Bloomberg Businessweek - USA (2020-04-20)

Bloomberg Businessweek April 20, 2020

PHOTO ILLUSTRATION BY JUSTIN METZ; PHOTOS: ALAMY (3), BLOOMBERG (1), GETTY IMAGES (2), SHUTTERSTOCK (2). *INCLUDES

LOANS,

REPURCHASE

AGREEMENTS,

AND

OTHER

ASSETS.

DATA:

FEDERAL

RESERVE

29

Federal Reserve Chair Jerome Powell and his

colleagues had a hard decision to make as the

coronavirus epidemic worsened in February

and March. If they stuck to the standard policy

of buying only highly rated bonds, they would

likely be accused of favoring Wall Street over

Main Street—the traditional rap on the Fed. If

they got creative, they could help more sectors

of the economy but they would almost certainly

be accused of overreaching, picking winners and

losers, rescuing the unworthy, and risking losses

that would ultimately be borne by taxpayers.

They decided to get creative. More creative, in

fact, than any Fed leaders since the birth of the

central bank in 1913. They not only relaunched

the special lending programs built for the 2008-09

financial crisis, but they invented entirely new ones

to rescue both big and small businesses. Powell’s

immediate predecessor, Janet Yellen, called the

actions “rapid and enormous.” Ben Bernanke,

who set the previous record for Fed activism,

commended Powell while calling some of the

newest measures “important and difficult.”

The Fed’s fire hose of lending hasn’t prevented

a recession, but it’s protecting the financial sys-

tem from seizing up. Fear was so rampant in the

financial markets in early March that even some

normally in-demand Treasury securities—such as

certain slightly older issues of 10-year government

notes—fell out of favor.

Now that the Fed is buying, investors have been

more willing to buy as well. That’s pulled down

interest rates for a wide range of debt, making it

easier for borrowers to finance themselves and stay

in business. And stocks have rebounded from their

lows in late March. “They should be very proud

of the way they have been able to return financial

markets to a more normal situation,” says Torsten

Slok, chief economist at Deutsche Bank Securities.

Powell portrays the Fed’s choice as no choice at

all, but a necessity. It’s politically important for the

central bank to be perceived as apolitical and tech-

nocratic, not a decision-maker akin to Congress or

the White House. In an April 9 speech, he seemed

to channel Winston Churchill, saying, “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.” He added, “At the Fed, we

are doing all we can to help shepherd the economy

through this difficult time.”

In fact, there was nothing preordained about the

Fed’s course of action. The Powell who’s going all in

on unprecedented rescue measures is a world apart

from the Powell who pushed interest rates higher

to forestall inflation and asset bubbles in 2018, his

first year in office. That hawkish stance earned

him the wrath and scorn of President Trump, who

appointed him to the top job at the central bank.

As recently as March 10, Trump was still complain-

ing in a tweet about “Our pathetic, slow moving

Federal Reserve, headed by Jay Powell.”

One clue to Powell’s decision to go big on keep-

ing companies financially liquid is his background

as a lawyer, investment banker, and private equity

investor. Although he’s the first Fed chair since the

1970s not to have economics training, he under-

stands markets and corporate finance better

than most of the Ph.D.s at Fed headquarters on

Constitution Avenue in Washington. He was quick to

see that lowering interest rates alone wouldn’t solve

the problems popping up as the economy went into

lockdown with the Covid-19 outbreak.

Conventional monetary policy reached its limit

when the Fed lowered the federal funds rate target

by 1.5 percentage points in March, to a range of zero

to 0.25%. The actions since then, reaching into the

bowels of the financial system to help companies

of all sizes borrow, are right up Powell’s alley, says

Michael Feroli, chief economist of JPMorgan Chase &

Co. “That’s business,” he says. “That’s knowing how

financial markets work.”

The Fed’s next step after the federal funds

rate hit the floor and conventional bond- buying

was cranked up was to ask for permission from

the Treasury Department to expand the range

TheBalanceSheetExplodes

4/9/08 4/8/20

$ 6t

3

0

Assets held by the Federal Reserve, weekly As of April 8

Central bank

liquidity swaps

$0.4t

Treasury

securities

$3.6t

Mortgage-backed

securities

$1.5t

Other*

S

○ Jay Powell’s Fed is

reaching beyond Wall Street

with lending programs for

companies big and small