The Year the Fed Changed Forever

WASHINGTON — As Jerome H. Powell, the Federal Reserve chair, rang in 2020 in Florida, where he was celebrating his son’s wedding, his work life seemed to be entering a period of relative calm. President Trump’s public attacks on the central bank had eased up after 18 months of steady criticism, and the trade war with China seemed to be cooling, brightening the outlook for markets and the economy.

Yet the earliest signs of a new — and far more dangerous — crisis were surfacing some 8,000 miles away. The novel coronavirus had been detected in Wuhan, China. Mr. Powell and his colleagues were about to face some of the most trying months in Fed history.

By mid-March, as markets were crashing, the Fed had cut interest rates to near zero to protect the economy. By March 23, to avert a full-blown financial crisis, the Fed had rolled out nearly its entire 2008 menu of emergency loan programs, while teaming up with the Treasury Department to announce programs that had never been tried — including plans to support lending to small and medium-size businesses and buy corporate debt. In early April, it tacked on a plan to get credit flowing to states.

“We crossed a lot of red lines that had not been crossed before,” Mr. Powell said at an event in May.

The Fed’s job in normal times is to help the economy operate at an even keel — to keep prices stable and jobs plentiful. Its sweeping pandemic response pushed its powers into new territory. The central bank restored calm to markets and helped keep credit available to consumers and businesses. It also led Republicans to try to limit the vast tool set of the politically independent and unelected institution. The Fed’s emergency loan programs became a sticking point in the negotiations over the government spending package Congress approved this week.

But even amid the backlash, the Fed’s work in salvaging a pandemic-stricken economy remains unfinished, with millions of people out of jobs and businesses suffering.

The Fed is likely to keep rates at rock bottom for years, guided by a new approach to setting monetary policy adopted this summer that aims for slightly higher inflation and tests how low unemployment can fall.

And the Fed’s extraordinary actions in 2020 weren’t aimed only at keeping credit flowing. Mr. Powell and other top Fed officials pushed for more government spending to help businesses and households, an uncharacteristically bold stance for an institution that tries mightily to avoid politics. As the Fed took a more expansive view of its mission, it weighed in on climate change, racial equity and other issues its leaders had typically avoided.

“We’ve often relegated racial equity, inequality, climate change to simply social issues,” Mary C. Daly, president of the Federal Reserve Bank of San Francisco, said in an interview. “That’s a mistake. They are economic issues.”

In Washington, reactions to the Fed’s bigger role have been swift and divided. Democrats want the Fed to do more, portraying the attention to climate-related financial risks as a welcome step but just a beginning. They have also pushed the Fed to use its emergency lending powers to funnel cheap credit to state and local governments and small businesses.

Republicans have worked to restrict the Fed to ensure that the role it has played in this pandemic does not outlast the crisis.

Patrick J. Toomey, a Republican senator from Pennsylvania, spearheaded the effort to insert language into the relief package that could have forced future Fed emergency lending programs to stick to soothing Wall Street instead of trying to also directly support Main Street, as the Fed has done in the current downturn.

Republicans worry that the Fed could use its power to support partisan goals — by invoking its regulatory power over banks, for instance, to treat oil and gas companies as financial risks, or by propping up financially troubled municipal governments.

“Fiscal and social policy is the rightful realm of the people who are accountable to the American people, and that’s us, that’s Congress,” Mr. Toomey, who could be the next banking committee chairman and thus one of Mr. Powell’s most important overseers, said last week from the Senate floor.

Mr. Toomey’s proposal was watered down during congressional negotiations, clearing the way for a broader relief deal: Congress barred the central bank from re-establishing the exact facilities used in 2020, but it did not cut off its power to help states and companies in the future.

Democrats said the new language was limited enough that the Fed could still buy municipal bonds or make business loans via emergency powers; Mr. Toomey told The New York Times that doing so would require congressional approval. The divide suggested that the scope of the Fed’s powers could remain a point of debate.

As Mr. Powell, 67, faces pressure from all sides in 2021, he could find himself auditioning for his own job. His term expires in early 2022, which means that President-elect Joseph R. Biden Jr. will choose whether to renominate him.

Mr. Powell, a Republican who was made a Fed governor by President Barack Obama and elevated to his current position by Mr. Trump, has yet to say publicly whether he wants to be reappointed.

His chances could be affected by the Fed’s coronavirus crisis response, which has been credited as early and swift. Mr. Powell was at Group of 20 meetings in Riyadh, Saudi Arabia, in late February when it began to become clear to him that the coronavirus was unlikely to remain regionally isolated. He checked in with his colleagues in Washington to see what emergency powers the central bank and Treasury Department had at their disposal.

By the time his 14-hour-flight landed at Dulles International Airport on Monday, Feb. 24, stocks were plummeting. He opened his phone to numerous missed calls and emails. From that point, the central bank’s response kicked into gear.

That Friday, the 28th — the same day Mr. Trump called worries about the coronavirus a “new hoax” spread by Democrats — Mr. Powell issued a statement conveying the Fed’s concern. On March 3, the next Tuesday, the Fed made its first emergency rate cut since the global financial crisis 12 years earlier, the first of many steps the Fed would take to avert a catastrophic market meltdown.

Some analysts warned that the Fed’s rush to accommodate the economy with lower interest rates might be poorly targeted. What could interest rates do in the face of a pandemic?

A lot, it appears in hindsight. The Fed’s rate cuts set the stage for a refinancing boom and, more recently, a rush to buy houses.

The decision of Penny Achina, a first-time home buyer just outside Houston, shows how Fed policy can cascade through the economy. After thinking about buying a house for four years, Ms. Achina, a 31-year-old medical technologist, took the leap in 2020.

“I said — it’s either you sink or you swim, and the interest rates really enticed me,” she said, and she is set to close next week. With 3 percent down, she was approved for a 2.5 percent interest rate on a 30-year mortgage.

When people like Ms. Achina buy houses, they often then spend money on new couches and refrigerators to fill them. Higher consumer demand prompts businesses, also attracted by low rates, to borrow money to invest in equipment to produce more.

The central bank’s rescue could yet have side effects. While most economists believe that runaway inflation is unlikely, a minority warn that price increases, which have been quiescent for years, could be kindled by huge government spending and a post-pandemic economic surge. Policymakers have been watching for signs of financial excess as their tools have helped stocks soar and companies to issue debt at a stunning pace.

Jobs remain the Fed’s biggest challenge. While low rates are helping many employed people like Ms. Achina, millions of others are out of work. Lower-wage workers, women and minorities have been particularly likely to lose their livelihoods.

The Fed’s low rates and bond purchases may do little to immediately help people who rent, own few stocks and find their jobs eliminated.

Many economists say the $900 billion assistance package passed on Monday will need to be followed by more. Some of its key provisions, such as extended jobless benefits, will expire before spring.

“We have a tough period to get through,” Loretta Mester, president of the Federal Reserve Bank of Cleveland, said Friday, pointing out that businesses and households will need help in the next few months as coronavirus cases swell before vaccines are widely distributed.

Even after the recovery takes hold, the Fed is likely to be slow to lift interest rates — and that’s when those left behind in the pandemic may feel the more widespread benefits of its policies.

If its policies work, the Fed could pave the way for the sort of stable, inclusive growth that was taking hold at the start of 2020. Mr. Powell has repeatedly called job losses “heartbreaking” and has pledged to use the Fed’s powers to try to restore the job market to its former strength.

“We’re thinking that this could be another long expansion,” he said at a news conference in mid-December, as he vowed to boost the economy “until the expansion is well down the tracks.”