By The Washington Post · Heather Long, Jeff Stein · NATIONAL, BUSINESS, US-GLOBAL-MARKETS
While Fed economists began to run through scenarios of what could go wrong, senior White House officials both privately and publicly maintained that there was virtually no reason for concern. On Feb. 25, as Powell began meeting with staffers to prepare contingency plans, White House economic adviser Larry Kudlow said the U.S. had an almost "airtight" containment on the outbreak, a day after urging investors to "buy these dips" in the stock market.
The coronavirus is threatening the economy, with supply chains stalling, tourism falling sharply and the oil markets plunging 30% on Sunday night. Yet U.S. economic leaders are divided about how to respond, with Powell and his Trump administration counterparts, Kudlow and Treasury Secretary Steven Mnuchin, differing in their assessments of the risks as well as the policies best suited to address the economic threat.
Not only do the Fed and the White House appear to disagree on the severity of the potential economic hit, they're at odds about the power of interest rate cuts to stem the panic. Trump and Kudlow have emphasized the Fed's power to cut interest rates as the primary economic response to the crisis.
Although they have moved to cut rates, Powell and others at the Fed have suggested that they have only a limited role to play, with some Fed officials arguing that spending or tax stimulus from Congress and the president would have a greater effect.
The White House hasn't, however, shown consistent support for such stimulus, with Trump and his top advisers showing daylight among themselves. Although the president has raised the idea of a payroll tax cut to put more money in people's pockets, Kudlow has rejected such broad-based efforts and on Friday called for more targeted relief for specific industries. Others in the White House are advocating tax reductions on investment income, a longtime conservative wish, or tariff relief with China, but these ideas have not moved forward. Some White House officials have said they would consider more dramatic action, if necessary.
This discord, described in new detail from interviews with more than 15 current and former Trump administration officials and Fed leaders, threatens to undermine how Trump's team handles its gravest economic challenge to date. The Washington Post spoke to many of these sources on the condition of anonymity to share candid assessments.
A White House spokesman declined to comment.
Unlike the seasoned economists and Wall Street players who dealt with the 2008 financial panic such as Lawrence Summers, Timothy Geithner and Ben Bernanke, or the 1999 "Committee to Save the World" that quelled the Asian financial crisis, today's top policymakers have less expertise steering the government through a crisis.
"There is not any sense yet of a coherent American economic strategy for responding to what's clearly a very important set of developments," said Summers, a former treasury secretary who played a key role in financial crises in the Clinton and Obama administrations. "From the outside, things seem amateurish in terms of international coordination, cooperation with international financial institutions, and the presentation of a joint front by treasury and the Fed."
During the Asian financial crisis, Summers said, it was not unusual for the Treasury to talk to Fed Chair Alan Greenspan multiple times a day along with the International Monetary Fund and the World Bank.
Today there is a more awkward relationship among the key players. Trump distrusts many global institutions, and he frequently criticizes Powell on Twitter, even calling him an "enemy" in August. These repeated attacks on the Fed alarm many who have steered the economy in the past.
"Throughout both the Bush and Obama administrations, both the president and the treasury secretary left monetary policy alone," said Bernanke, a former Fed chair who led the central bank during the 2008 financial crisis. "It's worrisome that the president seems to think cutting interest rates is the first line of defense."
Wall Street's wild roller coaster ride in recent days shows how worried investors are that the health crisis is turning into an economic crisis. Travel and airline companies have been getting hammered. U.S. stocks are in a correction. Riskier corporate debt is showing signs of trouble as investors rush to exit weaker companies. And employers are canceling events and telling workers to stay home. The market is implying a 90% chance of a recession, JPMorgan told clients, though most experts still put the odds around a coin toss, which is high.
Looming over the widening economic fallout lies the 2020 presidential reelection campaign - on which Trump has long pinned the performance of the economy and the stock market.
"A sitting president who has a recession at the time of their election doesn't stand a good shot at getting reelected," said Scott Minerd, global chief investment officer at Guggenheim Partners.
On Feb. 28, as the market closed after its worst week since the 2008 financial crisis, calls grew for the Fed to slash rates. Powell, a lawyer and former private equity investor, spent the weekend of Feb. 28 calling and emailing Fed leaders and central bank chiefs from around the world, except for a brief dinner Saturday with an old friend. As the weekend ended, Fed leaders came to the conclusion that the risk was too great not to act.
The diverging approaches between the Fed and the White House were on display Monday. As Fed leaders met by video conference that evening to vote on a rate cut, the White House called various Wall Street leaders. White House officials said the most important step the government can take is cutting interest rates. A person on one call who spoke on the condition of anonymity said it was "not confidence-inspiring."
