Jan 16 (Reuters) – At the onset of the COVID-19 pandemic, the U.S. Federal Reserve slashed interest rates and used massive bond purchases to flood financial markets with liquidity to try to offset the actual and potential economic devastation from the health emergency.
Transcripts of policymakers’ closed-door meetings from 2020, released on Friday, show Fed Chair Jerome Powell navigated more internal division about some of those initial moves than was previously known.
They also show how concern about maintaining the Fed’s political independence — seen as key to the central bank’s ability to do its job on inflation as well as maximizing employment — shaped its approach to market interventions and coordination with the rest of government as it battled the job losses and other fallout from COVID-19 shutdowns.
Those debates have particular relevance in the current moment, as the Trump administration piles pressure on Powell to do the president’s bidding, and Powell, along with most of his colleagues, his predecessors, Wall Street CEOs, global central bankers and even some key members of Trump’s Republican Party, push back.
As COVID-19’s spread from China to the rest of the world gathered pace and began roiling financial markets, Fed policymakers met twice in the first half of March 2020 to marshal their response, which included a cumulative 150 basis points of interest rate cuts and the start of hundreds of billions of dollars of Treasury and mortgage-backed securities purchases.
The Fed cut rates 50 basis points in an emergency meeting on March 3 by unanimous consent. Less than two weeks later on March 15 at its regularly scheduled policy meeting, Cleveland Fed President Loretta Mester cast a lone dissent against the second 100-basis-point rate cut, but the transcripts show three others — Atlanta Fed President Raphael Bostic, Dallas Fed President Robert Kaplan and Fed Vice Chair for Supervision Randal Quarles – were not fully on board, at least to start.
“Lowering the interest rate will not open schools, and it won’t finish the NBA season,” Quarles quipped as he expressed his reservations. He ultimately voted for the move.
Bostic also offered that signals from Congress and the Trump administration that they would soon offer a large fiscal stimulus “reduce the urgency of our moving to a dramatically more accommodative stance.”
Both worried, as Mester had argued, that a big rate cut could telegraph alarm and undermine the Fed’s own efforts to stabilize the situation. Kaplan said he was sympathetic to those arguments, though he ended up supporting the Fed’s rate cut.
The hesitancy expressed by some members did not carry the day, with Powell forcefully making the case for the big rate cut as well as the bond purchases. “I feel that there is no useful purpose to be served in holding back today,” he said.
Indeed Fed policymakers ended up going even more all-in than initially proposed, adopting that day Minneapolis Fed President Neel Kashkari’s suggestion to make their bond-buying promise open-ended rather than limited to specific amounts.
“We should be erring on the side of doing too much,” Kashkari urged, a point that Fed policymakers would repeatedly make publicly in the months to come.
At the same time Kashkari obliquely raised the potential for such activism to damage the Fed’s independence, a theme that increasingly came up as the Fed pushed the policy envelope with an array of programs to support the economy including direct purchases of corporate credit.
“We are going to need to focus our attention and how to design those in a way that can support the economy, without having us step out of our lane,'” Kashkari warned.
Philadelphia Fed President Patrick Harker was more explicit in his concern that the Fed’s independence might be seen as compromised. “Given the declaration of a national emergency, our actions might also be viewed as bowing to political pressures,” he said.
The key, he said, is to communicate in a unified way that the Fed’s actions are aimed at providing relief rather than stimulus.
In the crisis moment it faced then, the group leaned into action.
“We may want to consider encouraging the Treasury to issue more Treasury bills to keep the rate at or above zero,” Boston Fed President Eric Rosengren said, an idea that did not appear to garner any serious discussion but suggests how far at least one policymaker was willing to go.
By summer, Fed independence concerns got wider discussion around the table, and were a central reason the policymakers stopped short of taking their bond purchases to what Fed Vice Chair Lael Brainard had proposed could be a next-step evolution — yield curve control.
YCC, by which the Fed would aim to cap long-term rates to further boost the economy, “may prove to be incompatible with central bank independence,” St. Louis Fed President James Bullard said at the Fed’s June meeting, a view echoed by several policymakers.
After extensive discussion, Fed policymakers decided against the idea.
(Reporting by Ann Saphir; Editing by Andrea Ricci )
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