Federal Reserve’s efforts on coronavirus raise eyebrows

The Federal Reserve is pumping unrivaled levels of economic aid across the U.S., blowing through old taboos with trillions in rescue loans and bond purchases to buoy the American economy through the coronavirus pandemic.

Faced with a once-in-a-century economic crisis, the Fed under Chairman Jerome Powell has pledged to flood the U.S. with as much rescue lending and bond purchases as its legal charter allows and the economy requires.

The Fed has purchased more than $1 trillion in Treasury bonds and mortgage-backed securities — products that anchor U.S. financial markets — with no clear limit in sight.

The central bank has also opened nearly a dozen special credit facilities to purchase a wide range of consumer, corporate and government debt in exchange for loans to financial firms, businesses and municipal governments.

“We will continue to use these powers forcefully, proactively, and aggressively until we’re confident that we are solidly on the road to recovery,” Powell said in a speech Thursday, shortly after the Fed announced it would offer another $2.5 trillion in economic relief, including unprecedented direct aid to nonfinancial businesses and municipal governments.

The Fed used its emergency lending powers and balance sheet to stimulate the economy and stabilize financial markets during the 2007-09 crisis and recession. While the Fed was criticized for its efforts to prop up banks a decade ago, few have questioned the necessity of its recent sprint to stop an economic collapse.

“Moral hazard is not part of the debate as it was within the Fed during the financial crisis in 2008-09,” said Diane Swonk, chief economist at Grant Thornton, in a Thursday analysis.

“That is because this time really is different. We have to abandon our biases and warehouse them to deal with a health crisis. It is not the time to discuss who is worthy of our efforts.”

Even so, the unrivaled scale and breakneck speed of the Fed’s latest intervention have raised concerns about who may still get left behind and how much the rest of Washington should depend on the Fed’s last-resort loans.

“If the Fed continues to go down this road and opens new windows and picks more sectors to support, particularly in this top-down way, the political consequences of this for independent central banking are going to be pretty interesting,” said Karen Shaw Petrou, managing partner at Washington, D.C., research and consulting firm Federal Financial Analytics.

The Fed’s primary responsibilities fall into two main buckets: keeping prices stable and unemployment low through monetary policy and ensuring the safety of the U.S. banks through regulation and supervision. But a provision of the bill that created the modern Fed system allows the central bank to become the lender of last resort in extreme economic downturns, with the consent of the Treasury secretary.

The catastrophic toll of the coronavirus pandemic and the recession it has created spurred few political challenges to the Fed’s leap to action. With the blessing of Treasury Secretary Steven Mnuchin — Powell’s chief ally within the Trump administration — the Fed has rewritten the playbook for responding to an economic crisis.

While Powell has pledged to stretch the Fed’s lending authority to its legal boundaries, his hand was forced in part by President Trump and Congress. A provision in the $2.2 trillion economic rescue bill signed by Trump orders the Fed to use some of the $454 billion appropriated to backstop its emergency lending programs in facilities for businesses and municipal governments.

The Fed faced criticism during the Great Recession for its unwillingness to extend the same discounted loans to businesses and local governments that it offered to banks. It’s refusal to do so was largely attributed to the political implications of choosing which specific municipalities or businesses would receive help and a concern over losing money on behalf of the U.S.

But the scale of the coronavirus pandemic and steep costs it will impose on states have largely erased any hesitation to the Fed aiding municipal governments. The central bank announced last week it would purchase up to $500 billion in bonds from cities with more than 1 million residents and counties with more than 2 million.

The Fed also announced it would offer four-year loans to companies with up to 10,000 employees or less than $2.5 billion in annual revenue that were financially solid before the coronavirus outbreak through a “Main Street Lending Facility.”

“The latest actions from the Fed and the likelihood of further substantial fiscal support mean that the risk of an uncontained failure of the economy beyond, say, the end of May, has greatly diminished,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a Tuesday research note.

“The speed and extent of the subsequent rebound remains deeply uncertain, but it is clear that both Congress and the Fed appreciate the depth and extent of the problem.”

Few have questioned the necessity of the Fed’s ambitious rescue plan. Even Trump, who ridiculed and berated Powell for nearly two years before the pandemic, has praised the Fed for its swift action.

Even so, the long-term implications of the central bank’s scramble to save the economy worry some Fed watchers and analysts, especially because of the coronavirus’s unique threats to the most vulnerable.

Brookings Institution fellow Aaron Klein and senior fellow Camille Busette wrote in a Tuesday analysis that while black Americans make up a disproportionate number of COVID-19 victims, “none of the thirty-five most African American cities in America meets the Fed’s criteria for direct assistance.”

These parameters would exclude the entire metropolitan statistical areas of Atlanta, Baltimore, Boston, Pittsburgh and Detroit and all counties in Ohio, Florida and New Jersey, they wrote.

“We are not suggesting that the Fed had racist intentions when setting this limit. To the contrary, everything suggests the Fed was just acting quickly in an unprecedented area,” Klein and Busette wrote.

“Quick actions can have unintended consequences, and the Fed has time to fix this one,” they added.

Petrou also noted that the Fed’s cutoff for the Main Street lending program was well above the size and revenue of most small businesses facing uncertain financial danger.

“The only Main Street I know that looks like that is Park Avenue,” Petrou said.

“When you’re putting a $2.3 trillion program together and trying to open a lot of these complex windows essentially overnight, things will go wrong,” she said.