Under Powell — a former investment banker appointed by Trump, who has since suggested he regretted the choice — the Fed has pushed the boundaries of actions and power to a degree that was considered exceedingly difficult, unlikely or impossible as recently as the 2008 financial crisis.
“It really is impressive the speed with which they move,” David Wessel, a senior fellow in economic studies at the Brookings Institution and the author of the definitive history of the Fed’s actions during the 2008 crisis. “They are doing things in days and weeks that it took them months to do during ’07, ’08 and ’09.”
The latest blast, announced this past week, would provide up to $2.3 trillion in lending programs for companies, cities and states, a move that extended the scale Fed’s efforts to a place they had simply never been before.
Powell, in a conversation with Wessel on Thursday after the rollout of the latest lending bazooka, framed the action — and everything the Fed has done — as an effort to match the moment with commensurate action.
“None of us has the luxury of choosing our challenges; fate and history provide them for us. Our job is to meet the tests we are presented,” Powell said. “At the Fed, we are doing all we can to help shepherd the economy through this difficult time.”
Learning the lessons of 2008
So far, even the most prominent Fed critics and skeptics have hardly batted an eye at the scale of the moves as the depth of the hit to the economy has been laid bare in recent weeks.
That’s in part because of the nature of the current crisis versus the last one. A pandemic is not the same as Wall Street banks using financial instruments to package bad loans at a scale that would threaten the global financial system, or overleveraged borrowers, or companies that made bad decisions or investments.
It’s a once-in-a-century event that has led to a freeze of the entire US economy, and as such has placed an enormous weight on the Fed to respond.
“The Fed’s overall objective is blindingly simple,” Tim Duy, professor of practice in the department of economics at the University of Oregon wrote in his newsletter “Tim Duy’s Fed Watch.” “To not let the financial sector seize up and reverberate back into the real economy. To not repeat the mistakes of the Great Depression. To not let another 15 million people lose their jobs. To hold as much of the economy together as possible to let those newly unemployed return to work as quickly as possible.”
The role of the Fed in mitigating the current economic crisis is not without potential pitfalls. The backlash to the central bank in the wake of the 2008 financial crisis was fierce — and placed it in the crosshairs of lawmakers from both parties for years.
After that, efforts to engage with lawmakers and the public were dramatically expanded as Fed officials came to realize the traditional playbook of letting the Fed’s actions and occasional public statements or congressional testimony speak for itself was not going to address the very real perception issues with the Fed’s moves.
A Washington operator
By the time the final emergency rescue package was put together, it was both big — at $2.2 trillion it marked the largest economic rescue package in US history — and explicitly directed the Fed to use financial backing to create a facility to aid states and localities.
While the Fed’s economic power is unparalleled, its role in nearly every aspect of the current effort to rescue the economy is striking — both in direct action or with regulatory moves to assist other elements.
The central bank has deployed its traditional tools but also dusted off many of the tools deployed in the last financial crisis, from cutting rates to making massive purchases of Treasury and mortgage-backed securities.
And the Fed has gone significantly further in structuring lending programs that are massive in scale and have expanded into areas — in particularly its municipal facility announced last week — that the bank had refused to approach in the past.
Powell has also worked hand-in-glove with the Treasury Department, often at the explicit instruction of the US Congress — a partnership that’s just as notable.
The Fed’s role in the $2.2 trillion rescue
The $2.2 trillion economic recovery law passed in March placed significant onus — in the form of $454 billion in taxpayer money to serve as credit protection — on the Fed to craft programs to assist businesses, states and localities.
When the emergency small business lending program that is a backbone element of that law, the Paycheck Protection Program, faced the possibility of overwhelming the balance sheets of banks, the Fed quickly deployed a facility to buy
In that same program, when Wells Fargo said it would have to cap its loans due to restraints placed on the bank as punishment for a series of scandals, the Fed stepped in an provided a temporary reprieve from an imposed asset cap. The bank immediately expanded its participation in the program.
The Fed joined with other banking regulators to ease broader restrictions on banks as well.
Even the timing of announcements have served to bolster the markets. At the same exact time this week’s staggering new jobless claims were announced, the Fed released the details of its new and expanded lending facilities. The market stayed positive throughout the day — in spite of the devastating jobs numbers — largely on the back of the Fed’s action.
The Fed’s moves aren’t without potential pitfalls, as the last crisis displayed on numerous occasions. The bank can’t do everything — something Powell made clear in his conversation with Wessel. While he has made clear there are no limits, in his mind, on the scale of bond buying or spending programs, direct spending — or any bailouts — must come directly from Congress.
“I would stress that these are lending powers, not spending powers,” Powell said of the Fed’s actions.
Lawmakers have also already raised concern about the easing of regulatory restrictions for banks, Wells Fargo in particular. Sen. Sherrod Brown, the top Democrat on the Senate Banking Committee, called the move “troubling.”
“If the Fed wants Wells to focus on community lending, and if Wells is truly committed to its communities and customers, the bank could instead have given up other risky lines of business in order to serve small businesses,” Brown said.
Brown, along with Sens. Elizabeth Warren and Brian Schatz, fired off a letter to Powell on Friday calling out the Fed’s “missteps” in how it has treated the regulatory environment for banks since the onset of the crisis, and asking for the central bank to “take immediate steps to stop buybacks, dividends, and other bank activities that increase risk to the financial system.”
“While the Fed’s monetary policy actions in response to the coronavirus outbreak are commendable, we are deeply concerned that the Fed is not ensuring banks remain healthy enough to continue lending into what may be a prolonged recession,” the Democratic senators wrote.
Republicans have already started questioning the efficacy of the municipal bond buying facility launched on April 9 and lawmakers and accountability groups have warned that lending facilities for large distressed companies are ripe for potential bad actors.
“There’s probably going to be some problems and some scandals and some of that mud will splatter on the Fed,” said Wessel, who also noted another potential issue that is likely tor rear its head as the pandemic is brought under control.
“At some point the Fed is going to want to pull back and what if the Treasury at the time says not yet?”
Never immune from criticism
That may be what brings Powell and the Fed back under Trump’s Twitter spotlight. Still, it’s a long way from when the President was clubbing Powell on a seemingly weekly basis for being “weak” or unable to “‘mentally’ keep up with the competition – other countries.” It’s an even longer way from the President asking “who is our bigger enemy Jay Powell or Chairman Xi?”
Yes, Trump was asking the general public whether it was Powell, or the authoritarian leader of the top global competitor to the US, who posed the biggest threat to the country.
For now, however, as the US economy continues to convulse, Powell has made clear the Fed has no intention of letting up soon.
“We will continue to use these powers forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery,” Powell said Thursday.