Instructions
- Read the following article.
"The Federal Reserve is Changing What It Means to Be a Central Bank" by Nick Timiraos and Jon Hilsenrath, The Wall Street Journal, April 27, 2020.
- Answer both of the questions listed below.
- Include and cite additional resources.
Discussion Questions:
· What do you think about the Federal Reserve's decision to provide liquidity and a lending backstop to businesses, states, and cities?
· What are some of the short-term and/or long-term effects of these policies?
11/22/2020 The Federal Reserve Is Changing What It Means to Be a Central Bank - WSJ https://www.wsj.com/articles/fate-and-history-the-fed-tosses-the-rules-to-fight-coronavirus-downturn-11587999986 1/15 This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers visit https://www.djreprints.com. https://www.wsj.com/articles/fate-and-history-the-fed-tosses-the-rules-to-�ight-coronavirus-downturn-11587999986 ECONOMY The Federal Reserve Is Changing What It Means to Be a Central Bank By lending widely to businesses, states and cities, the Fed is breaking taboos about who gets money to prop up a frozen U.S. economy By and April 27, 2020 11�06 am ET Nick Timiraos Jon Hilsenrath The Federal Reserve is redefining central banking. By lending widely to businesses, states and cities in its effort to insulate the U.S. economy from the coronavirus pandemic, it is breaking century-old taboos about who gets money from the central bank in a crisis, on what terms, and what risks it will take about getting that money back. And with large-scale purchases of U.S. Treasury securities, the Federal Reserve is stretching the boundaries for what a central bank will do to finance soaring federal debt— actions that move it deeper into political decisions it usually tries to avoid. Fed leaders don’t like doing any of this. They believe they have no better alternative. “None of us has the luxury of choosing our challenges; fate and history provide them for us,” Fed Chairman Jerome Powell said in a speech this month. “Our job is to meet the tests we are presented.” Economists project the central bank’s portfolio of bonds, loans and new programs will swell to between $8 trillion and $11 trillion from less than $4 trillion last year. In that https://www.wsj.com/news/types/economy?mod=bigtop-breadcrumb https://www.wsj.com/articles/fed-announces-new-facilities-to-support-2-3-trillion-in-lending-11586435450 https://www.wsj.com/livecoverage/coronavirus-2020-04-21?mod=article_inline&mod=article_inline https://www.wsj.com/articles/the-fed-transformed-jay-powell-leads-central-bank-into-uncharted-waters-11585596210?mod=article_inline https://www.wsj.com/articles/powell-pledges-aggressive-fed-action-says-congress-will-need-to-spend-more-to-combat-coronavirus-shock-11586440814?mod=article_inline 11/22/2020 The Federal Reserve Is Changing What It Means to Be a Central Bank - WSJ https://www.wsj.com/articles/fate-and-history-the-fed-tosses-the-rules-to-fight-coronavirus-downturn-11587999986 2/15 range, the portfolio would be twice the size reached after the 2007-09 financial crisis and nearly half the value of U.S. annual economic output. It would make its role in the economy far greater than during the Great Depression or World War II, according to Wall Street Journal calculations. The portfolio had reached $6.57 trillion by April 22. “The Fed is being sent on a mission to places it has never been before,” says Adam Tooze, a Columbia University history professor who writes about financial crisis and war. Due to the financial and economic shocks caused by the virus, he says, central-bank officials “are being sucked into a series of entanglements that they cannot control and that they normally will not touch with a long pole, but this time felt they had to go in, and go in hard.” https://www.wsj.com/news/collection/financial-crisis-10-years-later-81622936?mod=article_inline https://www.wsj.com/articles/great-depression-unemployment-levels-are-on-tap-11587053071?mod=article_inline 11/22/2020 The Federal Reserve Is Changing What It Means to Be a Central Bank - WSJ https://www.wsj.com/articles/fate-and-history-the-fed-tosses-the-rules-to-fight-coronavirus-downturn-11587999986 3/15 Many government policy makers, including past Fed critics, support its actions this time, though political calculations could change quickly. Uncharted Territory The Fed's portfolio of bonds, loans and new programs will swell to $8 trillion–$11 trillion, economists estimate. Modern EraDepression Era and World War II 40% 30 20 Federal Reserve balance-sheet assets relative to GDP 10 0 1930 ’50 2000 ’20 