If a hegemon is one nation above other nations empowered to make the rules of the game, what is an institution that is supposedly independent yet part of the United States government that does the same thing? The answer is the Federal Reserve. In most democracies when the pandemic began, the government did not have the broad ability to halt the rapidly deteriorating economic situation. A vacuum of leadership developed in the United States, and the central bank stepped in to fill the void.
The power of the Federal Reserve is based on its credibility, which partly derives from its independent status. While it reports to Congress, it does not rely on the legislative branch for funding, and it earns money from its transactions. The president, with the consent of the Senate, appoints the chairman, yet the term does not coincide with the president. The central bank is not allowed to be involved overseas or have offices based outside the United States. Its main job is the dual mandate to protect the stability of the dollar and to maximize employment with monetary policy.
Neither of those have anything to do with supporting the economies of other countries amid a crisis. But you can stretch the mandate to mean that in a world where a crisis as devastating as the coronavirus happens, supporting other economies is also protecting the stability of the dollar and maintaining employment in the United States. This is now what the Federal Reserve has been doing in the downturn by taking international responsibility and filling the void where no other institution exists.
The Federal Reserve started making dollars available to the central banks of other countries. Since the majority of world trade is done in dollars, the Federal Reserve had to make dollars easily available, as it received foreign currencies in exchange and charged interest on these transactions. It has also cut the rate it charges on those interactions with the central banks in numerous countries and extended their maturity. This program was used amid the Great Recession, however, it was nowhere near this level.
So the Federal Reserve went far beyond its dual mandate, acting while the administration and Congress dithered. As Chairman Jerome Powell stated about preventing the economy from diving into free fall, “When it comes to lending, we are not going to run out of ammunition.” Over two months, the Federal Reserve sent more than $2 trillion into the domestic economy, twice the amount that it used after the collapse of Lehman Brothers.
It is as though the mandate of maximizing employment gives the Federal Reserve the power to take any monetary action to fill that power vacuum left by the government. Take the Metropolitan Transportation Authority of New York. The financial situation swiftly declined as the pandemic caused ridership to drop near zero. A bill had been introduced in Congress to help states fund such problems, however, it became a political football with the Senate majority leader refusing to support it. But as Congress was bitterly fighting, the Federal Reserve allowed states to designate their mass transit systems so they can raise funds by selling debt to the central bank.
There is no doubt that the coronavirus would have caused much greater hardship if it were not for the extraordinary actions taken by the Federal Reserve. But what does that mean for the future? In the United States, it becomes very easy during any emergency for democratic institutions to give power to a supposedly neutral institution. Yet who gets voted out if the central bank makes a bad decision or is involved in a scandal?
On the world stage, the Federal Reserve takes on a totally undefined role. There has never been an international conference that has granted it this power, and there are no outside shareholders in the Federal Reserve. For the veiled area of central banks, it is assumed that if a crisis occurs, the Federal Reserve will act forthrightly. It will be the global fireman putting out fires that the common citizen does not understand, which is what it has done this time. But what if it does not act as wisely next time?
Edward Goldberg is an assistant professor at New York University Center for Global Affairs where he teaches international political economy. He is an author whose latest book “Why Globalization Works for America: How Nationalist Trade Policies Are Destroying Our Country” is out in summer.