Apr 16, 2020 - Economy

Jay Powell: Hero of the coronavirus crisis

Illustration: Eniola Odetunde/Axios

Move over, Anthony Fauci. Fed chair Jay Powell has come into his own in recent weeks, acting with uncommon and entirely unexpected speed and boldness.

Why it matters: The federal government has in general not acted with the alacrity that the fast-spreading coronavirus demands. But Powell has — and he's done so with moral clarity, talking about how "people are undertaking sacrifices for the common good. We need to make them whole."

  • Powell was early to grok the magnitude of the crisis, rapidly running through every tool that Ben Bernanke used in 2009 and then coming up with more of his own.

The ability to move aggressively when facing a real crisis — while not overreacting to a mere stock-market tumble — is arguably the most important quality in any Fed chair.

Bernanke was by all accounts an excellent crisis-era Fed chair, but even he moved extremely slowly by Powell standards.

  • The day after Lehman Brothers filed for bankruptcy, for instance, Bernanke's Fed held rates steady at 2%, noting only that "economic growth appears to have slowed recently," and worrying about "the upside risks to inflation."

Be smart: After the financial crisis, Congress attempted to curtail much of the Fed's authority to lend to non-banks — something Powell has been doing more of than Bernanke ever did.

  • Since the Dodd-Frank Act, all such lending needs to be approved by Treasury.
  • What they're saying: "Dodd-Frank turned out to be a blessing in disguise," says former Fed economist Steven Friedman, who now works at MacKay Shields.
  • Forcing Powell to get Treasury sign-off for its programs "has actually provided the Fed with tremendous political cover to expand its balance sheet rapidly in response to the crisis and really take risks," Friedman tells Axios' Courtenay Brown.
  • "The Fed can point to the administration if there’s ever any criticism of their actions during the crisis," Friedman adds.

The bottom line: How does the current Fed compare to Bernanke's?

  • "Powell's Fed is twice as aggressive and more than twice as fast," says former Fed staffer Claudia Sahm, who's now at the Washington Center for Equitable Growth.
  • The crisis has effectively silenced Powell's critics who initially saw him as a B-team player, not in the same league as the likes of Yellen and Alan Greenspan.

The man behind the borrowing

steven mnuchin giving a thumbs up
Steven Mnuchin on the right. Photo: Kim Kyung-Hoon/AFP via Getty Images

Treasury Secretary Steven Mnuchin has played a vitally important role in enabling much of the Fed's emergency lending.

The state of play: By allocating $195 billion from the stimulus package to a series of borrowing vehicles funded by the Fed, he has been able to mobilize 10 times that amount — $1.95 trillion — to support corporate and municipal America.

  • In principle, there's no reason why the Fed can't lend even more than that. So long as Mnuchin is happy to take the credit risk, Powell has shown that he's happy to lend.
  • If losses in the borrowing vehicles turn out to be larger than the amount Treasury has put in, the Fed will just end up paying Treasury less money at the end of the year.
  • What they're saying: "Monetary policy and fiscal policy are closely joined at the hip in the crisis," says Friedman. "As they should be."

Why it matters: By tying itself so closely to Treasury, Powell's Fed has lost a lot of its independence. It's now taking actions — like lending to junk-rated companies — that look a lot like fiscal policy.

  • Desperate times call for desperate measures. But already critics are saying that the Fed "has failed and is fundamentally broken." Powell will never be able to prove to their satisfaction that his actions were necessary to save the economy.

Go deeper: Jay Powell's Fed gives Trump what he wants

Editor's note: This story has been updated to clarify that former Fed economist Steven Friedman now works at MacKay Shields, a New York Life Investments company.

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