How the Fed Opened Pandora’s Box
Jerome H. Powell’s no-holds-barred response to the pandemic was made possible by history. It raises questions about the future.It was July 2019 when Representative Rashida Tlaib, a Michigan Democrat, asked Jerome H. Powell, the chair of the Federal Reserve, whether he would use the central bank’s powers to help state and local governments during the next recession.“We don’t have authority, I don’t believe, to lend to state and local governments,” Mr. Powell replied. “I don’t think we want that authority.”Yet nine months later, at the start of April 2020, the central bank announced that it would do effectively what Ms. Tlaib had asked. Fed officials set up a program to make sure that state and local governments could continue to borrow as credit markets dried up.What had changed was the onset of the coronavirus pandemic. Roughly 15 of every 100 adults who wanted to work found themselves jobless that month, many of them suddenly. Stocks had plunged in value so precipitously that the nation’s households would lose 5.5 percent of their wealth in just the first three months of the year. Amid government-imposed shutdowns, with millions of people at home, there were real worries that Wall Street and small businesses alike would implode.What hadn’t changed was the Fed’s enormous power. Whether central bankers were ready to embrace it in 2019 or not, the institution has long had sweeping authority to use its ability to create money out of thin air to save the financial system and economy in times of trouble.And it could exercise that power expediently — and with considerable independence from the rest of the government — in no small part because a man named Marriner Eccles reluctantly took on the job of leading America’s central bank in 1934. That history is particularly useful for understanding what happened in 2020 — and what that might set in motion for the future. It is detailed in my new book “Limitless: The Federal Reserve Takes on a New Age of Crisis,” from which this article is adapted.The Fed staged a no-holds-barred intervention during the pandemic to stabilize Wall Street and insulate the economy, slashing interest rates to rock bottom, buying trillions of dollars’ worth of government-backed bonds to keep critical markets functioning and promising trillions more in emergency programs that would keep loans flowing to municipal and corporate borrowers and midsize businesses.It worked. The rescue was so successful that by the end of 2020 the Fed’s response effort was shutting down, rapidly fading from headline-grabbing news to mere historical artifact.But the Fed’s actions quietly opened the monetary and financial policy equivalent of Pandora’s box: They made it clear to Fed officials themselves, to Congress and to financial market players exactly what the central bank is capable of doing and whom it is capable of saving. That makes it much more likely that the central bank will be called on to use its tools expansively again.After seeing what the Fed could do during the 2008 financial meltdown, politicians asked: Why save Wall Street but not Detroit? After 2020, they may wonder: Why react to a pandemic crisis but not a climate crisis, or a military one?Inflation F.A.Q.Card 1 of 5What is inflation? More
