Yet the Fed’s moves have also pushed the central bank into uncharted territory, testing how far its tools can go and how inclusive they can be. The central bank was quick to bring interest rates to zero, backstop credit markets and buy up corporate debt — but those policies often sidestep Americans who don’t hold investments. A lending program for small and midsized businesses has seen little uptake, raising doubts about the Fed’s ability to directly help companies fighting for survival. And as the pandemic widens long-standing racial and economic gaps, the Fed is facing urgent questions over how it can steer a recovery that lifts all Americans.
“The Fed has been very effective at keeping credit flowing in the U.S. economy, and that is the result of their creative and vigorous use of these various facilities for encouraging borrowing,” said Douglas Elmendorf, dean of faculty at the Harvard Kennedy School and former director of the Congressional Budget Office. “What the Fed cannot do on its own, with interest rates so low to start with, is to stir enough demand for goods and services to put everyone back to work. And what the Fed can’t do is to plug all the gaps in peoples’ incomes.”
Fed leaders, including Chair Jerome H. Powell, have said a stable turnaround must be in place before the central bank unwinds its interventions, which began in the early days of the pandemic and resulting recession. But much about a recovery is still unknown. Powell is expected to give an update on the economy and the Fed’s thinking Wednesday, at the end of the regular policy meeting of Fed policymakers.
As the coronavirus spread in and beyond China, and the stock market burrowed further into the red in February, the Fed announced an emergency interest rate cut of half a percentage point on March 3, the largest cut, at that point, since the Great Recession. Twelve days later, the Fed announced it would slash rates to zero and buy at least $700 billion in government and mortgage-related bonds to stabilize the financial system and contend with the mounting crisis.
As Congress hustled to pass the Cares Act at the end of March, the Fed outlined a sprawling set of programs to flood the markets and boost bond purchases. The Fed would also announce a $500 billion program to lend to states and municipalities, along with the $600 billion Main Street lending program for small and midsized companies.
“One of the main things we’re trying to do by assuring the flow of credit in the economy and keeping rates low, is to assure that that rebound, when it does come, is as vigorous as possible,” Powell said on NBC’s “Today” show on March 26.
These moves signaled that the Fed was going far to cushion the financial system. But the response was also meant to build a short-term bridge to when the pandemic was contained and the economy got back on its feet. The $2 trillion Cares Act — which sent stimulus money straight to households, businesses, and state and local governments — was also crafted to stop the bleeding for a few months.
Strong job gains from May and June buoyed hopes that people were going back to work as states reopened, and that a spike in retail sales pointed to an economic turnaround. Yet unlike in past recessions, consumer spending is inextricably linked to a public health crisis. Powell and other Fed leaders have long said that a stable recovery depends on giving people the confidence to safely go about their old routines, be it eating at a restaurant, getting a haircut or booking a hotel.
By July, worsening outbreaks and dips in consumer spending suggested the nascent rebound was slowing.
“On balance, it looks like the data are pointing to a slowing in the pace of the recovery,” Powell said at a July 29 news conference. “I want to stress it’s too early to say both how large that is and how sustained it will be.”
Throughout the summer, Powell and other Fed officials continued their calls for more aid from Congress, which can send direct relief to households, businesses and local governments. Fed leaders routinely stopped short of outlining what exactly should go into another rescue package, but they made clear that withdrawing direct help too soon would hurt those who were suffering the most.
“Fiscal policy is essential here, and I would say, again, Congress’s action early in the pandemic, historically large by any standard around the world, and certainly by U.S. standards, it’s really helping now,” Powell said at the July 29 news conference. “As I’ve said, very likely more will be needed from all of us, and I see Congress negotiating now over a new package, and I think that’s a good thing."
In August, nearly 30 million Americans lost their $600 enhanced unemployment benefits. Scores of businesses risked shutting down permanently or converting springtime furloughs to layoffs. The recession continued to hurt the working class, while the wealthy largely recovered and the stock market climbed toward record highs.
