In undertaking what will undoubtedly be its largest rescue effort ever, the Federal Reserve on Monday announced programs that represent a never-before-seen intervention by the central bank into the heart of the “real” American economy.
Chair Jerome Powell and his colleagues, in a desperate gambit to prevent outright economic calamity during the coronavirus pandemic, are on the cusp of redefining the long-established role of the U.S. central bank, extending its “lender of last resort” power from Wall Street to Main Street and City Hall.
With many details still being hammered out as to just how it pulls off such a historic effort, the Fed – in partnership with the U.S. Treasury – aims to cast a financial lifeline to millions of American companies both large and small and potentially hundreds of local governments as it battles a crisis of still unknown proportions.
But the numbers are massive, with some analysts saying that an expanded Treasury commitment, leveraged by the Fed, could make $4 trillion or more in loans to nonfinancial firms.
“This is the Fed taking a really huge step to try to backstop the financing of real activity,” said Bill English, a Yale School of Management professor and former head of the Fed’s monetary affairs division. The programs “can be ramped up. They can take on more risk. It is a suite of programs that is pretty complete.”
Karen Petrou, the managing partner at Federal Financial Analytics, was more blunt: “This isn’t helicopter money – it’s the Fed becoming a B1 bomber, dropping hundreds of billions into a desperate economy. When the funds land, they will do a lot of good.”
Just over a decade ago the Fed was pressed to take hitherto unheard-of actions to keep the financial system from collapse, then to expand the boundaries of traditional central banking.
To that moment, central banks largely operated on the assumption that setting short-term interest rates were sufficient to help manage business cycles.
But the Fed helped bail out banks, plugged holes deep in the financial system, bought trillions of dollars in bonds and engineered a low-interest rate landscape that helped foster an arduous recovery from the 2007-2009 financial crisis and recession.