The US Federal Reserve Building in Washington DC
The Federal Reserve Board Building in Washington DC on a bright spring morning. The building was completed in 1937. It was named after Marriner S. Eccles (1890–1977), a former Chairman of the Federal Reserve by an Act of Congress on October 15, 1982.

Jerome Powell, chairman of the U.S. Federal Reserve, waited to begin a Senate Banking Committee hearing on Feb. 12. ANDREW HARRER/BLOOMBERG NEWS

 

The Fed Transformed: Jay Powell Leads Central Bank into Uncharted WatersThe 107-year-old institution has moved faster and farther in just weeks than it did during the entire 2008 financial crisis

 

WASHINGTON—To meet the dislocation the coronavirus pandemic unleashed on the economy, Federal Reserve Chairman Jerome Powell has mobilized the central bank to move faster and farther than ever before.

 

In the short weeks since financial markets seized up, Mr. Powell has placed the Fed on wartime footing. He took up the central bank’s playbook from the 2008 financial crisis and then some—cutting rates to near zero, purchasing huge quantities of government debt and, breaking a taboo, lending to American businesses.

 

The pace left no time for the deliberative policy process the Fed prefers. Officials can spend weeks tweaking a few words in a heavily parsed statement. This time, the team saw the need for immediate action.

 

When Fed officials met Sunday morning, March 15, infections were rising along the East Coast. Mr. Powell and his colleagues left empty seats in between them at the central bank’s oval boardroom table, made of Honduran mahogany and granite. Two screens suspended from the two-story boardroom ceiling showed 12 reserve bank presidents and others who dialed in remotely.

 

They made decisions in four hours that would usually take two days.

 

“We learned our lesson. Moving early and aggressively is really important,” said Patrick Harker, president of the Federal Reserve Bank of Philadelphia. “We needed to get the markets functioning.”

 

It’s another transformation of the Fed’s traditional role in American finance, as banks’ lender of last resort, in a time of crisis. Congress has encouraged the Fed, working with the Treasury Department, to invent new ways to stem the damage, pushing the Fed into fiscal policy choices it has long preferred that elected officials decide.

 

Mr. Powell and his colleagues have rolled out new programs at all hours of the day to keep markets functioning and otherwise-solvent businesses afloat. They are preparing to facilitate lower-cost lending for cities and states. Adding to the challenge, they have done much of this from their homes, as a health precaution, instead of from a Fed war room.

 

People waited in line to enter a New York job fair in 2008, and for coronavirus testing in New York on March 24. PHOTO:ASSOCIATED PRESS

 

The current situation has no precedent in postwar America. Economic activity has been deliberately halted, the equivalent of a medically induced coma, to slow the virus. That means the Fed, rather than trying to kick-start growth, is instead focused on preventing credit from drying up to preserve the economy’s capacity to produce once activity resumes.

 

The big challenge for the Fed is that so much about the economy’s future remains out of its control. If the virus overwhelms the Fed’s power to preserve businesses’ access to money, the result could be defaults and bankruptcies that turn a severe, synchronized global recession into a full-bore depression.

 

The Fed’s actions appear to have helped core pillars of the financial market to function for now. The danger is that new programs, even those launched very quickly, won’t be ready in time to help revenue-starved businesses already burning through cash. Designing new programs also raises fundamental questions about which firms should get help and on what terms.

 

Many economists now expect the U.S. economy to experience a severe recession. Goldman Sachseconomists see it contracting at an annualized rate of 24% during the April-to-June quarter. Morgan Stanley sees the unemployment rate rising to 12.8% this spring—the highest on records that date to 1948.

 

The economic outlook is more dire than after the 2008 financial crisis, making it easier for Mr. Powell to cast aside the nagging concerns that his predecessors faced as the housing bubble burst.

 

Back then, officials were reluctant to cut rates as quickly because they weren’t sure how bad the housing bust might get. Some were concerned that untested tools to purchase government debt might fuel excessive inflation. Others worried about the effect near-zero rates would have on markets.

 

Back to Zero

The Fed lowered its benchmark rate by 1.5 percentage points at two consecutive meetings this month.

Federal-funds rate target

 

Note: Rate target is reported as a range from Dec. 16, 2008.

 

Source: Federal Reserve via St. Louis Fed

 

Now, Fed officials have lent freely and purchased enormous amounts of debt, likely swelling its balance sheet to $6 trillion this week from $4.2 trillion in late February.

 

Officials unveiled six new lending facilities, lending not only to banks, its primary role, but also to businesses. As part of its rescue package, Congress kicked in $454 billion so that the Fed can take on more risky lending, with programs expected to support trillions of dollars of borrowing.

 

With credit markets beginning to rally last Monday, Mr. Powell fielded a phone call from President Trump, who earlier in the month had disparaged the Fed as “pathetic,” the latest in a yearlong string of insults over his desire for lower rates, even when the economy was on a stronger footing.

 

“I said, ‘Jerome, good job. You really did it,’ ” Mr. Trump recounted later to reporters. “I was proud of him. That took courage.”

