WASHINGTON—To meet the dislocation the coronavirus pandemic unleashed on the economy, Federal Reserve Chairman Jerome Powell has mobilized the central bank to move faster and farther than ever before.
In the short weeks since financial markets seized up, Mr. Powell has placed the Fed on wartime footing. He took up the central bank’s playbook from the 2008 financial crisis and then some—cutting rates to near zero, purchasing huge quantities of government debt and, breaking a taboo, lending to American businesses.
The pace left no time for the deliberative policy process the Fed prefers. Officials can spend weeks tweaking a few words in a heavily parsed statement. This time, the team saw the need for immediate action.
When Fed officials met Sunday morning, March 15, infections were rising along the East Coast. Mr. Powell and his colleagues left empty seats in between them at the central bank’s oval boardroom table, made of Honduran mahogany and granite. Two screens suspended from the two-story boardroom ceiling showed 12 reserve bank presidents and others who dialed in remotely.
They made decisions in four hours that would usually take two days.
“We learned our lesson. Moving early and aggressively is really important,” said Patrick Harker, president of the Federal Reserve Bank of Philadelphia. “We needed to get the markets functioning.”
It’s another transformation of the Fed’s traditional role in American finance, as banks’ lender of last resort, in a time of crisis. Congress has encouraged the Fed, working with the Treasury Department, to invent new ways to stem the damage, pushing the Fed into fiscal policy choices it has long preferred that elected officials decide.
Mr. Powell and his colleagues have rolled out new programs at all hours of the day to keep markets functioning and otherwise-solvent businesses afloat. They are preparing to facilitate lower-cost lending for cities and states. Adding to the challenge, they have done much of this from their homes, as a health precaution, instead of from a Fed war room.
The current situation has no precedent in postwar America. Economic activity has been deliberately halted, the equivalent of a medically induced coma, to slow the virus. That means the Fed, rather than trying to kick-start growth, is instead focused on preventing credit from drying up to preserve the economy’s capacity to produce once activity resumes.
The big challenge for the Fed is that so much about the economy’s future remains out of its control. If the virus overwhelms the Fed’s power to preserve businesses’ access to money, the result could be defaults and bankruptcies that turn a severe, synchronized global recession into a full-bore depression.
The Fed’s actions appear to have helped core pillars of the financial market to function for now. The danger is that new programs, even those launched very quickly, won’t be ready in time to help revenue-starved businesses already burning through cash. Designing new programs also raises fundamental questions about which firms should get help and on what terms.
Many economists now expect the U.S. economy to experience a severe recession. Goldman Sachs economists see it contracting at an annualized rate of 24% during the April-to-June quarter. Morgan Stanley sees the unemployment rate rising to 12.8% this spring—the highest on records that date to 1948.
The economic outlook is more dire than after the 2008 financial crisis, making it easier for Mr. Powell to cast aside the nagging concerns that his predecessors faced as the housing bubble burst.
Back then, officials were reluctant to cut rates as quickly because they weren’t sure how bad the housing bust might get. Some were concerned that untested tools to purchase government debt might fuel excessive inflation. Others worried about the effect near-zero rates would have on markets.
Now, Fed officials have lent freely and purchased enormous amounts of debt, likely swelling its balance sheet to $6 trillion this week from $4.2 trillion in late February.
Officials unveiled six new lending facilities, lending not only to banks, its primary role, but also to businesses. As part of its rescue package, Congress kicked in $454 billion so that the Fed can take on more risky lending, with programs expected to support trillions of dollars of borrowing.
With credit markets beginning to rally last Monday, Mr. Powell fielded a phone call from President Trump, who earlier in the month had disparaged the Fed as “pathetic,” the latest in a yearlong string of insults over his desire for lower rates, even when the economy was on a stronger footing.
“I said, ‘Jerome, good job. You really did it,’ ” Mr. Trump recounted later to reporters. “I was proud of him. That took courage.”
Mr. Powell, who goes by Jay, said little in response.
People who work with Mr. Powell, a 67-year-old lawyer who isn’t an economist, say he has carried a calm demeanor throughout. That, they say, reflects his comfort with the team inside the central bank, the relationships he has cultivated across Washington and his experience studying the economy and financial markets during a career in private equity and a stint in the Treasury Department during George H.W. Bush’s presidency.
From his home office in the Maryland suburbs, Mr. Powell fields early-morning calls with central-bank counterparts abroad and late-night consultations with Treasury Secretary Steven Mnuchin. He relies on a specially configured laptop to access his Bloomberg data terminal, Wall Street’s ubiquitous trading-desk tool.
Mr. Powell has made clear that even with interest rates at zero, the Fed’s firepower is limitless. “When it comes to lending, we are not going to run out of ammunition,” he said Thursday in an interview on NBC’s “Today” show. “That doesn’t happen.”
Just as Ben Bernanke, a leading scholar of the Great Depression, was praised by economists and his peers in government for being the right person to lead the Fed during the 2008 crisis, current and former colleagues say Mr. Powell is proving more decisive than more academic-minded colleagues in a job that is becoming more political.
His feel for markets “is more second nature, and that gives him a greater level of confidence,” said William Dudley, a former president of the New York Fed who served alongside Mr. Powell for six years. “If you’re not as confident you tend to want to get more evidence before you move. He’s responding very aggressively, and that’s appropriate.”
