Fed Chair Powell challenged ‘institutional timidity’ in pandemic response, author says

'Trillion Dollar Triage' Author and The Wall Street Journal Chief Economics Correspondent Nick Timiraos joins Yahoo Finance Live to discuss Fed Chair Powell's response to the coronavirus pandemic in March 2020 and the outlook for the Fed.

Video Transcript

BRIAN CHEUNG: You know, it seems so long ago that there was a time in 2020 where Fed action was described by Sunday evening emergency announcements. And now that we're entering the third year of COVID-- hard to believe-- it's worth a look back on the Fed's response and the man behind it all, that being Fed Chair Jay Powell. Nick Timiraos is the "Wall Street Journal's" Chief Economics Correspondent. And he's got a new book out called "Trillion Dollar Triage." It's "How Jay Powell and the Fed Battled a President and a Pandemic and Prevented Economic Disaster."

Nick, it's not often the case that we have another Fed reporter on our network here, but a lot of really interesting details that you've got here in this book, which came out today. Jay Powell appears to, based off your reporting, have exited the pandemic in a very different man than he entered it. Give us a little bit more of kind of the evolution of his thinking on central bank policy during that time.

NICK TIMIRAOS: Sure. And thanks for having me, Brian. Yeah, you know, I think one of the things people forget is that we nearly had a financial crisis in 2020. And I think one of the things the book walks through is there's an assumption right now that anybody would have done what Powell did in March of 2020. And sure, there's some truth to that.

But there's a view of how hard is it to fire up the money printer, make the money printer go BRRR. And if you look at what actually was going on inside the Fed, you'll see that there's an institutional timidity there, right? There are lawyers and economists who want to check every box.

And Powell was really hurrying people along. The week of March 16th, which was just ground zero for the financial crisis, he's telling people, it feels like we're swimming after a speedboat. We really need to get going faster here. And so there were a number of really controversial decisions that the Fed made-- controversial at the time.

I think looking back now, people sort of take it as a given. Well, of course, the Fed was going to do all this, of course the Fed had to do all this. But that's really not the case. And I think the book really explores how Powell played a key role-- remember, he's, of course, not a PhD economist. We're reminded of that by pundits all the time.

But he has a background in corporate finance. He's a lawyer. He's a small p politician. He really honed his retail political skills in the first two years on the job when he was being attacked by Donald Trump. And all of those skills served the Fed quite well in March of 2020.

BRIAN CHEUNG: Nick, what's really interesting-- I mean, you've got so many little tidbits of information in here like Jay Powell has a Tesla, he stubbed his toe, apparently, during the pandemic. But there were some really important details in here too that suggest that Jay Powell may have actually wanted to get more aggressive during some of those big emergency liquidity facilities that were opened up over the course of 2020, but was actually met with resistance from Steve Mnuchin, who was the US Treasury Secretary at the time. Tell us about what your book kind of explores in terms of the relationship between the Fed and the Treasury during these emergency situations.

NICK TIMIRAOS: Well, Powell and Mnuchin had a very good relationship. Through all of the drama where Trump was attacking Powell, Mnuchin was quietly providing him backup. So they had a close relationship. But it's true that as the Fed got into designing these programs, Fed officials generally were wanting to take more risk, they were wanting to provide more of a backstop, particularly in some of the things like the lending programs for cities and states, the municipal liquidity facility, or the Main Street Lending Program.

And the Treasury was more resistant to taking losses. The Treasury was providing the equity capital there. So what's surprising, I think, is that for the first three years of Powell's term, Trump was constantly pushing the Fed to provide more stimulus to the economy. And then when you got into the pandemic, you saw a little bit of a reversal there where the Fed was the one saying, well, can't we be a little bit more aggressive here?

BRIAN CHEUNG: And what's interesting here is, I guess, the way that the Fed was trying to grapple with the risk that they would be taking on by doing this lender of last resort role-- how do you think the evolution of the Federal Reserve's-- not to get into badghis dictum here-- but how do you think the Federal Reserve's role as a lender of last resort kind of evolved over the course of this crisis? People were already saying the Fed pushed the line with the term asset liquidity facility during the 2008 crisis, but they had a lot more this time around. How do you think that has changed what the Fed means to the global economy?

NICK TIMIRAOS: You're right. I mean, Powell took Ben Bernanke's playbook from 2008 and he added page after page after page after he ran through the playbook. And what's interesting about that moment in our political economy was that the Congress was perfectly willing and eager to have the Fed step in in this fashion. That's surprising if you look back 10 years earlier when the Fed was, essentially, reprimanded by Congress for bailing out the banks, Dodd-Frank placed new strictures on the Fed's ability to make those kinds of emergency loans. They needed the sign-off of the Treasury Secretary.

But here, you had a situation where I think people realized the Fed was going to be the fast mover. You had Democrats who were probably more skeptical of Trump, maybe concerned that there were going to be political favors being done in any kind of emergency lending programs. And so they felt comfortable with Powell.

I think the attacks of Trump on Powell, even though it led people to wonder, well, gee, is the Fed doing the president's bidding? It also gave Powell the chance to show that he wasn't going to fall in line with the president. And that earned him, on both sides of the aisle, a lot of respect.

I mean, fast forward to today, right? He hasn't been confirmed yet. We're waiting for his confirmation vote in the Senate to his second term. Inflation's very high. High inflation is not politically popular. And yet it looks likely that he's going to have a bipartisan confirmation vote, to the point that nobody's even talking about the fact that we're a month in now with no Senate-confirmed chairman of the Federal Reserve.

BRIAN CHEUNG: Yeah, and as you mentioned, I mean, the story is still very much being written. I mean, look, no further than the fact that Chairman Powell will be testifying for two back-to-back days beginning tomorrow at 10:00 AM during a time where inflation is high-- that's something the president's going to have to touch on tonight in the State of the Union.

But there's also this whole Russia-Ukraine conflict that could be feeding into inflation as well. I mean, what are you expecting to see from the Fed chairman tomorrow? And how do you think that kind of bleeds into the importance of the Fed's efforts, really, to tighten the spigot on that money printer this year?

NICK TIMIRAOS: It's a really terrible time for energy prices and commodity prices to be rising if you're the Fed. I think a lot of people in the markets are conditioned to think that the Fed is going to rush to the rescue every time that there is a geopolitical shock. Because in 2016, whether it was the China swoon at the beginning of that year or Brexit in the middle of the year, the Fed kept putting off its plans to raise interest rates.

But growth was running between 1% and 2%. We don't have that problem now. We don't have a problem of insufficient demand in the US economy. So it seems much less likely that the Fed is going to be able to get off of the plans here to raise interest rates.

And when you do have a negative supply shock, like what we're probably going to see in the energy market right now, the textbooks say the Fed shouldn't react to that, central banks shouldn't react to a one-off increase in the price level. But you know, inflation's 7% heading up to 8%, consumers are beginning to think more about inflation, you're seeing companies raise wages multiple times a year. There's a real concern about a self-sustaining inflationary cycle.

And the Fed cannot ignore that right now. So it's going to make Powell's testimony tomorrow and the next few months of Fed policy really, really interesting to watch.

BRIAN CHEUNG: Yeah, an important point you bring up there. If there's one thing we've learned from the Powell-led Fed, it's that they're not going to tie themselves to the pull of an FRB, USD, SGE model, or anything like that. But Nick Timiraos again, the "Wall Street Journal" Chief Economics Correspondent and the author of "Trillion Dollar Triage." Again, you can get that today. It's good to see you. And I'll see you in that next Zoom room or Webex room on March 16. Thanks, Nick.