 

Mr. Powell, who goes by Jay, said little in response.

 

People who work with Mr. Powell, a 67-year-old lawyer who isn’t an economist, say he has carried a calm demeanor throughout. That, they say, reflects his comfort with the team inside the central bank, the relationships he has cultivated across Washington and his experience studying the economy and financial markets during a career in private equity and a stint in the Treasury Department during George H.W. Bush’s presidency.

 

From his home office in the Maryland suburbs, Mr. Powell fields early-morning calls with central-bank counterparts abroad and late-night consultations with Treasury Secretary Steven Mnuchin. He relies on a specially configured laptop to access his Bloomberg data terminal, Wall Street’s ubiquitous trading-desk tool.

 

Mr. Powell has made clear that even with interest rates at zero, the Fed’s firepower is limitless. “When it comes to lending, we are not going to run out of ammunition,” he said Thursday in an interview on NBC’s “Today” show. “That doesn’t happen.”

 

In 2008, Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, Security and Exchange Commission Chairman Christopher Cox, and Federal Housing Finance Agency Director James Lockhart testified before the Senate Banking Committee.PHOTO: CHARLES DHARAPAK/ASSOCIATED PRESS

 

Just as Ben Bernanke, a leading scholar of the Great Depression, was praised by economists and his peers in government for being the right person to lead the Fed during the 2008 crisis, current and former colleagues say Mr. Powell is proving more decisive than more academic-minded colleagues in a job that is becoming more political.

 

His feel for markets “is more second nature, and that gives him a greater level of confidence,” said William Dudley, a former president of the New York Fed who served alongside Mr. Powell for six years. “If you’re not as confident you tend to want to get more evidence before you move. He’s responding very aggressively, and that’s appropriate.”

 

When Mr. Powell traveled to Riyadh for a Feb. 22 summit of Group of 20 ministers and central bankers, the virus was tearing through Italy, Iran and South Korea, and markets had started to turn from record highs. Mr. Powell began emailing staff back in Washington that their policy plans would need to change.

 

U.S. school closures and travel restrictions that would crimp the economy, until then a far-off hypothetical, were quickly becoming a reasonable base case.

 

By the end of that week, with markets down more than 14% from their highs of one week earlier, Mr. Powell issued a rare statement under his name signaling rate cuts were likely. Fed officials met March 2 to agree to the first emergency rate cut in 12 years.

 

By March 11, the uncertainty about economic disruptions panicked markets.

Jerome Powell, chairman of the U.S. Federal Reserve, waited to begin a Senate Banking Committee hearing on Feb. 12. ANDREW HARRER/BLOOMBERG NEWS

 

The Fed Transformed: Jay Powell Leads Central Bank into Uncharted WatersThe 107-year-old institution has moved faster and farther in just weeks than it did during the entire 2008 financial crisis

 

 

WASHINGTON—To meet the dislocation the coronavirus pandemic unleashed on the economy, Federal Reserve Chairman Jerome Powell has mobilized the central bank to move faster and farther than ever before.

 

In the short weeks since financial markets seized up, Mr. Powell has placed the Fed on wartime footing. He took up the central bank’s playbook from the 2008 financial crisis and then some—cutting rates to near zero, purchasing huge quantities of government debt and, breaking a taboo, lending to American businesses.

 

The pace left no time for the deliberative policy process the Fed prefers. Officials can spend weeks tweaking a few words in a heavily parsed statement. This time, the team saw the need for immediate action.

 

When Fed officials met Sunday morning, March 15, infections were rising along the East Coast. Mr. Powell and his colleagues left empty seats in between them at the central bank’s oval boardroom table, made of Honduran mahogany and granite. Two screens suspended from the two-story boardroom ceiling showed 12 reserve bank presidents and others who dialed in remotely.

 

They made decisions in four hours that would usually take two days.

 

“We learned our lesson. Moving early and aggressively is really important,” said Patrick Harker, president of the Federal Reserve Bank of Philadelphia. “We needed to get the markets functioning.”

 

It’s another transformation of the Fed’s traditional role in American finance, as banks’ lender of last resort, in a time of crisis. Congress has encouraged the Fed, working with the Treasury Department, to invent new ways to stem the damage, pushing the Fed into fiscal policy choices it has long preferred that elected officials decide.

 

Mr. Powell and his colleagues have rolled out new programs at all hours of the day to keep markets functioning and otherwise-solvent businesses afloat. They are preparing to facilitate lower-cost lending for cities and states. Adding to the challenge, they have done much of this from their homes, as a health precaution, instead of from a Fed war room.

 

People waited in line to enter a New York job fair in 2008, and for coronavirus testing in New York on March 24. PHOTO:ASSOCIATED PRESS

 

 

The current situation has no precedent in postwar America. Economic activity has been deliberately halted, the equivalent of a medically induced coma, to slow the virus. That means the Fed, rather than trying to kick-start growth, is instead focused on preventing credit from drying up to preserve the economy’s capacity to produce once activity resumes.

