The Federal Reserve’s economic policy powers might be limitless, but should they?
The Federal Reserve’s economic policy powers might be limitless, but should they?
In 2020, the Federal Reserve took unprecedented measures as it propped up an economy halted by the COVID-19 pandemic. It kept credit markets from crashing and even created lending facilities for both municipal bonds and midsized businesses, which the central bank had never done before. As Fed Chair Jerome Powell told the Brookings Institution’s David Wessel at the time, “There’s no limit on how much of that we can do other than that it must meet the tests under the law.”
In her new book, “Limitless: The Federal Reserve Takes on a New Age of Crisis,” New York Times reporter Jeanna Smialek asks how the Fed got to this point and what comes next now that those powers have been exercised. The following is an excerpt of the book looking at that moment in March 2020 when the Fed decided to intervene in the economy. To listen to “Marketplace” host Kai Ryssdal discuss the book with Smialek, click the audio player above.
By the end of March 2020, a series of memes and short YouTube videos had begun to make their way around the quirkier parts of the internet. One showed Jerome Powell, making a consternated face and cranking U.S. dollars out of a hand-turned printer from his press conference podium. Another showed a flat cartoon figure with gray hair next to a printer spewing dollars, below the Federal Reserve’s official seal and above the phrase “haha money printer go brrrr.”
As the month closed out, the saying had become ubiquitous in Twitter’s finance-focused corners and had begun to seep out into the world beyond. Google search interest for “money printer” spiked and was most intense in Singapore, Canada, and Scandinavia, in a testament to how much the finance-focused world was watching American policy. On Etsy, the online marketplace for gifts and artwork frequented by America’s twenty-and thirtysomethings, a seller who labeled themselves “Moneyprinterr” began to sell “brrrr” paraphernalia (among the kitsch: a stuffed printer holding a cigar and minting a dollar called the “money printer official plushie” and a “Jerome Powell, lord and savior” poster that pictured the Fed chair in red and blue robes, face framed by a golden halo).
It was not the first time a central banker had become a cultural touchpoint. Back in the 2008 crisis, Ben Bernanke had earned the label “Helicopter Ben” after he gave a speech mentioning a particularly novel type of monetary policy that involved a “helicopter drop” of money into the economy. It did not matter that the idea was theoretical and not what the Fed was actually doing. Cartoon artists across the nation had seized on the line, doodling the bearded and balding Bernanke chucking bags of cash out chopper doors.
Still, given the internet’s primacy in everyday life as people languished at home with little to entertain them outside Tiger King and social media in spring 2020, the money printer series was the first time a Fed meme became quite so pervasive. At the heart of the “brrrr” phenomenon was the reality that by the time March turned into April, the Fed’s actions were a major, even the primary, driver of markets.
That reputation had been cemented on March 23, 2020.
That day, a Monday, started menacingly. By 7:00 a.m. on America’s East Coast, news had broken that German chancellor Angela Merkel was self-isolating after a virus exposure, Japan’s Shinzo Abe had signaled that the Tokyo summer Olympics might be delayed, and U.S. stock futures had slumped so much that their trading had been suspended. After years of dysfunction, many worried that Congress would not agree to a relief package rapidly enough to preclude economic disaster, and Wall Street continued to nervously eye Washington.
Neel Kashkari had been on 60 Minutes the prior night with his message that the Fed had “infinite cash” to help, but the handful of market programs it had rolled out at that point were cold comfort for a world staring down a lockdown of indeterminate length. For investors who continued to confront a breaking Treasury market, the world had gone topsy-turvy. Analysts wouldn’t even begin to guess when stock and other asset prices might begin to recover.
“Markets and investors overall, right now, are predominantly focused on liquidity and the functioning of financial markets, before we can then move on,” Sonja Laud, chief investment officer at the firm LGIM, said in an early-morning interview on Bloomberg Television.
“If we’ve reached those first two points, then let’s start assessing when markets might bottom out,” she continued, speaking to Francine Lacqua and Tom Keene. Keene, a bow-tied fixture on Wall Street’s news scene, joined much of America in working remotely and sporting a stubble on that stressed morning.
Not much later, at 8:00 a.m., the headlines hit the newswires. The Fed was coming to the rescue, and in the process crossing nearly every barrier it had left standing after the 2008 crisis.
The announcement was sweeping. The Fed would revive a 2008 program that could help out the market for securitized loans, which bundle credit card balances, auto loans, and other types of debt and sell it off to investors in slices. It would also set up a series of totally novel emergency rescue plans. Officials promised two corporate bond programs, with the unwieldy titles Primary Market Corporate Credit Facility and Secondary Market Corporate Credit Facility. The first would buy company debt that had already been issued, and the latter would buy new bonds, to make sure that businesses could continue to raise money in the choked market. The goal was to keep corporate America supplied with borrowed cash so that the massive debt hanging over Wall Street’s neck like a guillotine would not fall.
