How Jay Powell’s Coronavirus Response Is Changing the Fed Forever

On March 11, a group of traders inside the New York Federal Reserve Bank had the chance to watch, in real time, as financial markets spiraled downward. The market was in a panic that day. Stocks were down about 20% from their high in February, and the bottom didn’t seem within view. As the novel coronavirus pandemic was starting to roll across the country, markets were trying to price in the near biblical damage it might cause. The traders inside the Fed had the unenviable job of trying to make sense out of the chaos. They met around a conference table, nursing their coffees, taking notes and speaking to their colleagues throughout the country. The New York team was the central bank’s eyes and ears in the market, and their reports were grim. Even ultrasafe markets were seizing up. Buyers and sellers were having a hard time even determining a price for key assets. This was a crisis.

The information gathered in New York was ultimately passed on to Federal Reserve Chairman Jerome “Jay” Powell. Before the markets closed on March 11, Powell made a breathtaking announcement. The Fed was willing to print half a trillion dollars the following day, to provide short-term loans for distressed borrowers on Wall Street. The day after that, the Fed would offer another $500 billion in the short-term loans (called repo loans) market. A trillion dollars, offered over two days, was the central-bank equivalent of a “shock and awe” campaign. There was every reason to believe this would work. The Fed’s superpower rests on the simple fact that it is the only institution on earth that can create U.S. dollars out of thin air (that thing we call a “dollar” is, in fact, a Federal Reserve note). But on March 12, the Fed was outmatched by the coronavirus. Even a trillion dollars didn’t soothe the nerves of traders. They worried that all the printed money in the world couldn’t give people the courage to go back to Chipotle or the movie theater. Printed money couldn’t keep open the businesses along Fifth Avenue in Manhattan. Markets continued to crash.

In the face of this panic, Powell and the Fed unrolled a second, even larger, wave of actions in late March and early April, pushing the central bank into new areas of the economy, expanding its reach dramatically and weaving it more tightly than ever into the fabric of American economic life. Now the Fed stands as the guarantor of huge swaths of the American and world economy. It’s not a place where Powell expected to find himself.

“My views evolve with the evidence,” Powell said to TIME in an interview in early May. The evidence before him these days is terrifying, and it has driven Powell’s Fed to take actions that seemed unthinkable just months ago.

The coronavirus epidemic has, in a matter of months, wiped out roughly a decade’s worth of job creation, destroying some 20 million positions as of late May and pushing the unemployment rate to its highest level since the Great Depression. The crisis has strained worldwide financial markets and corporations that were already saddled with record levels of debt. It caused a financial panic in March that wasn’t fully appreciated at the time. The pandemic has shut down the U.S. economy with more speed and more force than perhaps any event in history. And everybody is looking to Powell to make it stop.

It is difficult to describe the Fed’s interventions without sounding hyperbolic. The Fed has printed money at a scale that dwarfs all previous efforts. Just consider the Fed’s balance sheet, a rough indicator of how much money the bank has printed. After the financial crash of 2008, for example, the Fed added $1.4 trillion to its balance sheet over two years (a record-breaking increase at the time). This year, the Fed added $2.9 trillion in less than three months. Back in 2007, the Fed’s balance sheet was about 6% of the size of the entire national economy. By the end of this year, it is expected to be about 40%.

Back in 2010, the Fed launched the second round of a controversial stimulus program called quantitative easing (QE), under which it bought $600 billion worth of U.S. debt over several months. In March, the Fed bought roughly $543 billion in a week through similar programs. In 2015, the Fed’s balance sheet hit $4.5 trillion. Analysts expect it to hit roughly $8 trillion or more by the end of this year. Perhaps most significantly, the Fed is now operating several programs in direct partnership with the U.S. Treasury by buying up corporate debt and small-business loans. These new programs are breaking down the walls of the Fed’s jealously guarded independence. Just months ago, there was speculation that the Fed might have run out of ammunition to combat an economic downturn, in part because it had kept interest rates so low for so long, but Powell’s Fed has proved that in a time of crisis it is willing to launch new programs, expand its influence and take on ever greater risks.