 

The big challenge for the Fed is that so much about the economy’s future remains out of its control. If the virus overwhelms the Fed’s power to preserve businesses’ access to money, the result could be defaults and bankruptcies that turn a severe, synchronized global recession into a full-bore depression.

 

The Fed’s actions appear to have helped core pillars of the financial market to function for now. The danger is that new programs, even those launched very quickly, won’t be ready in time to help revenue-starved businesses already burning through cash. Designing new programs also raises fundamental questions about which firms should get help and on what terms.

 

Many economists now expect the U.S. economy to experience a severe recession. Goldman Sachseconomists see it contracting at an annualized rate of 24% during the April-to-June quarter. Morgan Stanley sees the unemployment rate rising to 12.8% this spring—the highest on records that date to 1948.

 

The economic outlook is more dire than after the 2008 financial crisis, making it easier for Mr. Powell to cast aside the nagging concerns that his predecessors faced as the housing bubble burst.

 

Back then, officials were reluctant to cut rates as quickly because they weren’t sure how bad the housing bust might get. Some were concerned that untested tools to purchase government debt might fuel excessive inflation. Others worried about the effect near-zero rates would have on markets.

 

Back to Zero

The Fed lowered its benchmark rate by 1.5 percentage points at two consecutive meetings this month.

Federal-funds rate target

 

 

Note: Rate target is reported as a range from Dec. 16, 2008.

 

Source: Federal Reserve via St. Louis Fed

 

Now, Fed officials have lent freely and purchased enormous amounts of debt, likely swelling its balance sheet to $6 trillion this week from $4.2 trillion in late February.

 

Officials unveiled six new lending facilities, lending not only to banks, its primary role, but also to businesses. As part of its rescue package, Congress kicked in $454 billion so that the Fed can take on more risky lending, with programs expected to support trillions of dollars of borrowing.

 

With credit markets beginning to rally last Monday, Mr. Powell fielded a phone call from President Trump, who earlier in the month had disparaged the Fed as “pathetic,” the latest in a yearlong string of insults over his desire for lower rates, even when the economy was on a stronger footing.

 

“I said, ‘Jerome, good job. You really did it,’ ” Mr. Trump recounted later to reporters. “I was proud of him. That took courage.”

 

Mr. Powell, who goes by Jay, said little in response.

 

People who work with Mr. Powell, a 67-year-old lawyer who isn’t an economist, say he has carried a calm demeanor throughout. That, they say, reflects his comfort with the team inside the central bank, the relationships he has cultivated across Washington and his experience studying the economy and financial markets during a career in private equity and a stint in the Treasury Department during George H.W. Bush’s presidency.

 

From his home office in the Maryland suburbs, Mr. Powell fields early-morning calls with central-bank counterparts abroad and late-night consultations with Treasury Secretary Steven Mnuchin. He relies on a specially configured laptop to access his Bloomberg data terminal, Wall Street’s ubiquitous trading-desk tool.

 

Mr. Powell has made clear that even with interest rates at zero, the Fed’s firepower is limitless. “When it comes to lending, we are not going to run out of ammunition,” he said Thursday in an interview on NBC’s “Today” show. “That doesn’t happen.”

 

In 2008, Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, Security and Exchange Commission Chairman Christopher Cox, and Federal Housing Finance Agency Director James Lockhart testified before the Senate Banking Committee.PHOTO: CHARLES DHARAPAK/ASSOCIATED PRESS

 

Just as Ben Bernanke, a leading scholar of the Great Depression, was praised by economists and his peers in government for being the right person to lead the Fed during the 2008 crisis, current and former colleagues say Mr. Powell is proving more decisive than more academic-minded colleagues in a job that is becoming more political.

 

His feel for markets “is more second nature, and that gives him a greater level of confidence,” said William Dudley, a former president of the New York Fed who served alongside Mr. Powell for six years. “If you’re not as confident you tend to want to get more evidence before you move. He’s responding very aggressively, and that’s appropriate.”

 

When Mr. Powell traveled to Riyadh for a Feb. 22 summit of Group of 20 ministers and central bankers, the virus was tearing through Italy, Iran and South Korea, and markets had started to turn from record highs. Mr. Powell began emailing staff back in Washington that their policy plans would need to change.

 

U.S. school closures and travel restrictions that would crimp the economy, until then a far-off hypothetical, were quickly becoming a reasonable base case.

 

By the end of that week, with markets down more than 14% from their highs of one week earlier, Mr. Powell issued a rare statement under his name signaling rate cuts were likely. Fed officials met March 2 to agree to the first emergency rate cut in 12 years.

 

By March 11, the uncertainty about economic disruptions panicked markets. Financial institutions began selling U.S. government securities, typically considered a haven, to raise cash after markets for corporate debt, mortgage-backed securities and other assets began seizing up.

 

Source: Federal Reserve

 

institutions began selling U.S. government securities, typically considered a haven, to raise cash after markets for corporate debt, mortgage-backed securities and other assets began seizing up.

 

Source: Federal Reserve

 

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