Depression Era and World War II: 1929�1948 Modern Era: 2007�2020 1929 market crash U.S. suspends gold standard Fed responds to Coronavirus pandemic Germany invades France Germany and Japan defeated Lehman collapse Fed mounts second wave of bond buying %50 50% 40 40 30 30 MODERN ERA DEPRESSION ERA20 20 10 10 Japan attacks Pearl Harbor Fed launches modern-era bond-buying program0 0 20 20Year 1 5 10 15 Year 1 5 10 15 Notes: Figures are as of year end, except �inal two. First 2020 assets �igure is as April 22. Final 2020 estimate is based on WSJ Survey of Economists’ GDP forecast and the midpoint of analysts’ balance-sheet estimate, $9.5 trillion. Sources: Federal Reserve Bank of St. Louis, FRED and Fraser databases (assets); Commerce Department (GDP) 11/22/2020 The Federal Reserve Is Changing What It Means to Be a Central Bank - WSJ https://www.wsj.com/articles/fate-and-history-the-fed-tosses-the-rules-to-fight-coronavirus-downturn-11587999986 4/15 “This should be considered a very freakish Black Swan event, not anything that would be revisited under ordinary circumstances,” says Sen. Pat Toomey (R., Pa.), who criticized the Fed after the last crisis for enabling large federal budget deficits. Last month, he helped advance the $2.2 trillion economic-rescue legislation in Congress that puts the Fed at the center of the government’s economic-rescue efforts. Among risks the Fed is taking: that some programs won’t work, that officials won’t be able to unwind them, that politicians will grow accustomed to directing the central bank to fix problems its tools aren’t designed to solve, and that public discontent about the central bank’s choices will erode its authority over time. This last risk is prominent because the Fed’s tools are better suited to helping large firms that borrow in capital markets than small ones that don’t. “Capitalism without bankruptcy is like Catholicism without hell,” Howard Marks, director of investment fund Oaktree Capital Management LP, said in a letter to shareholders this month, writing that “Markets work best when participants have a healthy fear of loss.” Mr. Marks in a later interview said he didn’t want to imply Mr. Powell’s actions were wrong: “The fact that something can have negative, unintended consequences, doesn’t mean it’s a mistake.” Mr. Powell defines the government’s task from a different moral perspective. “People are undertaking these sacrifices for the common good,” he said in his speech. “We need to make them whole to the extent we have the ability.” ‘The Treasury is using the Fed as its arm,’ says a former CBO director, ‘because the Fed is better at setting up these facilities and getting the money out.’ PHOTO: AL DRAGO�BLOOMBERG NEWS https://www.wsj.com/articles/after-fed-unleashes-firepower-washington-rearms-central-bank-11585498301?mod=searchresults&page=1&pos=15&mod=article_inline https://www.wsj.com/articles/mr-under-the-radar-jerome-powell-trumps-federal-reserve-pick-signals-continuity-1509643306?mod=article_inline 11/22/2020 The Federal Reserve Is Changing What It Means to Be a Central Bank - WSJ https://www.wsj.com/articles/fate-and-history-the-fed-tosses-the-rules-to-fight-coronavirus-downturn-11587999986 5/15 After cutting interest rates to near zero in mid-March, the Fed began a torrent of bond- buying programs to stabilize markets. Between March 16 and April 16, it bought Treasury and mortgage securities at a pace of nearly $79 billion a day. By comparison, it bought about $85 billion a month between 2012 and 2014. Fed purchases help the government inexpensively finance its debt, which is soaring as the Treasury sends checks directly to households and spends more on unemployment insurance. The central bank is preparing a second wave, programs in partnership with the Treasury to get loans directly to companies and state and local governments. Congress has armed the Treasury with $454 billion to work in cooperation with the central bank for the effort. The Fed will lend as much as 10 times the amount Congress appropriated, with the Treasury taking the first losses on loans that go bad. The Treasury has so far committed around 40% of those funds to some of nine different programs, leaving room to expand them or deploy others. Congress called upon the Fed in part because it developed capabilities to intervene during the 2008 banking crisis and is positioned like few other institutions to move fast. It also entered the crisis outside a partisan fray marked by distrust between congressional Democrats and the Trump administration, lawmakers and analysts