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The Year the Fed Changed Forever

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WASHINGTON – When Jerome H. Powell, chairman of the Federal Reserve, called Florida in 2020 celebrating his son’s wedding, his work life seemed to be entering a period of relative calm. President Trump’s public attacks on the central bank had subsided after 18 months of constant criticism, and the trade war with China appeared to be cooling down and improving the outlook for markets and the economy.

However, the first signs of a new – and far more dangerous – crisis appeared about eight miles away. The novel coronavirus was discovered in Wuhan, China. Mr Powell and his colleagues were facing some of the most difficult months in Fed history.

By mid-March, when the markets collapsed, the Fed had cut interest rates to near zero to protect the economy. To avert a full blown financial crisis, by March 23, the Fed had rolled out almost its entire range of emergency loan programs for 2008 and partnered with the Treasury Department to announce programs that had never been tried – including plans to support lending to small and medium-sized enterprises medium-sized businesses and buy corporate debt. At the beginning of April a plan was started to flow loans to states.

“We’ve crossed a lot of red lines that haven’t been crossed before,” Powell said at an event earlier this year.

In normal times, the Fed’s job is to keep the economy steady – to keep prices stable and create plenty of jobs. His comprehensive pandemic response pushed his forces into new territory. The central bank restored market calm and helped provide credit to consumers and businesses. It also prompted the Republicans to try to narrow down the extensive range of tools of the politically independent and unelected institution. The Fed’s emergency loan programs became a critical point in negotiations over the government spending package that Congress approved this week.

But even amid the backlash, the Fed’s work to save a pandemic-hit economy remains unfinished, and millions of people without jobs and businesses are suffering.

The Fed is likely to keep rates at their lows for years, guided by a new approach to monetary policy that was passed this summer, which targets slightly higher inflation and examines how low unemployment can be.

And the Fed’s extraordinary actions in 2020 were not just aimed at keeping the flow of credit going. Mr Powell and other senior Fed officials pushed for more government spending to help businesses and households, an unusually bold stance for an institution mightily trying to avoid politics. As the Fed became more expansive on its mission, it weighed on climate change, racial justice, and other issues that its leaders normally avoided.

“We have often only referred racial justice, inequality and climate change to social issues,” said Mary C. Daly, president of the Federal Reserve Bank of San Francisco, in an interview. “This is a mistake. These are economic problems. “

In Washington, reactions to the Fed’s greater role have been swift and divided. Democrats want the Fed to do more and make awareness of climate-related financial risks a welcome move, but only a start. They also urged the Fed to use their emergency lending powers to channel cheap loans to state and local governments and small businesses.

Republicans have been working to curtail the Fed to ensure that the role it played in this pandemic didn’t last out of the crisis.

Patrick J. Toomey, a Republican Senator from Pennsylvania, led efforts to include language in the relief package that could have forced future Fed emergency loan programs to adhere to soothing Wall Street instead of trying to support Main Street directly as well, as the Fed has done in the current downturn.

Republicans fear that the Fed could use its powers to support partisan targets – by invoking its regulatory powers over banks, for example to treat oil and gas companies as financial risks or to support financially troubled local governments.

“Taxation and social policy is the rightful realm of people accountable to the American people, and that’s us, that’s Congress,” said Toomey, who will be the next chairman of the banking committee and one of Mr. Powell’s chief overseers could be said from the Senate last week.

Updated

Apr. 23, 2020 at 1:40 am ET

Mr Toomey’s proposal was watered down during the Congressional negotiations, paving the way for a broader aid deal: Congress banned the central bank from restoring the exact facilities that were in use in 2020, but it did not interrupt its power to help states and corporations Future.

Democrats said the new language was so limited that the Fed could continue to buy municipal bonds or issue business loans through emergency powers. Mr Toomey told the New York Times that this would require Congressional approval. The gap suggested that the scope of the Fed’s powers may remain a point of discussion.

When 67-year-old Powell is pressured from all sides in 2021, he could audition for his own job. His term expires in early 2022, meaning President-elect Joseph R. Biden Jr. will decide whether to appoint him.

Mr Powell, a Republican named governor of the Fed by President Barack Obama and elevated to his current position by President Trump, has yet to state publicly whether he wishes to be reappointed. Its chances could be hurt by the Fed’s response to the coronavirus crisis, which has been classified as early and rapid. Mr Powell attended a Group 20 meeting in Riyadh, Saudi Arabia, in late February when he realized the coronavirus is unlikely to remain regionally isolated. He asked his colleagues in Washington what emergency powers the central bank and the Treasury Department had.

When its 14-hour flight landed at Dulles International Airport on Monday, February 24, inventories plummeted. He opened his phone to numerous missed calls and emails. From that point on, the central bank’s response shifted into gear.

On Friday the 28th – the day President Trump described coronavirus worries as a “new joke” the Democrats were spreading – Mr Powell made a statement expressing Fed concerns . On March 3, the following Tuesday, 12 years earlier, the Fed made its first rate cut since the global financial crisis. This was the first of many steps the Fed would take to avert a catastrophic market collapse.

Some analysts warned that the Fed’s rush to house the economy with lower interest rates may be misaligned. In the face of a pandemic, what could interest rates do?

Much appears in retrospect. The Fed’s rate cuts set the stage for a refinancing boom and, more recently, a rush to buy homes.

The decision by Penny Achina, a first-time home buyer outside of Houston, shows how Fed policies can cascade through the economy. After Ms. Achina, a 31-year-old medical technician, had thought about buying a house for four years, she made the leap in 2020.

“I said – it’s either you sink or you swim and the interest rates really seduced me,” she said and it will close next week. With a decrease of 3 percent, she was granted 2.5 percent interest on a 30-year mortgage.

When people like Ms. Achina buy houses, they often spend money on new sofas and refrigerators to fill them up. Increased consumer demand is pushing businesses, also attracted to low interest rates, to borrow money to invest in equipment to produce more.

The central bank bailout could still have side effects. While most economists believe that inflation is unlikely to run out of control, a minority warns that price hikes that have been stalled for years could be triggered by huge government spending and a post-pandemic economic boom. Policymakers have been watching for signs of financial surplus as their tools have helped stocks soar and companies able to issue debt at an amazing rate.

Jobs remain the Fed’s greatest challenge. While low rates help many employees like Ms. Achina, millions of others are unemployed. Low wage workers, women and minorities are particularly likely to have lost their livelihood.

The Fed’s low interest rates and bond purchases can do little to provide immediate relief to people who rent, own few stocks, and are quitting their jobs.

Many economists say the $ 900 billion aid package approved on Monday will have to be followed by more. Some of the most important provisions, such as B. Extended unemployment benefits, expire before spring.

“We’re having a hard time getting through,” said Loretta Mester, president of the Cleveland Federal Reserve Bank, on Friday, pointing out that businesses and households will need help in the next few months as coronavirus cases swell before vaccines far to be spread.

Even after the rebound, the Fed is likely to be slow to hike rates – and then those left behind by the pandemic could feel the wider benefits of its policies.

If its policies work, the Fed could pave the way for the stable, inclusive growth that emerged in early 2020. Mr Powell has repeatedly described the loss of jobs as “heartbreaking” and has pledged to use the powers of the Fed to seek to restore the job market to its former strength.

“We think this could be another long expansion,” he said at a press conference in mid-December as he vowed to stimulate the economy “until the expansion is on the right track.”

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