The speed and chaos of the economic collapse during the pandemic has obscured the impact of the Fed’s actions. Behind all the numbers and complex programs, the Fed is quite simply rewriting the rules of American capitalism. In just months, the bank increased the size of its footprint in the economy by more than two-thirds and proved to investors that it would step in to buy entirely new kinds of things that it had never bought before, like corporate junk debt and Main Street business loans. As often happens with the Fed, this is all presented under the rubric of crisis management, but history shows that the Fed’s interventions are very difficult to withdraw once a crisis is over. The actions it took from 2008 to 2010, presented as temporary, remain largely in place. It is entirely plausible that the Fed will be grappling a decade from now to undo the emergency actions of today.

No one should know this better than Powell. When he joined the Fed, he voiced concerns about the dangerous side effect of the past decade’s emergency actions. He tried, unsuccessfully, to scale back some of these measures before the pandemic hit. Now he is overseeing the most far-reaching intervention in the Fed’s history.

“I think it’s unprecedented, even by the precedent of the financial crisis,” says U.S. Treasury Secretary Steven Mnuchin about the role of the Fed. Powell and Mnuchin have been on the phone daily, sometimes dozens of times a day, Mnuchin confirms. Both Powell and Mnuchin have made clear that they stand ready to do more if the situation warrants it but stress that the emergency measures are temporary.

“These are emergency powers that we can only use with the Secretary of Treasury’s permission” and under the law as written by Congress, Powell says. “And when that emergency is over, we’re going to put those powers back away again.”

But as the Fed continues to push further into different corners of the economy, it is making it all the more difficult to ever get out–and that concerns economists and critics who wonder what this means for the economy in the future.

“Once you cross a line, it’s really hard to go back,” says Roberto Perli, a former senior economist at the Federal Reserve. “It will be really hard, maybe not in the next recession but in the next crisis, for the Fed to say: No.”

Powell acknowledges this risk.

“The danger is that we get pulled into an area where we don’t want to be, long-term,” Powell says. “What I worry about is that some may want us to use those powers more frequently, rather than just in serious emergencies like this one clearly is.”

The Fed’s emergency actions have reshaped American capitalism, says Scott Minerd, the chief investment officer of Guggenheim Investments, who advises the New York Federal Reserve Bank. “They have essentially told the world that there is now a backstop on corporate debt,” Minerd says. “By directly intervening, [the Fed] has established a precedent that will be impossible to reverse … We have now socialized credit risk. And we have forever changed the nature of how our economy functions.” The private banking system will now have a new calculus as it makes loans: the price of a loan will also be based on the Fed’s appetite to buy it.

If there is a single mantra that seems to be guiding Powell and the Federal Reserve leadership, it’s that this Fed is on a war footing. Concerns about long-term consequences of today’s actions must be put aside. In a situation like this, Powell and his team believe that they have little choice but to do whatever they can to save as many jobs as possible.

“This is why the Fed was invented,” says former Fed Chair Janet Yellen. “There was just a huge, broad-based flight from risky assets of every type. And that’s like a modern-day bank run. The role of a central bank is to take risks and to avoid harm to the economy when no one else is willing to do so.”

When he first arrived at the Fed in 2012, Powell seemed keen to challenge the status quo. Powell was nominated by President Barack Obama, who wanted to appoint a Republican to one of two empty seats on the board.

The Federal Reserve System is an institution that prizes consensus and civility. It is notable, then, that during one of Powell’s first meetings as a Fed governor, he said things that were positively incendiary. This was back in January 2013.

At issue were the Fed’s increasingly sweeping interventions in the economy. In 2008 and 2009, the Fed took emergency measures to keep credit flowing during a global financial panic. It took an even bigger role starting in late 2010. At that time, the financial crisis had largely passed, but overall growth was weak. European governments faced huge debt problems, and tepid growth threatened to derail the recovery. It seemed that there was little the Fed could do because interest rates were close to zero.

The then Fed Chairman, Ben Bernanke, advocated a radical technique. The Fed could pump trillions of dollars into the banking system by purchasing certain kinds of assets from big banks. This was the quantitative-easing program, and the experiment appeared to pay off. Economic growth resumed. Some of that growth was inevitable. But supporters said the program helped by encouraging businesses to borrow money they used to hire workers and boost output. It also transformed financial markets.

Back in August 2008, before the stock market crashed, U.S. banks held about $2 billion of excess cash in their reserve accounts at the Fed, an insignificant amount. By the end of 2012, the level of excess reserves had swelled to $1.45 trillion, a historical anomaly by many factors of 10.