say. https://www.wsj.com/articles/federal-reserve-announces-major-expansion-of-market-supports-11584964844?mod=article_inline https://www.wsj.com/articles/after-fed-unleashes-firepower-washington-rearms-central-bank-11585498301?mod=article_inline https://www.wsj.com/articles/shrinking-influence-of-central-banks-ends-decades-of-business-as-usual-11579103829?mod=article_inline https://www.wsj.com/articles/fed-chairman-jerome-powells-approach-to-interest-rate-policy-wins-bipartisan-backing-11562664602?mod=article_inline 11/22/2020 The Federal Reserve Is Changing What It Means to Be a Central Bank - WSJ https://www.wsj.com/articles/fate-and-history-the-fed-tosses-the-rules-to-fight-coronavirus-downturn-11587999986 6/15 And Mr. Powell’s measured response to President Trump’s relentless attacks on him over the past two years have dispelled concerns among lawmakers that the central-bank chief would be a footman for the president or his re-election. “The Fed is not naturally suited to do this,” says Douglas Holtz-Eakin, a Republican former director of the Congressional Budget Office, “but the Treasury is using the Fed as its arm because the Fed is better at setting up these facilities and getting the money out.” Fed officials will hold a remote gathering Tuesday and Wednesday this week. Discussion will turn to implementation of an array of programs announced in the past few weeks and how much further to push its bond purchase programs. Rapid Response Fed asset holdings have grown more sharply than during past quantitative-easing, or QE, periods, in which the Fed bought nearly $4 trillion in securities* to stimulate the U.S. economy Change in holdings since the start of each program $2.0 trillion QE1: December 2008– June 2010 Since March 11 1.5 QE3: September 2012– October 2014 1.0 QE2: November 2010– June 2011 0.5 0 0 10 weeks 20 30 40 50 60 70 80 90 100 110 WEEKS INTO EACH PROGRAM *Treasurys, mortgage-backed securities and Fannie Mae and Freddie Mac debt Source: Federal Reserve Bank of St. Louis https://www.wsj.com/articles/fed-chief-wedged-between-a-slowing-economy-and-an-angry-president-11566166246?mod=article_inline https://www.wsj.com/articles/fed-focuses-on-lending-programs-but-monetary-policy-deliberations-loom-11587649697?mod=article_inline 11/22/2020 The Federal Reserve Is Changing What It Means to Be a Central Bank - WSJ https://www.wsj.com/articles/fate-and-history-the-fed-tosses-the-rules-to-fight-coronavirus-downturn-11587999986 7/15 Unique power The Fed has a unique power, the ability to create money by crediting banks with funds they can lend. That helps it guide the cost of money, which is the interest rate. Low rates and money printing spurred consumer-price inflation after World War II and during the 1970s. Fed officials don’t see that as a risk now because the economy is sinking, meaning less consumer demand and less inflation. Moreover, inflation has been dormant for years in the U.S. and other countries like Japan with aggressive central banks. Bigger federal borrowing needs will make it costly for the Treasury should interest rates eventually rise. “If the economy recovers and inflation is a problem, that will be the test,” says former Fed Chairwoman Janet Yellen. That isn’t a problem now. If it ever is, she says, “I think the Fed is going to win out on that.” Whether the economy stabilizes depends on many forces out of the Fed’s control, including whether the coronavirus’s spread slows, whether other authorities put in place testing and monitoring programs to tame it, and whether treatments and vaccines are discovered. The Fed said Monday it would expand a forthcoming program to provide financing to state and local governments squeezed by declining tax revenue. It will buy debts of up to three years in maturity issued by up to 261 municipal borrowers, including the 50 states, the District of Columbia, counties of at least 500,000 residents and cities of at least ‘This is why the Federal Reserve was invented,’ says former Fed Chairwoman Janet Yellen, ‘to do emergency lending in a crisis.’ PHOTO: ELIJAH NOUVELAGE�BLOOMBERG NEWS https://www.wsj.com/articles/fed-will-broaden-municipal-lending-program-eligibility-11588019579?mod=searchresults&mod=article_inline 11/22/2020 The Federal Reserve Is Changing What It Means to Be a Central Bank - WSJ https://www.wsj.com/articles/fate-and-history-the-fed-tosses-the-rules-to-fight-coronavirus-downturn-11587999986 8/15 250,000. It had initially said it would limit such purchases to counties of at least two million and cities of at least one million, in addition to the states. Political minefield The Fed has long seen lending