To help midsize businesses, the central bank also pledged to set up a Main Street loan program. Officials had been hoping Congress would come through with its own plan for the sector, but it had by then become clear that rescuing midsize companies would fall to the Fed. Central bankers had not come to a concrete enough agreement to release an outline of what Main Street would look like that Monday, so they simply announced that a rescue was coming. In its release, the Fed also promised to buy as much government-backed debt as was needed to restore function to the disrupted Treasury and mortgage-backed bond markets. It wasn’t the yield curve control Powell and [Fed Vice Chair Richard] Clarida had discussed, but the amped-up version of quantitative easing wasn’t a million miles away, either. The media immediately took the Fed’s series of market supports as the huge deal that they were.
“Fed Signals Unlimited QE, Adds Company Aid,” the Bloomberg chyron read as economics reporter Mike McKee read the news live on air. “The Fed, throwing the kitchen sink and more, all the stuff under the stove and in the closet, at the markets,” he bantered.
“Federal Reserve Chairman Jerome Powell’s whatever-it-takes moment arrived Monday,” a Wall Street Journal story declared. “The Fed goes all-in,” The New York Times agreed.
As the headlines broke, stock futures began to bounce back from their worst week since 2008. Though equities would sink again that day, concerned about Congress’s continued inaction, that Monday would mark a critical turning point in the fast-building financial crisis. Stocks would soar on Tuesday as they digested what the Fed’s promises meant and as hope for congressional action grew. Across the bond and equity universe, March 23 was the date after which the pandemic financial shock began to reverse itself, setting up the most spectacular and sudden rally in U.S. market history.
The performance to shore up investor confidence had been carefully timed. Behind the scenes, Fed and Treasury officials had spent a harried weekend pulling together the programs, intent on unveiling the plans before Wall Street got off to another week of calamitous trading. [Treasury Secretary Steven] Mnuchin had been simultaneously working with lawmakers to try to secure the massive pot of funding to back up the central bank’s efforts, a sum that by that Sunday had swollen from $200 billion to more than $400 billion. There was still no guarantee that it would pass Congress, and the Fed programs announced on March 23 were mostly set up so that they could function at a small scale without it. Still, chances seemed to be on Mnuchin’s side. Powell, from his desk in Chevy Chase, had been coordinating the political and practical planning, taking both scheduled calls from lawmakers and nonstop unscheduled ones from the Fed’s staff.
The all hands on deck effort, and the precedent-shattering package that it produced, were aimed squarely at staving off a financial crisis. That did not mean they would be costless. Powell and his colleagues knew, even as business news channels cheered on the forceful March 23 response that morning, that it would open his institution up to political criticism and possible mission creep. Accusations that the central bank was bailing out the corporate bond market seemed inevitable. Designing Main Street would be an exercise in deciding who would win and who would lose from the Fed’s help, forcing the central bank to make awkward decisions that would anger many. Main Street would also shift the Fed’s modern role as an emergency lender in subtle but profound ways: The program could not function as a last-ditch backstop for a traded market the way the 2008 rescues had, because midsize businesses financed themselves with loans rather than by selling securities. It seemed destined to make the Fed, at least in a small way, banker to the private sector.
Even the basic mechanics of the new suite of programs were reputationally risky. Mnuchin and the Fed had chosen the financial crisis management arm of BlackRock, America’s largest money manager, to run the corporate bond programs. That they had tapped the behemoth firm without obviously considering alternatives was guaranteed to draw criticism. The corporate bond program would inevitably end up helping BlackRock’s own exchange-traded funds, which dominated the market, creating an appearance problem and a potential conflict of interest. But the company was experienced and Mnuchin had been consulting with Chief Executive Officer Laurence Fink for days. It seemed like the most expedient option at a moment that called for rapid action.
The Fed’s bond buying could also end in backlash. The central bank had purchased hundreds of billions of dollars in Treasuries by the time of the March 23 announcement. After it, that pace of balance sheet buying would continue to skyrocket. Between March 1 and the end of April, the Fed’s holdings would go from $2.5 trillion to about $4 trillion, growing by roughly the same amount as they had over the course of all three of the central bank’s post-2008 quantitative easing programs. This time, instead of taking five years, the change would take two months, and it would leave the central bank holding about a quarter of all outstanding Treasury debt. It wasn’t the same as in World War II, when the Fed and the government had coordinated to keep rates low and the market functioning. Even so, the massive scale of the purchases would clearly reverberate across government finance, making it easier for the Treasury to fund the government’s crisis response plan without pushing longer-term interest rates higher. Though the risk of setting off an inflationary spiral seemed distant to officials then—years of weak price gains had suggested that QE didn’t do much to stoke those pressures—the Fed’s independence was sure to come into question.
Those risks were worth taking to blunt the economic fallout from the crushing pandemic, Fed officials had decided. Powell spent the morning catching up with his staff, and then, for ten minutes starting at 11:43 a.m., talking with the president who had spent nearly two years deriding him. The profundity of the moment seemed to register on Pennsylvania Avenue (not historically home to Jerome Powell’s fan club).
“He’s really stepped up over the last week,” Trump would say at a press conference later that afternoon. “I called him today and I said, ‘Jerome, good job.’”
From Limitless: The Federal Reserve Takes on a New Age of Crisis © 2023 by Jeanna Smialek. Excerpted by permission of Alfred A. Knopf, a division of Penguin Random House LLC. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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