This meant that the days of the Fed simply trimming interest rates during a downturn, and raising them again during the upswing, were gone. Things were more complicated now. The Fed had injected hundreds of billions into the banking system while keeping interest rates near zero, which affected banks’ behavior by encouraging them to lend rather than save. Many critics of QE pointed out that all this money created a desperate “search for yield,” meaning that banks, pension funds and hedge funds needed to invest excess cash and were willing to invest in just about anything that yielded more than 1% or 2%. This search for yield was a classic recipe for creating asset bubbles.

This kind of bubble is exactly what Powell warned about back in early January 2013. He was something of an outsider at the time. Unlike many Fed officials, Powell is not an economist. He is a lawyer who has spent his career toggling between two worlds: government service and private-equity dealmaking. His experience gave him a firsthand view of how Fed interventions could distort credit markets, and he was worried about what he saw.

“While financial conditions are a net positive, there’s also reason to be concerned about the growing market distortions created by our continuing asset purchases,” Powell said, according to a transcript. “Many fixed-income securities are now trading well above fundamental value, and the eventual correction could be large and dynamic.”

In Fed language, these could be considered fighting words. Powell was saying that the value of assets like fixed-income bonds was being inflated by quantitative easing. Amid pressure from Powell and other Fed governors who worried about asset bubbles, Bernanke started to publicly signal that the Fed might scale back its QE asset purchases. Investors panicked and started dumping long-term Treasury bonds, fearing that the market would fall without the Fed making big purchases through QE. The Fed backed off, worried that its moves might wreak more havoc. This set a tricky pattern for the Fed.

Bernanke and then his successor, Yellen, and then her successor, Powell, have all tried to scale back the Fed’s asset purchases, raise interest rates and reduce the size of the Fed’s balance sheet, all with limited success. Every time the Fed tried to pull back, it caused volatility in the markets, threatening a downturn, putting pressure on the Fed to back off. Powell learned firsthand how difficult this process could be after President Donald Trump nominated him to be the Fed chairman in 2017.

In December 2018, Powell said during a press conference that the Fed was committed to reversing the process of QE by drawing down the Fed balance sheet.

“So we thought carefully about this, on how to normalize policy, and came to the view that we would effectively have the balance-sheet runoff on automatic pilot and use monetary policy, rate policy, to adjust to incoming data,” Powell said during his public comments.

The “automatic pilot” part of that statement got Wall Street’s attention. Powell was saying that the Fed was determined to reduce its footprint in financial markets. This did not go over well. The stock market started to crater, and the Dow Jones fell more than 600 points on Christmas Eve, a frightening event on a usually quiet day.

In light of the market turmoil, Powell essentially reversed course in January.

“As always, there is no preset path for policy,” he said during a public appearance. “And particularly with muted inflation readings that we’ve seen coming in, we will be patient as we watch to see how the economy evolves.”

Markets recovered. But the Fed had fundamentally committed itself to enduring intervention and money pumping, just to keep the financial system working.

This commitment became apparent in September of last year. That’s when a vital Wall Street loan market called the repurchasing agreement, or repo, market seized up. Repo loans are supposed to be cheap and safe. People borrow money in the repo market by putting up solid collateral, like Treasury bills, and getting cash in return. These loans might be as short-lived as a single day. At that time, the borrower swaps back the cash for Treasury bills, paying a tiny premium for the privilege. Repo markets allow investment houses to quickly turn their assets into cash, and they are the lifeblood of Wall Street.

But something went wrong with this market in September 2019. From Sept. 16 to Sept. 17, the cost of a repo loan spiked from the usual rate of about 2.5% to higher than 9%, a shocking level that caught traders and the Fed off guard.

It’s unclear what precisely caused this market seizure, but a few things are certain. The Fed’s effort to “normalize” its operations had drawn down excess bank reserves to about $1.4 trillion. This level of excess bank reserves was more than 100,000% higher than in the decades before 2008, but they weren’t high enough to keep the repo market going. Banks weren’t willing or able to extend repo loans. Most repo borrowers were “nonbank actors” like hedge funds, according to Bank of America analyst Ralph Axel. For some reason, banks were not willing to offer these hedge funds repo loans, even at exorbitant rates.

