'I had hoped the virus would be contained in China': An inside look at the Fed's historic fight to save the U.S. economy

By Jeffry Bartash

From Super Bowl banter to coronavirus fears, new 2020 transcripts detail the Fed's pandemic response

Federal Reserve Chair Jerome Powell (left) and then-Treasury Secretary Janet Yellen, seen here in 2021, had their hands full during the COVID-19 pandemic.

Senior Federal Reserve officials were in a good mood in early 2020: The U.S. economy was humming, inflation was low, and the Kansas City Chiefs were preparing to play in their first Super Bowl in 49 years.

"The U.S. economy begins the year in a good place," said then-Fed Vice Chair Richard Clarida in late January.

As danger spread on the other side of the world, Fed officials placed imaginary bets and joked about who would win the big game. It was the subject of much banter and laughter in their first meeting of the year, newly released transcripts of the central bank's 2020 meetings show.

New York Fed President John Williams proved the most farsighted of all in his football - and economic - forecasts.

"The last time the Chiefs won a Super Bowl, which was a half-century ago, the economy fell immediately into a recession," Williams counseled.

The Patrick Mahomes-led Chief won - and a few months later, the U.S. plunged into a recession.

Yet the recession was not for the reason Williams expected; rather, it was due to the worst pandemic in a century. Williams didn't even mention the COVID-19 virus brewing on the other side of the world when it came time for him to talk.

Far side of the world

Fed officials weren't entirely oblivious to the growing threat, the newly released transcripts show.

Staff economists and a smattering of Fed governors and bank presidents mentioned a "dangerous virus in China," as San Francisco Fed chief Mary Daly put it.

Another top official said the coronavirus "is a new threat that is a big wild card right now."

Still, the overriding consensus was that the virus would be contained and have little or no effect on the U.S. economy.

Fast forward two months later, and Fed officials realized they had been wrong - badly.

But they acted quickly.

'Forceful' action

On March 2, 2020 - a Sunday when most central bankers would usually be relaxing at home - top Fed officials held a rare emergency meeting by phone.

The result: They voted unanimously to cut their key short-term U.S. interest rate by half of a percentage point, despite some reluctance.

The goal was to send a message to investors on Wall Street and around the world that the Fed would do whatever it could to protect the global economy.

"I had hoped - and I'm sure we all had hoped - that the virus would be contained in China," Fed Chair Jerome Powell told his colleagues. "I believe that this committee should take such action today in a forceful manner."

But it wasn't enough.

Just two weeks later, with much of the U.S. and global economies shutting down, the Fed took perhaps its biggest step ever. In another emergency meeting by phone, top officials slashed the Fed's benchmark rate to 0% for the first time since the global financial crisis of 2008-09.

That wasn't all. The Fed also began to buy hundreds of billions of dollars in Treasurys to stabilize a wobbling global financial system. It also started buying up hoards of mortgage-backed securities to drive down borrowing costs for American households.

"This is a very difficult time for our nation - actually, for the world," Powell said at the unscheduled March 15, 2020 meeting. "The level of uncertainty and fear is unlike anything I can recall from my lifetime except, perhaps, the 9/11 attacks."

His vice chair, Clarida, agreed. "Life and economic activity are being disrupted to a degree not seen since at least 2001 and perhaps not since 1918," he said, referring to the deadly worldwide outbreak of the Spanish flu after World War I.

Among those pushing for a dramatic Fed response was Neel Kaskari, the president of the Minneapolis Fed and a top Treasury official during the 2008 financial crisis. Kashkari had always lamented how Washington didn't do enough to help the economy during the financial crisis - an insufficient response that, in his view, led to a slow and painful recovery.

"We were always slow, we were always too little, and we were always timid," Kashkari said at the emergency March 15 meeting. "We should be erring on the side of doing too much, not doing too little."

Economists widely agree that the Fed's actions helped save the day in 2020 - but did it go too far?

Critics argue the Fed kept interest rates too low for too long, helping to spark a huge surge in U.S. inflation in 2022 and 2023 that was the worst in 40 years.

Fed transcripts are only released five years after the fact, so the latest batch only covers 2020. By the end of that year, none of the top officials could see the the surge in inflation coming. They expected inflation to rise about 2% or even less - well below the eventual postpandemic peak of 7.2%.

-Jeffry Bartash

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