyer just outside of Houston, shows how Fed policies can impact the economy. After thinking about buying a house for four years, Ms. Achina, a 31-year-old medical technologist, took the leap in 2020.
“I said – it’s either you sink or you swim, and the interest rates really hit me,” she said, and it is expected to close next week. With a 3% down payment, it was approved for a 2.5% interest rate on a 30-year mortgage.
When people like Ms. Achina buy homes, they often spend money on new sofas and refrigerators to fill them up. Increased consumer demand prompts companies, also attracted by low interest rates, to borrow money to invest in equipment in order to produce more.
However, the central bank bailout could have side effects. While most economists believe runaway inflation is unlikely, a minority warn that price increases, which have been at rest for years, could be ignited by huge government spending and a post-pandemic economic surge. Policymakers are watching for signs of financial excess, as their tools have helped stocks soar and companies issue debt at breakneck speed.
Jobs remain the Fed’s biggest challenge. While the low rates help many employed people like Ms. Achina, millions more are out of work. Low-paid workers, women and minorities are particularly vulnerable to losing their livelihoods.
Low rates and Fed bond purchases may not immediately help people who rent, own few stocks, and find their jobs cut.
Many economists believe the $ 900 billion aid package adopted on Monday will have to be followed by others. Some of its main provisions, such as extended unemployment benefits, will expire before spring.
“We have a difficult time to go through,” Loretta Mester, chairman of the Federal Reserve Bank of Cleveland said on Friday, noting that businesses and households will need help in the coming months as coronavirus cases swell before vaccines are not widely distributed.
Even after the recovery begins, the Fed will likely be slow to raise interest rates – and that’s when those left behind in the pandemic can feel the most widespread 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 hold in early 2020. Mr Powell has repeatedly called the job losses “heartbreaking” and pledged to use the powers of the Fed to try. to restore the labor market to its former strength.
“We think this could be another long expansion,” he told a press conference in mid-December, as he pledged to stimulate the economy “until the expansion is well advanced. “
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