U.S. and international stock markets plunged in February 2020 amid uncertainty about a coronavirus outbreak in China and other parts of the world. By early March, the Dow Jones industrial average was rapidly tumbling toward a bear market, even though only a few covid-related deaths had been confirmed in the United States. Shortly afterward, the most safe and liquid financial market in the world — the U.S. Treasury market — started to seize up. It seemed like the United States was facing pressures possibly as severe as the 1918 flu pandemic and the 2008 financial crisis all at once.
Politicization and public pushback marred the public health response, tragically resulting in a death toll that exceeds that of the pandemic a century ago. The financial system, however, survived, and the Dow average and the S&P 500 closed 2020 at record highs. Saving the financial system kept credit flowing to businesses, enabling them to avoid layoffs and even hire new workers. Both Main Street and Wall Street were the beneficiaries. We have the Federal Reserve largely to thank for these early successes under the leadership of Chair Jay Powell, who seemed made for the moment.
Nick Timiraos wrote the first draft of this remarkable history as the chief economics correspondent for the Wall Street Journal and now has followed up with “Trillion Dollar Triage: How Jay Powell and the Fed Battled a President and a Pandemic — and Prevented Economic Disaster.”
The book’s strength lies in its detailed original reporting and the fast-paced narrative of the harrowing month that the Fed spent nearly unilaterally preventing a financial catastrophe as the coronavirus was taking off in 2020. Embedded in the tale is a careful accounting of the economic and financial implications of the Fed’s actions. Timiraos takes the story into 2021 and the fallout from the Fed’s subsequent decisions that contributed to the highest inflation in four decades. The author conducted more than 100 interviews. (I spoke with Timiraos, who sought my perspective as an economist who had helped craft President Barack Obama’s response to the 2008 economic crisis and my view of one congressional meeting where I delivered remarks.)
“Trillion Dollar Triage” begins with a short history of the Federal Reserve, from its inception through the inauguration of Donald Trump. While little of this history is new, it lays out important context for steps the Fed took to maintain its crucial independence. We also are introduced to the historical role models whom Powell would try to emulate and other leaders whose example he sought to avoid.
Timiraos recounts President Trump’s nomination of Powell to chair the Federal Reserve, Trump’s increasingly unhinged attacks on the Fed and Powell’s deft handling of them. We see how the Fed chair used the president’s criticisms to garner widespread support on Capitol Hill. I was sitting 20 feet from Powell at the Fed’s Jackson Hole conference in 2019 when Trump tweeted, “Who is our bigger enemy, Jay Powell or Chairman Xi?” Timiraos provides nothing new on this incident, but it was still shocking to live through it again in his account.
The narrative takes off when it gets into a detailed, day-by-day account of the pandemic response, highlighted by tables showing the daily totals of covid-19 deaths and the fluctuations of the Dow Jones industrial average, among other data.
The book makes clear how much of a collective process this dizzying month of policymaking was. Timiraos portrays not just top leaders of the Fed such as Powell, Vice Chair Richard Clarida, New York Federal Reserve President John Williams and Fed Governor Lael Brainard, but also an assortment of key staffers like Daleep Singh, whose international contacts give him advanced warning of the pandemic; Lorie Logan, who oversaw the Fed’s operations with financial markets; and Andreas Lehnert, whose penchant for reading books about disasters served him well in avoiding one in this case — to name just a few of the dozens who addressed the crisis and play a role in the book.
The key to their success was not that they got everything right the first time but that they kept going at the problems over and over again, tackling issues in market after market that underpinned realms such as business lending, state borrowing and international transactions with promises of forceful action. The team relied in part on Ben Bernanke’s playbook from the 2008 crisis, which called for purchasing Treasury and mortgage bonds to lower an array of interest rates. At the same time, the playbook promoted setting up programs to buy securities in markets that support specific loans, like credit cards, auto and student loans.
All of this was done faster and larger than in 2008 and extended into new areas. For instance, unlike Bernanke, the Fed in 2020 bought corporate bonds, including junk bonds, as well as municipal securities and a range of other credit instruments. In many cases, just the promise to act if needed was enough to persuade the private sector to continue lending at reasonable rates, greatly reducing the resources the Fed had to expend.
A lot of prominent economists criticized these steps, worrying that they would take the Fed into new political territory that would undermine its independence. In fact, the opposite happened. The Fed enhanced its prestige and bolstered its independence by ensuring that credit continued to flow and markets continued to function. In contrast to the hostile response to much of what the Fed did in the 2008 financial crisis, Rep. Patrick McHenry (N.C.), the top Republican on the House Financial Services Committee, which oversees the Fed, praised Powell’s work: “A-plus for 2020. On a 1-to-10 scale? It was an 11.”
But the political skills and instinct to go big and go fast — which created an almost unqualified success in staving off a financial crisis in 2020 — may have led the Fed to go astray in its macroeconomic response in 2021. Powell cheer-led an oversize fiscal response last year while doing little to alter the Fed’s extremely easy interest rate policies, even as the recovery picked up pace and it became increasingly clear that inflation was not just a transitory phenomenon in certain markets. This response may have contributed to the speed of the U.S. recovery (although I doubt it added very much), but it also helped stoke inflation, which has aggravated Americans and eroded their purchasing power. Rising inflation also makes it more difficult for the Fed to respond to unexpected economic perils such as an increase in commodity prices in the wake of Russia’s invasion of Ukraine.
Timiraos provides little insight into what was going on inside the Fed and the minds of its leaders as they sought to deal with inflation in 2021 — what was presented first as transitory in the summer and then as a serious concern by the end of the year. Perhaps his sources were less eager to talk about the latter issues than their initial successes. As a result, the pages about the current battle against inflation read like a rough draft of a history that is still being written. Powell’s legacy and the credibility of the Fed will be influenced by how this story turns out. For answers, we may have to wait for Timiraos to write a sequel.
Jason Furman is the Aetna professor of the practice of economic policy at Harvard University. He served as chairman of the Council of Economic Advisers from 2013 to 2017.
Trillion Dollar Triage
How Jay Powell and the Fed Battled a President and a Pandemic — and Prevented Economic Disaster
By Nick Timiraos
Little, Brown. 342 pp. $30