"A lot of their thinking is short-term right now," said one former senior White House official. "We are almost going to need another fiscal response, regardless of what the White House is saying right now. The likelihood has to be growing each week."
The Fed moved decisively, enacting on March 3 the largest emergency cut to interest rates since 2008 in a bid to boost confidence and prevent a worst-case scenario.
"By going to 50 basis points, what the Fed did [Tuesday] was to say, 'We did our thing. Stop looking at us,' " said Tony Fratto, a Treasury Department official for President George W. Bush. "They tried taking themselves off the field."
Rather than stem the panic in the markets, the cut appeared to accelerate it. Stocks fell significantly on Tuesday. Critics said Powell's sudden response confirmed investors' fears of a growing emergency. And Trump immediately fumed that the Fed was not doing enough to prop up markets and backstop the economy.
Wall Street and business leaders are looking to the Treasury Department for leadership and aid, but its response is hindered by so many vacancies in top positions, including the assistant secretary for financial markets, several former staff members said.
At the Treasury, Mnuchin acts as the bridge between all the key players. Kudlow and Powell have talked only once this year, said people familiar with their schedules. In contrast, the treasury secretary meets weekly with the Fed chair for breakfast or lunch, a precedent that has been in place for years.
The solid working relationship between Powell and Mnuchin helped drive a coordinated phone call Tuesday among all the central bank leaders and finance ministers of the Group of Seven economies. Yet the group stopped short of announcing concrete action. And the Fed made its own rate cut announcement a few hours later.
Mnuchin praised the Fed's rate cut, and Powell was careful to tell reporters that it's "not our role to give advice to the fiscal policymakers."
Powell's constant mantra is to stay in his lane and focus solely on what the Fed can do.
Many economists say it's increasingly clear that more fiscal response is needed. A fiscal response could include cutting business taxes or strengthening sick leave. But some former Treasury officials worry that Mnuchin's approach has been too hands-off.
Other industrialized nations, especially those hit harder by the coronavirus, such as Italy and South Korea, have moved swiftly to stimulate their economies with tax cuts and other measures. But Kudlow, a longtime supply-side conservative and former aide to President Ronald Reagan, has suggested that such stimulus is ineffective - a marked contrast from how Democrats and Republicans have dealt with previous economic crises.
Kudlow built a career on TV in part by telling investors not to overreact to short-term financial panics. He used the same phrase ― "buy these dips" ― on his 2014 podcast when markets careened during the Ebola crisis under President Barack Obama. Kudlow believes he was vindicated last summer when he urged calm amid fear that tensions with China would spark a recession.
But his approach has caused internal frustration. Health officials, even in the Trump administration, are angered that he played down the risks of coronavirus. Since January, public health officials have been urging others in the administration not to use the word "contained" in reference to the virus. They were alarmed when Kudlow said the virus was "contained" during a CNBC interview on Feb. 25.
Kudlow's posture also pits him against his boss. Trump has tweeted about supporting a payroll tax cut to help businesses weather the coronavirus. But Trump has done little to develop the idea into concrete details, and aides to senior Republicans in Congress say they have not been in contact with the White House about preparing a package.
Many in Congress largely respect Mnuchin and think he has been a good partner in negotiations. Yet he is considered often unwilling to stick his neck out against Trump, a former White House official said.
"Larry's real skill is in how he does not make the president feel like Larry is the smartest guy in the room - and that's where others have badly failed. He has the benefit of being the happy warrior," said another former senior White House insider. "But he's not as malleable as Mnuchin. If Trump digs in, you don't see a lot of pushback from Mnuchin."
Yet, on Friday, Kudlow opened the door for a White House response. He suggested that some "targeted" relief might be needed for companies hit the hardest, especially airlines and hospitality operations, and possibly some sort of relief for Americans in cities such as Seattle, which Kudlow said is a "place you would avoid for now."
And with new coronavirus cases popping up in the United States over the weekend and more broadly around the world, the uncertainty about the global economy continues.
"The possibility of a downward spiral is quite large," said Adam Posen, president of the Peterson Institute for International Economics. "It will be devastating for small business and lower-wage workers throughout the economy. It's just bizarre there's not more action."
Fed officials have opened the door to greater measures. Boston Fed President Eric Rosengren said Friday that it would be wise to "allow the central bank to purchase a broader range of securities or assets." His comments were widely considered an indication that the central bank might be willing to step in and purchase troubled corporate debt similar to how the Fed bought troubled mortgage securities during the 2008 financial crisis.
Rosengren's idea would require a law change by Congress, and many people think it is unwise to have the central bank heavily intervene in the private market. But the fact that it even came up is an indication of just how much the Fed is preparing for worst-case scenarios.