On Sept. 17, the New York Federal Reserve stepped in. It offered about $75 billion and up to $100 billion in nightly repo loans at below-market rates. This cheap credit allowed the hedge funds and nonbank actors to keep their doors open. The repo markets calmed. But in October, Powell announced that the Fed would purchase billions of dollars in assets like Treasury bills and mortgage-backed securities. In all, the Fed pumped about $400 billion into financial markets. And this was during the good old days of January.

Powell might have argued over the years that the Fed should scale back some of its interventions. But Powell, and those who work with him, are emphatic that he is no ideologue. They say that he adjusted his views on the basis of the data. He operated much as he did back in the private-equity world, always measuring the performance of an enterprise against the verdicts of the marketplace and making adjustments when necessary.

On Feb. 11, Powell mentioned in public testimony to Congress that the Fed was monitoring reports of a novel coronavirus in China.

“We’ll be watching this carefully,” Powell said at the time.

Like so many people these days, Powell is working from home, dealing with the same hectic mix of conference-call meetings and video-conferences that millions of Americans do. On the desk in his home office, Powell keeps one thing handy for constant reference: key passages from the 2010 Dodd-Frank financial-reform act. The law laid out how the Fed can use its emergency lending powers during a crisis, in partnership with the U.S. Treasury. This has become Powell’s guidebook for surreal times.

The current wisdom inside the Fed points toward acting aggressively and quickly, according to former Fed senior economist Claudia Sahm. After the crash of 2008, the Fed formed an internal policy group to study its emergency responses in 2009 and to come up with “lessons learned.” Fed officials came to believe that the bank was too slow to respond to the housing bubble and then too slow to respond when the bubble burst.

“The lesson of the Great Recession is if you don’t move fast, if you don’t go big, you are going to have a mess,” Sahm says. “The best opportunity that you have to short-circuit a recession, and make it less severe, is right at the start.”

Powell seemed to take this lesson to heart. From March 3 to March 23, the Fed rolled out its playbook from 2009, just larger and faster than ever before. It slashed interest rates to zero. It offered $500 billion in daily repo loans. It opened up so-called swap lines with foreign central banks, allowing those banks to trade their own currency for dollars at a stable rate. The Fed ramped up the quantitative-easing machine, essentially promising to buy an unlimited amount of Treasury bills until further notice. But these emergency measures weren’t enough to keep the markets from continuing to crash.

Minerd, the Guggenheim investor, says a panic erupted across financial markets during this time. The panic even overwhelmed the market for Treasury bills, arguably the foundation of the global economic system. Minerd and others watched in horror as the spread on Treasurys jumped to 4% over a matter of days in March. The price spread on riskier kinds of debt, like corporate bonds, hit 30%.

“That is unthinkable,” Minerd says.

This was the kind of flashing red signal that indicates a financial crisis. All around the world, investors dumped whatever securities and assets they owned in a desperate effort to raise cash. The widening bond spreads showed that there simply wasn’t enough cash to be had around the world. The Fed’s 2009 playbook wasn’t enough.

On March 23, the Fed introduced a new set of interventions, announcing three programs that dramatically expanded its reach into the economic landscape. Known as special purpose vehicles, or SPVs, these newly minted legal entities are joint ventures created with the Treasury that will live inside the Federal Reserve Bank. Using Fed and Treasury money, the SPVs will be used to buy up a variety of assets that the Fed had avoided purchasing before.

Corporate debt has been a particular concern. Companies like Ford Motor Co. and Kraft Heinz took on billions in debt when interest rates were low. When the coronavirus hit, their debt burdens became unmanageable. In March alone, about $90 billion worth of investment-grade corporate debt was written down to junk-debt status, according to Deutsche Bank. This risked causing a cascading effect. As the debt of more companies was downgraded to junk, it might crowd out investors for billions of dollars in other junk-debt loans, causing them to falter or face default.

The Fed created two new SPVs to buy corporate debt and help short-circuit this process. As of April 9, the Treasury had put down $75 billion between these two bond-buying SPVs. The taxpayer’s cash will act as the “first loss” money, meaning that if the bonds default, the losses will be paid with the Treasury money first. Another major SPV will buy loans that have been given to businesses with as many as 15,000 employees.

Subsidizing loans to companies that once relied only on the private banking system is a major departure for the Fed. Mnuchin says the effort is already paying off. “The day we jointly announced that transaction–and the commitment to it–that unlocked the entire corporate bond market,” Mnuchin says. “So without having to actually invest a dollar of taxpayer money, the mere announcement of providing liquidity and a backstop unlocked unprecedented amounts of activity.”

