The Fed demonstrates US leadership at its best

Federal Reserve Chairman Jerome “Jay” Powell calls it the “announcement effect.” When financial markets were buckling in March because of terror about the emerging pandemic, the Fed’s simple pledge that it would use its “full range of authorities” to maintain the flow of credit was enough to restore order.
The Fed’s success is a lesson in how the credibility and competence — and boldness — of government leaders can bring us back from the economic catastrophe wrought by the novel coronavirus. The liquidity panic that was taking hold on Wall Street ended quickly with the Fed’s March 23 promise of unlimited support; now, even with economic activity still at a near standstill, the financial markets operate smoothly because Wall Street trusts the Fed.
It’s about confidence. The markets have stabilised because they believe the Fed will do whatever it takes to backstop the financial system. And the central bank has demonstrated during the past six weeks, as it did in 2008, that it can create innovative new tools to keep the system afloat and prevent financial contagion.
But beware: The economic crisis is moving from one of liquidity to solvency, just as happened after the 2008 financial crash. As business activity sluggishly returns from lockdown, many companies and individuals will go bust — perhaps with terrible human and economic cost. The Fed’s lending and asset purchases can’t solve that problem, but Congress can, by expanding its emergency spending programmes. Congress needs to be as creative as the central bank.
Powell shows Congress and the White House the path forward in this crisis: Take aggressive, disciplined action, and then do it again. He doubled down this week on his promise to create whatever tools are needed to support the financial system. After a meeting this week of the Federal Open Market Committee, he pledged to keep buying assets and offering credit “until we’re confident that we are solidly on the road to recovery.”
Powell underscored that resolve last week. “We won’t run out of money. It’s not a limited pot,” he told reporters, describing some of the Fed’s programs to provide cash to financial institutions and businesses. The Fed broadened its “Main Street Lending Program” to more small businesses, and eventually to nonprofits like hospitals and universities. And it has expanded its support for state and local municipal bonds.
The Fed also continues to direct the global financial system, at a time when the Trump administration has stepped back from international leadership on other fronts. Powell chairs the two key committees that coordinate the world’s central bankers, and Fed governors Randal Quarles and Lael Brainard head other key global financial groups. Finance is one area where American primacy remains unchallenged.
The Fed’s power lies partly in its ability to create money by buying Treasury and other securities, which it lists on its balance sheet as assets. The Fed’s balance sheet has ballooned because of the pandemic.
Total assets stood at $6.6 trillion last week, up an astonishing 69% from a year earlier. Powell believes the Fed can reduce this asset bulge as the economy grows; now is the time to lend and spend to prevent a cataclysm. He’s right: Congress and the Fed should get the nation’s house in order later, when they’ve helped save the people inside.
Powell is dealing with a situation rightly described as “Radical Uncertainty” in the title of a new book by Mervyn King, former governor of the Bank of England, and John Kay, an Oxford economist. The authors quote the great economist John Maynard Keynes’ comment that on many questions that bound the future, the right answer is: “We simply do not know.”
This radical uncertainty applies to the recovery from the pandemic. How long will it take businesses to reopen? Which vaccines and therapeutic drugs will work, and how soon will they be ready? Powell can only answer, with Keynes: We don’t know.
What’s needed now, in the space Powell has created by calming the markets? Congress needs to help Main Street as boldly and wisely as the Fed supports Wall Street. It was essential to get money out the door fast in the early weeks of the pandemic. Now, Congress should be thinking about building a stronger post-pandemic economy — investing in new industries, modern infrastructure, and a framework for growth. Our best political minds need to be thinking about new economic designs as intensely as doctors are racing to create vaccines.
We’ve seen how a disorganised America, without a social safety net or a coherent national health care system, functions in a crisis. The compassionate competence of the Fed reminds us that America isn’t hapless in this terrible moment.

—The Washington Post

David Ignatius is an American journalist and novelist. He is an
associate editor and columnist for The Washington Post. He has
written eleven novels, including Body of Lies, which director Ridley Scott adapted into a film