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Monday, April 5, 2021

The Power of the Fed

Felix Salmon at Axios:
We're not in the throes of a "Greater Depression," and we're not facing a tsunami of bankruptcies. In fact, the stock market is hitting new record highs, while employment is rising fast. For all of these things, thank one institution above all others: the Federal Reserve.
Why it matters: The coronavirus crisis has made abundantly clear the awesome power of central banks in general and of the Fed in particular.

The big picture: Most of the time, the Fed is a deliberately slow and quiet agency, keeping a close eye on thousands of economic indicators and trying its best to keep employment high and inflation low.
  • In a crisis, however, the Fed has now shown beyond any doubt that it is both willing and able to create as much liquidity as is needed to put out all fires and get the economy floating happily again.
  • As Minneapolis Fed Chair Neel Kashkari memorably put it on "60 Minutes" in March 2020: “There is an infinite amount of cash in the Federal Reserve. We will do whatever we need to do to make sure there’s enough cash in the banking system.”
How it works: The Fed, working hand in glove with the Treasury, announced a long list of programs in March 2020, all of which were designed to stabilize extremely jittery markets and make sure that creditworthy businesses had access to the capital they needed to get through the crisis.
Dion Rabouin at Axios: 
How it works: The Fed steadied the economy by setting interest rates near 0%, and buying so many bonds in the open market that it now boasts a $7.7 trillion balance sheet.
  • The hope is that companies will hire more workers, but that's no longer how the economy works, notes Columbia University professor and Nobel Prize-winning economist Joseph Stiglitz.
  • Rather than hiring, companies buy back their stock and invest in technology designed to replace workers.
"We’ve been through a period where low-interest rates have not stimulated the economy very much and where disproportionately [companies' increased profits] go into automation, killing jobs, not creating jobs," Stiglitz tells Axios.
  • "At a zero interest rate the cost you focus on is the cost of labor, because that’s your only cost. Whereas if the cost of capital goes up relative to the cost of labor you get a more balanced kind of innovation and investment."
Yes, but: Many argue the Fed was forced into this position and the extraordinary economic intervention is its attempt to make up for a new world of slowing growth, growing debt, an aging population and a dysfunctional Congress.

What happened: To battle the coronavirus pandemic, the Fed announced on March 23, 2020, that it would buy an unlimited amount of U.S. government bonds and mortgage-backed securities; purchase corporate bonds, including debt with a "junk" credit rating; and even provide financing directly to individual companies.