“I do worry that the Fed may be behind the curve when inflation inevitably picks up,” Senator Patrick J. Toomey, Republican of Pennsylvania, said during his opening remarks.
But Mr. Powell has consistently pushed back on warnings about runaway inflation and did so again on Wednesday.
stuck in the Suez Canal, but also in general as the economy reopens — he struck a similarly unconcerned tone.
“A bottleneck, by definition, is temporary,” he said.
He also batted back concerns about a recent increase in market-based interest rates. The yield on 10-year Treasury notes, a closely watched government bond, has moved up since the start of the year.
“Rates have responded to news about vaccination, and ultimately, about growth,” Mr. Powell said. “That has been an orderly process. I would be concerned if it were not an orderly process, or if conditions were to tighten to a point where they might threaten our recovery.”
By the middle of March 2020 a sense of anxiety pervaded the Federal Reserve. The fast-unfolding coronavirus pandemic was rippling through global markets in dangerous ways.
Trading in Treasurys — the government securities that are considered among the safest assets in the world, and the bedrock of the entire bond market — had become disjointed as panicked investors tried to sell everything they owned to raise cash. Buyers were scarce. The Treasury market had never broken down so badly, even in the depths of the 2008 financial crisis.
The Fed called an emergency meeting on March 15, a Sunday. Lorie Logan, who oversees the Federal Reserve Bank of New York’s asset portfolio, summarized the brewing crisis. She and her colleagues dialed into a conference from the fortresslike New York Fed headquarters, unable to travel to Washington given the meeting’s impromptu nature and the spreading virus. Regional bank presidents assembled across America stared back from the monitor. Washington-based governors were arrayed in a socially distanced ring around the Fed Board’s mahogany table.
Ms. Logan delivered a blunt assessment: While the Fed had been buying government-backed bonds the week before to soothe the volatile Treasury market, market contacts said it hadn’t been enough. To fix things, the Fed might need to buy much more. And fast.
announced an enormous purchase program, promising to make $500 billion in government bond purchases and to buy $200 billion in mortgage-backed debt.
It wasn’t the central bank’s first effort to stop the unfolding disaster, nor would it be the last. But it was a clear signal that the 2020 meltdown echoed the 2008 crisis in seriousness and complexity. Where the housing crisis and ensuing crash took years to unfold, the coronavirus panic had struck in weeks.
As March wore on, each hour incubating a new calamity, policymakers were forced to cross boundaries, break precedents and make new uses of the U.S. government’s vast powers to save domestic markets, keep cash flowing abroad and prevent a full-blown financial crisis from compounding a public health tragedy.
The rescue worked, so it is easy to forget the peril America’s investors and businesses faced a year ago. But the systemwide weaknesses that were exposed last March remain, and are now under the microscope of Washington policymakers.
cut interest rates to about 1 percent — its first emergency move since the 2008 financial crisis. Some analysts chided the Fed for overreacting, and others asked an obvious question: What could the Fed realistically do in the face of a public health threat?
“We do recognize that a rate cut will not reduce the rate of infection, it won’t fix a broken supply chain,” Chair Jerome H. Powell said at a news conference, explaining that the Fed was doing what it could to keep credit cheap and available.
But the health disaster was quickly metastasizing into a market crisis.
Lockdowns in Italy deepened during the second week of March, and oil prices plummeted as a price war raged, sending tremors across stock, currency and commodity markets. Then, something weird started to happen: Instead of snapping up Treasury bonds, arguably the world’s safest investment, investors began trying to sell them.
The yield on 10-year Treasury debt — which usually drops when investors seek safe harbor — started to rise on March 10, suggesting investors didn’t want safe assets. They wanted cold, hard cash, and they were trying to sell anything and everything to get it.
officially declared the virus outbreak a pandemic, and the morning on which it was becoming clear that a sell-off had spiraled into a panic.
The Fed began to roll out measure after measure in a bid to soothe conditions, first offering huge temporary infusions of cash to banks, then accelerating plans to buy Treasury bonds as that market swung out of whack.
But by Friday, March 13, government bond markets were just one of many problems.
Investors had been pulling their cash from prime money market mutual funds, where they park it to earn a slightly higher return, for days. But those outflows began to accelerate, prompting the funds themselves to pull back sharply from short-term corporate debt markets as they raced to return money to investors. Banks that serve as market conduits were less willing than usual to buy and hold new securities, even just temporarily. That made it harder to sell everything, be it a company bond or Treasury debt.
The Fed’s announcement after its March 15 emergency meeting — that it would slash rates and buy bonds in the most critical markets — was an attempt to get things under control.