Taken together, all of these programs have a single goal. The Fed and the Treasury are combining forces to purchase debt when the private market isn’t willing to do so. The Fed will print new dollars to do this, and the debt will effectively reside on the Fed’s balance sheet. This is why the balance sheet is predicted to roughly double this year from about $4.1 trillion before the crisis to $8 trillion or more.

The rise of the SPVs will fuse the Fed and the Treasury in the most significant way since 1951, when the two agreed to an “accord” that established the Fed’s independence. Ever since it was founded, the Fed’s leaders have worried that if elected politicians got hold of the Fed’s money-printing power, they would simply run the presses whenever they faced election, eventually creating out-of-control inflation or asset bubbles.

Powell has famously guarded this independence even as President Trump has made him a target of his Twitter rants, pressuring the Fed to cut interest rates and boost economic growth. Powell has stood firm that the Fed’s job is to act independently, without regard to the next election. In 2014, when he was a Fed governor, Powell was invited to speak at the Brookings Institution, where scholars had proposed that the Fed coordinate its bond-buying program with the Treasury. Powell disagreed with that idea and called it “fraught with risk.”

“I believe that monetary policy is–should be –independent, and that that independence is highly valuable to society,” Powell said at the event. “I’m afraid that any active collaboration between debt management and monetary policy, even in a crisis, would risk calling into question that independence.”

The Fed and the Treasury aren’t working together to manage U.S. debt, but they are working together to flood debt markets with new money.

Powell insists today that the Fed will remain fiercely independent when it comes to setting monetary policy and launching programs like quantitative easing. “It’s important that a democratically elected part of our government have some accountability, some responsibility, for these emergency measures that we take,” he says. “Dodd-Frank said that the Secretary of Treasury has to approve all these policies. I think that’s good policy, actually.”

Even if Powell maintains the Fed’s independence, the central bank faces a growing risk of political backlash against its new lending programs, says Kenneth Rogoff, an economics professor at Harvard University and former chief economist at the International Monetary Fund.

“They’re in dangerous territory, and they know it,” Rogoff says. The biggest risk is that people will grow increasingly angry when they realize the Fed has been picking winners and losers in debt markets, buying the debt of some cities and corporations and not others. Such resentment is already building.

Sheila Bair, former chair of the FDIC, says the Fed is being relied upon too much to fix deep economic problems as millions of jobs disappear and small businesses go wanting.

“I think financial assets across the board are inflated from monetary policy. I think that the markets have become so distorted now that you don’t know what’s real and what’s not. The stock markets and bond markets have become disconnected from the real economy,” Bair says. Indeed, stocks have regained most of their lost value since late February, even as unemployment has skyrocketed and the economy has officially entered a recession. Many analysts credit the market boom largely to the Fed’s actions.

This reality is already causing tension between the Fed and some lawmakers on Capitol Hill. When Powell and Mnuchin testified on May 19 in front of the powerful Senate Banking Committee, Democratic Senator Elizabeth Warren criticized both of them for bailing out financiers instead of workers. Senator Sherrod Brown, the top Democrat on the committee, amplified that criticism in a statement to TIME.

“The Federal Reserve is always creative about helping Wall Street and corporations during crises, but workers get left behind,” Brown writes.

It seems unlikely that the Fed’s new SPV programs will be the end of the bank’s intervention. In a press conference on April 29, with the pandemic still spreading, Powell reiterated that the central bank will be on hand to intervene as needed.

“They aren’t done,” says Sahm, the former senior Fed economist. She notes that the Fed has a list of emergency measures waiting in the wings. The nuclear option, Sahm says, would be a thing called a money-financed fiscal program, known as “helicopter money,” whereby the U.S. government issues debt, which the Fed immediately buys and holds permanently.

“It’s essentially just the Fed printing money and paying for the relief,” Sahm says.

Whether Powell will push the Fed past that threshold remains to be seen. It is clear that Powell will examine the economy’s health with the same ideological flexibility he has demonstrated since he became chairman. The question is, How far is he willing to go? Powell has said there is a limit to the Fed’s intervention. With the pandemic still raging worldwide, the next year may test just where that limit stands.

Leonard is the author of Kochland: The Secret History of Koch Industries and Corporate Power in America. Alexander Holt provided research for this story.