The Fed has been grappling with the gut problem: What happens when cash flow essentially stops in the United States because of the economic lockdown? While Congress was still haggling over its $2 trillion rescue package, the Fed last week began creating emergency facilities that could tide over businesses (and their employees) until the crisis eases.
The Fed’s infusion of cash will touch every part of the economy. The central bank will help small and medium-size companies borrow on soft terms through a “Main Street” lending window to pay salaries and bills; big companies can roll over debts through a “primary” Fed facility; secondary markets for mortgage-backed securities and other debt, which were near meltdown last week, will get a third Fed fire hose of cash.
Powell’s message is that the Fed’s support for U.S. business is unlimited, “in the amounts needed to support smooth market functioning,” as a Fed statement Monday put it. His basic rationale is simple: Nobody caused this crisis, and nobody is to blame. The government-ordered lockdown affects every company and worker, and the government should protect people until the crisis eases. Any other concern is secondary.
For the rest of the world, Powell offers “swap lines” to provide the dollars needed to keep trade and finance going. He also chairs the top committees of the Bank for International Settlements, where central bankers coordinate policy. This is one part of the international economy where America still leads unambiguously, helping ease a global crisis that could bring down everyone.
Why has Powell moved quickly where so many other U.S. officials, from President Trump on down, have seemed slow or uncertain about policy moves since the novel coronavirus struck? The Fed succeeds partly because it’s an independent body, outside politics, staffed by experts who understand their mission and have the self-confidence to get it done.
And partly, it’s Powell himself, a low-key Princeton grad who has managed to stay cool despite regular tongue lashings from Trump. Powell turns often to the Fed’s alumni club, including his immediate predecessors Janet L. Yellen and Ben Bernanke. Mervyn King, a former governor of the Bank of England, says of Powell: “He is calm, and experienced, and has exactly the right qualities you need to manage this crisis.”
Powell likes to quote the famous 1873 advice of Walter Bagehot that, to avoid panic, central banks should lend quickly and aggressively: As Bagehot said: “The object is to stay alarm, and nothing therefore should be done to cause alarm.”
The challenge for Powell and other policymakers is to keep the economy hobbling along until the coronavirus peaks and people can go back to work. If a quarter of America’s businesses go bankrupt this year, it could take the economy a decade to recover. That’s one reason Trump is understandably eager to get people back to work.
But how soon does America ease the lockdown? Trump proposed Tuesday that the country be “opened up and just raring to go” by Easter, April 12. Anthony Fauci, the nation’s public health guru, agreed Sunday that “if you knock down the economy completely and disrupt infrastructure,” the shutdown itself could cause health risks. But Fauci, a physician who is backed by many economists, wants to “flatten the curve” of infections — and avert hospital breakdowns and severe loss of life — before playing the “back to work” card.
Powell’s success at the Fed is a reminder of the importance of expertise — and decisive action when necessary. When the Fed cut interest rates to zero on March 15, some analysts thought the Fed had exhausted its arsenal. But that turned out to be wrong. Ten days of creative policy followed, as the Fed demonstrated that in backstopping the markets by buying debt, it never runs out of bullets.
One measure of success for Powell will be if people decide in retrospect that his crisis moves were unnecessary. They’ll have the luxury of not understanding how much worse things could have been if the central bank hadn’t taken strong action.