That stark gap poses a fundamental challenge for the Fed, namely how it can fill the economy’s holes beyond setting interest rates or working through Wall Street. For example, the Fed has bought $12.6 billion in bonds through its corporate credit programs and is buying up debt from massive companies that haven’t borne the brunt of the recession.
The Main Street lending program has become especially fraught. The program is geared to businesses that might be too small to get relief through the Fed’s corporate credit facilities and may not be able to seek credit elsewhere. Through the Main Street program, the Fed buys 95 percent of a loan from a bank, leaving lenders with some skin in the game.
Of the program’s $600 billion pot, the Fed had only completed around $1.4 billion in Main Street loans as of Sept. 9. Many interested businesses say they have trouble finding banks willing to issue loans, and many banks, particularly larger national firms, shy away from the program altogether. Unlike Congress, the Fed can only offer loans to companies, many of which can’t afford to go into debt.
Moreover, there’s little consensus from lawmakers over whether to relax and expand the program’s guidelines and allow for riskier loans, even as businesses teetering on the edge say they don’t have time to waste.
“The Fed says, ‘We can only make loans, we can’t do grants,’” said Kathryn Judge, an expert on financial regulation at Columbia Law School. “On the other hand, they could do a lot in terms of the structure or the types of risk they’re willing to take and absorb … that could reach a broader set of companies, if the Fed and Treasury are willing to do it.”
Another $500 billion program to lend money to local governments has only issued two loans — to the state of Illinois and New York’s Metropolitan Transportation Authority — for a total of $1.6 billion. Fed leaders say it is a good sign that the municipal lending facility has seen little uptake, as the municipal bond market perked up once the Fed announced the program. But with state and local governments staring down massive budget shortfalls, it’s unclear just how effective the Fed’s program will be.
Increasingly, the looming question for the Fed is whether or how it can widen the scope of its tools, especially when it comes to shaping an economy that works for everyone. Job losses spurred by the pandemic disproportionately hurt low-income workers of color and women, who are also less likely to enjoy the benefits of higher stock prices and low mortgage rates. The recession has also sharpened attention on the Fed’s role in responding to systemic racism and the deep-seated inequalities that drag down the broader economy.
“Part of what is needed, and what we’re wrestling with, is rethinking exactly what our mandate means,” Atlanta Fed President Raphael Bostic told The Post earlier this summer. “The important thing about our mandate is that, to me, it says we should be making sure the economy works for everyone, because that’s the way you get to the largest maximum employment. That’s the way you get to the strongest, most resilient economy.”
That thinking extends well beyond the current crisis and informs the Fed’s approach to stable prices and maximum employment. A new long-term vision was spelled out, in part, last month when Powell unveiled a policy framework signaling that the Fed won’t respond to low unemployment levels by raising rates and slowing the economy. The framework also allows for inflation to temporarily rise above the Fed’s 2 percent target to balance out periods when inflation dipped below, though there are plenty of unknowns about how that framework will come into practice.
Now, six months into the crisis, it isn’t entirely clear what comes next. At this week’s meeting, the Fed isn’t expected to change rates. Powell has said that the Fed isn’t “even thinking about thinking about raising rates,” and the emergency programs are staying in place.
But the economy remains in trouble. Just over half of the 22 million total jobs lost between February and April have not returned. Hopes are fading for another rescue package from Capitol Hill.
“The rest of us have to come to the realization that fiscal response is absolutely necessary,” said William Spriggs, chief economist to the AFL-CIO and an economics professor at Howard University. “You cannot borrow your way to rich. And that’s the Fed’s function. The Fed’s function is to make sure that borrowing and liquidity are there, and that healthy firms have a way to smooth their income so that they can make it. We are no longer in that ‘smoothing income’ phase.”
“The longer-term challenge here is that the decisions we’re making in this period of time are going to shape the structure of the economy that emerges from it,” said Judge, of Columbia Law School.