When Mr. Powell traveled to Riyadh for a Feb. 22 summit of Group of 20 ministers and central bankers, the virus was tearing through Italy, Iran and South Korea, and markets had started to turn from record highs. Mr. Powell began emailing staff back in Washington that their policy plans would need to change.
U.S. school closures and travel restrictions that would crimp the economy, until then a far-off hypothetical, were quickly becoming a reasonable base case.
By the end of that week, with markets down more than 14% from their highs of one week earlier, Mr. Powell issued a rare statement under his name signaling rate cuts were likely. Fed officials met March 2 to agree to the first emergency rate cut in 12 years.
By March 11, the uncertainty about economic disruptions panicked markets. Financial institutions began selling U.S. government securities, typically considered a haven, to raise cash after markets for corporate debt, mortgage-backed securities and other assets began seizing up.
Mr. Powell concluded the Fed couldn’t wait until its regularly scheduled interest-rate policy meeting the following week to act. Fed officials decided to move up the policy meeting by two days to March 15. In between, the Fed accelerated previously planned purchases of Treasury securities in a bid to prevent strains from worsening.
A key ally, Richard Clarida, a monetary economist who became vice chairman in 2018 after serving as a longtime adviser to bond giant Pacific Investment Management Co., dialed in from the New York Fed’s lower Manhattan headquarters after driving from his home in Connecticut.
Messrs. Clarida and Powell, both mild-mannered professionals who formed the nucleus of the Fed’s leadership team, had built a strong relationship during their first year working together and cultivated the respect of the Fed’s staff. At the central bank’s holiday party last December inside the marble atrium, Mr. Clarida sang “What the World Needs Now Is Love” with Mr. Powell playing guitar.
That day, Fed officials received a briefing from Lorie Logan, the manager of the Fed’s portfolio. Ms. Logan, a 21-year veteran of the bank, had been at the New York Fed on Sept. 11, 2001. When the World Trade Center towers collapsed a few blocks from the New York Fed’s fortresslike headquarters, she led a few colleagues to check on the markets, working upstairs while others hunkered down in the basement.
Now Ms. Logan ran through the range of distress: market volatility at highs, short-term funding markets seizing up, businesses unable to borrow in debt markets, Wall Street dealers flooded with transactions, hedge funds unwinding bond trades that became unprofitable when volatility soared, fueling even more volatility.
Particularly troubling was a widening gap between the higher prices for Treasury securities that were issued more recently than so-called off-the-run securities issued previously. The Treasury market sits at the foundation of the financial market, providing a backbone for everything from hedging trades to conducting monetary policy, and certain types of deteriorating trading conditions in this normally robust market signaled much bigger cracks forming.
Officials agreed to what were once considered last-resort measures—the cut in the benchmark rate to near zero and open-ended purchases of Treasury and mortgage securities to bolster confidence and unclog markets. They also encouraged banks to tap the so-called discount window for emergency loans by reducing the rate on those loans to 0.25%, a record low, and by extending terms to 90 days.
“You can see us working through different solutions and finding the one that we think really will work, and then acting quite vigorously, quite aggressively, tonight to implement it,” Mr. Powell told reporters on a conference call.
The Fed announced its actions at 5 p.m. eastern, before Asian markets opened. But they tumbled. The selloffs moved on to Europe and, when U.S. markets opened, the stress spread to other assets.
Mr. Powell then deployed the rest of Mr. Bernanke’s crisis plan. Mr. Bernanke had broken the seal on a little-used but powerful provision—section 13(3) of the Fed’s charter—that allows the Fed to lend broadly during a crisis. Mr. Powell now kept that section tabbed on his computer screen.
In rapid-fire succession, the Fed redeployed those facilities. On March 17, the Fed unveiled at 10 a.m. a program to backstop markets for short-term corporate IOUs called commercial paper and another at 6 p.m. to allow approved dealers of U.S. government debt to borrow against stocks and bonds.
Still, the next day, money-market funds were besieged, unable to easily sell holdings of commercial paper to meet investor demands for cash. At 11:30 p.m., the Fed and Treasury announced a program to backstop prime money-market funds. Late that same evening, the European Central Bank had announced a new debt-purchase program to alleviate rising yields on certain countries’ government debt.
“Midnight announcements tell you there was an urgency to put a safety net under the system,” said Torsten Slok, chief economist at Deutsche Bank Securities.
In the midst of that frenetic week, Mr. Powell started to work from home, as did many other Fed officials. Mr. Powell’s youngest daughter, months from graduating from Princeton, had returned home after classes were suspended.
The financial bleeding spread to the mortgage market, forcing sales of government-backed bonds by real-estate investment trusts. Officials, who had previously said the Fed would buy at least $700 billion in government and mortgage bonds over months, now said it would purchase them within days. It is on track to have bought twice that by the end of this week.
At 8 a.m. Monday, March 23, Fed officials unveiled their latest package: open-ended bond purchases and three new lending facilities for business debt markets.
In moving so aggressively to keep the economy from being overwhelmed by the coronavirus, Mr. Powell has also transformed the Fed’s role to being the lender of last resort not only to banks, but to businesses. To fend off criticism the lending favors big business, Mr. Powell is planning a new facility to help smaller firms.
The Fed’s task now is to get these programs working quickly. “We are moving aggressively in our thinking in how we help Main Street,” said the Philadelphia Fed’s Mr. Harker. “We’re all seeing it right now walking around our neighborhoods. These are challenging times.”
Write to Nick Timiraos at nick.timiraos@wsj.com