On Wednesday, investors put the probability that Ford Motor Co. would default on its debts at around 20%. By Friday, that had plunged to 14%.
What happened? In between, the Federal Reserve announced that as part of its extensive new programs to support the economy, it would buy bonds that had been investment grade until March 22 but no longer are, a category that includes Ford.
That illustrates the sweeping new influence the central bank has over the economy--and the potential peril that accompanies that influence. The Fed got here by proving it can act quickly, effectively and apolitically at a time when the federal government is often hamstrung by partisan dysfunction. But it requires the Fed to make decisions traditionally left to politicians that thus risk dragging it into the partisan battleground.
At the outset of the coronavirus crisis, the Federal Reserve didn't seem destined to be a consequential player. It has no public health role and can't give cash to closed restaurants or their laid off workers. With interest rates so near zero, its ability to stimulate growth was limited.
By this week it had emerged as perhaps the most powerful component of the entire federal response. On Thursday it unveiled details of up to $2.3 trillion in loans it could issue to businesses of all sizes and sorts and to states and local governments.
The Fed's crisis response has three phases. The first was the traditional monetary policy response: it lowered interest rates to near zero on March 15 to absorb the blow to domestic demand. That effectively exhausted its conventional ammunition.
The second phase was to purchase vast quantities of Treasury and mortgage-backed bonds, lend heavily to banks and bond dealers, and offer credit to hundreds of foreign central banks to meet dollar shortages abroad. This was to prevent the financial system from seizing up, part of its established role as lender of last resort to the banking system, albeit on an unprecedented scale.
The third phase was to use its emergency authority under Section 13(3) of the Federal Reserve Act to set up programs to lend to money-market funds, issuers of corporate debt, municipal governments, and main street businesses, big and small. This goes well beyond the central bank's traditional duties. It is akin to fiscal policy, territory long off limits to central bankers because it risks taxpayer funds and requires politically fraught decisions about who gets help and who doesn't.
The Fed first got the authority for such lending in the 1930s, but in the following decades avoided using it. It then invoked that authority in the 2008-09 financial crisis to lend to financial companies. Because of controversy over bailouts, the 2010 Dodd Frank financial reform law forbid the Fed from using its 13(3) power to prop up individual companies, and could use it only with the Treasury secretary's approval.
Ironically, a decade after having its authority circumscribed, the Fed is more influential than ever. The coronavirus response legislation enacted last month, known as CARES, authorizes the Fed to leverage $454 billion of taxpayer funds, potentially to loans worth 10 times that much.
There is an irony here: many in Congress have spent the past decade, at times joined by President Trump, sniping at the Fed. Yet when the crisis came, both realized no one else had the necessary capacity and technocratic competence.
For this, Chairman Jerome Powell, known to many as Jay, gets credit. He took office in early 2018 without the political capital of Alan Greenspan or the economic chops of Ben Bernanke and Janet Yellen. Yet he has demonstrated both a clear grasp of the economic challenges facing the U.S. and finely tuned political radar, nurturing cordial relations with both parties in Congress. He has turned aside questions about charged political questions and ignored Mr. Trump's taunts.
In the face of an unprecedented economic shock, he quickly concluded holding back wasn't an option. Still, he has sought to insulate the Fed as much as possible from the messy business of deciding who gets credit and who doesn't. "We don't make decisions about individual firms," only broad classes of borrowers, he said in a video event sponsored by the Brookings Institution on Thursday, and all the Fed's programs must be approved by Treasury Secretary Steven Mnuchin, he added.
Yet the Fed will be making lots of judgments that implicitly or explicitly determine which firms and municipalities get credit, and any that lose out could seek the ear of a sympathetic congressman, or Mr. Trump. In a hotly contested presidential election, they are sure to listen.
These pressures would be unpleasant at any time, but they come as both the country and its institutions have become increasingly polarized. Mr. Trump has repeatedly pressured the Fed to pursue policies he prefers, and while Mr. Powell has turned those demands aside, his term expires in 2022. Democrats may have demands of their own, for more assistance to local governments, for example, or employers of key constituents.
Much as the Fed prefers to stay out of the political arena, that may prove impossible as its economic footprint grows. But then, the alternative, stay close to home and watch the economy founder, looks worse.