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Fed Faces Pressure to Do More as Virus Demands a Response

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WASHINGTON — Over a frenetic two weeks, as the coronavirus has upended American capitalism and changed every aspect of life, the Federal Reserve has taken drastic steps to keep money flowing throughout the financial system.

It has cut interest rates to near-zero, introduced a huge bond-buying program, revamped a crisis-era emergency lending program to calm the market big businesses use to raise cash, and enacted major backstops in an attempt to restore order to Wall Street’s volatile inner workings.

Late Wednesday evening, the Fed said it would offer emergency loans to money market mutual funds, backed by $10 billion from the Treasury Department, following a similar lending program for banks also established this week.

Such efforts could keep credit flowing. But calls abound for the central bank to do even more in the days and weeks ahead.

Speaker Nancy Pelosi has joined other Democrats in urging the Fed chair, Jerome H. Powell, to support state and local governments. The central bank can legally buy short-term local bonds, but that has long been seen as a nonstarter, in part because propping up some localities and not others could have serious political ramifications. Ben S. Bernanke and Janet L. Yellen, Mr. Powell’s predecessors, have said that the central bank should consider asking Congress to allow it to buy corporate debt — a suggestion that, until recently, was anathema.

And Fed officials could help get cash to desperate businesses and workers. Already, the central bank is urging the banks it oversees to go easy on their customers, working with them if they fall behind on bills. With backing from the Treasury Department, it could also support lending to companies and households — potentially going beyond its 2008 playbook, and pushing the central bank’s authority to untested extremes.

“The underlying power that the Federal Reserve has is massive,” said Peter Conti-Brown, a lawyer and leading Fed historian at the University of Pennsylvania’s Wharton School. “Politically, I think the Fed has so far walked a careful path,” he continued, but “that path is getting to the end.”

As the Fed takes center stage, it assumes a hefty risk. Blurring the lines between fiscal and monetary policy — bailing out nonfinancial companies or state and local governments — would lead to blowback down the road.

More than a decade after the financial crisis, at a time when experts agree that the central bank’s 2008 efforts helped prevent the United States from experiencing a second Great Depression, the Fed is still regularly blasted for its efforts to rescue banks.

But the coronavirus crisis is fundamentally different. The financial crisis was a growth slowdown that imprudent risk-taking magnified into a painful economic shock. This time, a real-world shock is instead spilling into the financial system and breaking its gears.

“It wasn’t bad behavior — it’s a virus,” said Patrick T. Harker, the president of the Federal Reserve Bank of Philadelphia. “Look at the streets — it’s affecting every single American immediately. This is just such a different scenario.”

So far, the Fed has used its firepower to keep loans cheap and prevent the financial system from melting down. That has been a challenge as companies grab for cash and banks and investment funds try to keep money at the ready.

But as the meltdown enters a new stage — closed dentist offices will struggle to make payroll and rent payments, quarantined chefs will fall behind on mortgage payments, and state and local governments will struggle to find the cash to fund relief efforts — the Fed could play a more immediate role in bailing out Main Street.

At the most extreme, some economists have suggested that the Fed could help send people money. David Beckworth, a senior research fellow at George Mason University’s Mercatus Center, has suggested that Congress should allow the Fed to create a so-called standing fiscal facility, which would allow it to deposit funds in the Treasury in exchange for Treasury bonds. The money would then be sent straight to Americans via the Internal Revenue Service, and would continue to be deployed until the economy was growing at a rate the Fed targeted using a monetary policy rule.

Such a rules-based, Fed-supervised approach would be more effective than one run by Congress, Mr. Beckworth said.

“You want an institution that is both nimble like the Fed but also careful like the Fed,” he said. “The Fed is not out of ammunition,” he added, “and this is what it would take to show that.”

More practically, the Fed could build on is postcrisis playbook.

The central bank this week opened the taps on its emergency lending facilities, declaring that the coronavirus was posing “unusual and exigent” circumstances and swooping in to backstop the market for commercial paper, short-term notes big businesses use to raise cash, as well as money market funds, vehicles that millions of Americans use to save money. Both programs were also used during the 2008 financial crisis to keep credit flowing.

The Fed cannot take on significant credit risk, but the Treasury Department has agreed to take the first $10 billion in losses in the central bank’s commercial paper and money fund facilities. Treasury is tapping a fund that has additional money that is not earmarked remaining, creating room for more programs.

While it cannot bail out individual companies, the Fed could use that money to get loans into the hands of broad groups of institutions. During the financial crisis, the central bank used several emergency programs to support lending to households and businesses, including one that bought up securities backed by such loans.

The Bank of England has a “funding for lending” scheme that provides low-cost funding to banks to support small businesses, and the Fed could explore a similar effort.

It could also legally buy short-term municipal debt to help local governments fund themselves, per the Federal Reserve Act. That would amount to government finance, though, something central banks around the world avoid at all costs because it can require picking favorites and carries immense political downsides.

Ms. Pelosi as well as Representatives Rashida Tlaib and Maxine Waters — all Democratic lawmakers — have suggested that the central bank could help states and localities.

“State and local governments may soon face funding pressures and need assistance as they address this public health emergency,” Ms. Waters said in a statement on Monday. “I call on the Fed to re-evaluate its response and work creatively to address the needs of everyday Americans.”

And the central bank could ask Congress to allow it to buy additional securities, like corporate debt, through its mass bond purchases. That could enable it to prop up a flailing market and provide direct support to American companies, but it could also be criticized as a bailout for corporate America.

Asking lawmakers to reopen the Federal Reserve Act would invite partisan tinkering in the Fed’s structure and threaten its prized independence. Even so, Mr. Bernanke and Ms. Yellen, who led the Fed through the darkest days of the 2008 financial crisis, suggested in an opinion piece published in The Financial Times on Wednesday that such a move might be necessary.

“The Fed could ask Congress for the authority to buy limited amounts of investment-grade corporate debt,” they wrote, because doing so might “help restart that part of the corporate debt market, which is under significant stress.”

Eric S. Rosengren, the president of the Federal Reserve Bank of Boston, had already raised such an idea, though Mr. Powell said on Sunday that policymakers had no plans to ask Congress for new buying powers at this point.

Mr. Bernanke and Ms. Yellen underlined that the Fed could not solve all of the coronavirus problems in the country, but said it should continue serving as a first line of defense — even if that requires going beyond the 2008 programs.

“To avoid permanent damage from the virus-induced downturn, it is important to ensure that credit is available for otherwise sound borrowers who face a temporary period of low income or revenues,” they wrote.

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