But Mr. Powell worried that the fix would fall short as short- and long-term debt of all kinds became hard to sell. He approached Andreas Lehnert, director of the Fed’s financial stability division, in the Washington boardroom after the meeting and asked him to prepare emergency lending programs, which the central bank had used in 2008 to serve as a support system to unraveling markets.
short-term corporate debt and another to keep funding flowing to key banks. Shortly before midnight on Wednesday, March 18, the Fed announced a program to rescue embattled money market funds by offering to effectively take hard-to-sell securities off their hands.
But by the end of that week, everything was a mess. Foreign central banks and corporations were offloading U.S. debt, partly to raise dollars companies needed to pay interest and other bills; hedge funds were nixing a highly leveraged trade that had broken down as the market went haywire, dumping Treasurys into the choked market. Corporate bond and commercial real estate debt markets looked dicey as companies faced credit rating downgrades and as hotels and malls saw business prospects tank.
The world’s most powerful central bank was throwing solutions at the markets as rapidly as it could, and it wasn’t enough.
How They Fixed It
hit newswires at 8 a.m., well before American markets opened. The Fed promised to buy an unlimited amount of Treasury debt and to purchase commercial mortgage-backed securities — efforts to save the most central markets.
serve as a lender of last resort to troubled banks. On March 23, it pledged to funnel help far beyond that financial core. The Fed said it would buy corporate debt and help to get loans to midsize businesses for the first time ever.
It finally worked. The dash for cash turned around starting that day.
The March 23 efforts took an approach that Mr. Lehnert referred to internally as “covering the waterfront.” Fed economists had discerned which capital markets were tied to huge numbers of jobs and made sure that every one of them had a Fed support program.
On April 9, officials put final pieces of the strategy into play. Backed by a huge pot of insurance money from a rescue package just passed by Congress — lawmakers had handed the Treasury up to $454 billion — they announced that they would expand already-announced efforts and set up another to help funnel credit to states and big cities.
The Fed’s 2008 rescue effort had been widely criticized as a bank bailout. The 2020 redux was to rescue everything.
The Fed, along with the Treasury, most likely saved the nation from a crippling financial crisis that would have made it harder for businesses to survive, rebound and rehire, intensifying the economic damage the coronavirus went on to inflict. Many of the programs have since ended or are scheduled to do so, and markets are functioning fine.
But there’s no guarantee that the calm will prove permanent.
“The financial system remains vulnerable” to a repeat of last March’s sweeping disaster as “the underlying structures and mechanisms that gave rise to the turmoil are still in place,” the Financial Stability Board, a global oversight body, wrote in a meltdown post-mortem.
Industry players are already mobilizing a lobbying effort, and they may find allies in resisting regulation, including among lawmakers.
“I would point out that money market funds have been remarkably stable and successful,” Senator Patrick J. Toomey, Republican of Pennsylvania, said during a Jan. 19 hearing.
Matt Phillips contributed reporting.
It is in distinct contrast with the experience after the 2008 financial crisis.
There was a large 2009 fiscal stimulus action, but a mix of legislative politics and deficit concerns by some officials in President Barack Obama’s inner circle restrained its size. Many of its components were relatively invisible to the average voter. And when the economy remained weak into 2010 and beyond, Republicans and many Democrats focused on deficit reduction. “Stimulus” became a dirty word in Washington.
The Fed stepped in, undertaking quantitative easing (essentially, buying bonds with newly created money) and other untested strategies in an effort to keep the expansion going.
But central bankers’ tools are limited. They can adjust interest rates and push money into the financial system in hope of making credit easier to obtain. That can spur more investment and spending, which in turn can generate more jobs and higher wages.
Sound circuitous? It is — the economics equivalent of a triple bank shot in billiards.
In the 2010s, the strategy sort of worked. There was no dip back into recession, and the expansion was the longest on record, until the pandemic ended it. But it took years and years for the economy to return to health, and it was a deeply unequal recovery in which owners of financial assets saw the biggest gains. That the effort was led by unelected central bankers reduced its democratic legitimacy, by appearing as if it were merely an effort by elitist institutions to protect the rich and powerful at the expense of everyone else.
“You can do it and it can be successful, but the income and wealth inequality consequences of it will stink to high heaven,” Professor McCulley said. “You can do it that way, but it is anathema to democratic inclusion.”
By contrast, fiscal authorities can spend money directly, funneling it where it is needed, without expectation of being paid back. The United States has done exactly that over the last year on a scale with no parallel since World War II.
The new $1.9 trillion package includes, among other provisions, $1,400 payments to most Americans, a new child care tax credit that will put $300 per month in the bank accounts of most parents of a young child, help for those facing eviction or foreclosure, and billions of dollars in grants for small businesses. Public opinion polling finds it considerably more popular than other major domestic policy legislation in recent years.