To Increase the Quantity of Money in theã¢â‚¬â€¹ Economy, the Federal Reserve Can

Editor's Note:

Jeffrey Cheng, Tyler Powell, and David Skidmore contributed to earlier versions of this post.

The coronavirus crisis in the United States—and the associated concern closures, event cancellations, and work-from-home policies—triggered a deep economic downturn. The precipitous wrinkle and deep incertitude about the grade of the virus and economy sparked a "dash for cash"—a desire to hold deposits and only the almost liquid assets—that disrupted financial markets and threatened to brand a dire state of affairs much worse. The Federal Reserve stepped in with a broad assortment of deportment to keep credit flowing to limit the economic damage from the pandemic. These included large purchases of U.S. government and mortgage-backed securities and lending to support households, employers, financial marketplace participants, and land and local governments. "We are deploying these lending powers to an unprecedented extent [and] … will go along to utilize these powers forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery," Jerome Powell, chair of the Federal Reserve Board of Governors, said in April 2020. In that same month, Powell discussed the Fed's goals during a webinar at the Brookings' Hutchins Center on Fiscal and Monetary Policy. This post summarizes the Fed's actions though the end of 2021.

HOW DID THE FED SUPPORT THE U.South. Economic system AND Fiscal MARKETS?

Easing Monetary Policy

Federal funds charge per unit: The Fed cut its target for the federal funds rate, the rate banks pay to borrow from each other overnight, by a full of i.v percentage points at its meetings on March three and March 15, 2020. These cuts lowered the funds rate to a range of 0% to 0.25%. The federal funds rate is a criterion for other short-term rates, and also affects longer-term rates, so this move was aimed at supporting spending by lowering the toll of borrowing for households and businesses.
Forward guidance: Using a tool honed during the Great Recession of 2007-09, the Fed offered forrard guidance on the futurity path of interest rates. Initially, information technology said that information technology would go along rates most zero "until it is confident that the economy has weathered contempo events and is on track to achieve its maximum employment and price stability goals." In September 2020, reflecting the Fed's new monetary policy framework, it strengthened that guidance, maxim that rates would remain low "until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to two pct and is on track to moderately exceed 2 percent for some fourth dimension." By the stop of 2021, inflation was well above the Fed's 2% target and labor markets were nearing the Fed's "maximum employment" target. At its December 2022 meeting, the Fed's policy-making commission, the Federal Open up Market Committee (FOMC), signaled that nearly of its members expected to raise interest rates in 3 ane-quarter pct point moves in 2022.
Quantitative easing (QE): The Fed resumed purchasing massive amounts of debt securities, a key tool it employed during the Peachy Recession. Responding to the astute dysfunction of the Treasury and mortgage-backed securities (MBS) markets after the outbreak of COVID-nineteen, the Fed's actions initially aimed to restore shine functioning to these markets, which play a critical role in the flow of credit to the broader economy equally benchmarks and sources of liquidity. On March fifteen, 2020, the Fed shifted the objective of QE to supporting the economy. Information technology said that it would buy at least $500 billion in Treasury securities and $200 billion in government-guaranteed mortgage-backed securities over "the coming months." On March 23, 2020, information technology made the purchases open-ended, proverb it would buy securities "in the amounts needed to support polish market performance and effective transmission of monetary policy to broader financial conditions," expanding the stated purpose of the bail buying to include bolstering the economy. In June 2020, the Fed set its rate of purchases to at to the lowest degree $80 billion a month in Treasuries and $twoscore billion in residential and commercial mortgage-backed securities until further notice. The Fed updated its guidance in Dec 2022 to betoken it would deadening these purchases in one case the economy had fabricated "substantial further progress" toward the Fed'due south goals of maximum employment and price stability. In November 2021, judging that examination had been met, the Fed began tapering its pace of asset purchases past $10 billion in Treasuries and $5 billion in MBS each month. At the subsequent FOMC meeting in Dec 2021, the Fed doubled its speed of tapering, reducing its bond purchases by $20 billion in Treasuries and $10 billion in MBS each month.

Supporting Financial Markets

Lending to securities firms: Through the Chief Dealer Credit Facility (PDCF), a plan revived from the global financial crisis, the Fed offered depression interest charge per unit loans up to xc days to 24 large financial institutions known as primary dealers. The dealers provided the Fed with various securities as collateral, including commercial paper and municipal bonds. The goal was to help these dealers continue to play their part in keeping credit markets performance during a time of stress. Early in the pandemic, institutions and individuals were inclined to avoid risky assets and hoard cash, and dealers encountered barriers to financing the ascent inventories of securities they accumulated as they made markets. To re-institute the PDCF, the Fed had to obtain the approval of the Treasury Secretarial assistant to invoke its emergency lending authority under Section thirteen(3) of the Federal Reserve Deed for the commencement time since the 2007-09 crisis. The program expired on March 31, 2021.
Backstopping money market mutual funds: The Fed too re-launched the crisis-era Money Market Mutual Fund Liquidity Facility (MMLF). This facility lent to banks against collateral they purchased from prime number coin market funds, which invest in Treasury securities and corporate short-term IOUs known as commercial newspaper. At the onset of COVID-xix, investors, questioning the value of the private securities these funds held, withdrew from prime money marketplace funds en masse. To meet these outflows, funds attempted to sell their securities, but market disruptions made it difficult to find buyers for fifty-fifty high-quality and shorter-maturity securities. These attempts to sell the securities only drove prices lower (in a "burn down sale") and closed off markets that businesses rely on to raise funds. In response, the Fed set up the MMLF to "assist money marketplace funds in meeting demands for redemptions by households and other investors, enhancing overall market functioning and credit provision to the broader economy." The Fed invoked Section 13(3) and obtained permission to administer the plan from Treasury, which provided $10 billion from its Substitution Stabilization Fund to cover potential losses. Given express usage, the MMLF expired on March 31, 2021.
Repo operations: The Fed vastly expanded the scope of its repurchase agreement (repo) operations to funnel greenbacks to coin markets. The repo market is where firms borrow and lend cash and securities short-term, usually overnight. Since disruptions in the repo market place tin can bear upon the federal funds rate, the Fed's repo operations made cash available to master dealers in commutation for Treasury and other authorities-backed securities. Before coronavirus turmoil hit the market, the Fed was offering $100 billion in overnight repo and $twenty billion in two-calendar week repo. Throughout the pandemic, the Fed significantly expanded the programme—both in the amounts offered and the length of the loans. In July 2021, the Fed established a permanent Standing Repo Facility to backstop money markets during times of stress.
Foreign and International Budgetary Authorities (FIMA) Repo Facility: Sales of U.S. Treasury securities by foreigners who wanted dollars added to strains in money markets. To ensure foreigners had admission to dollar funding without selling Treasuries in the market, the Fed in July 2022 established a new repo facility called FIMA that offers dollar funding to the considerable number of foreign primal banks that do not have established bandy lines with the Fed. The Fed makes overnight dollar loans to these key banks, taking Treasury securities as collateral. The central banks can so lend dollars to their domestic financial institutions.
International swap lines: Using some other tool that was of import during the global fiscal crisis, the Fed made U.Due south. dollars available to strange central banks to ameliorate the liquidity of global dollar funding markets and to assist those authorities support their domestic banks who needed to raise dollar funding. In exchange, the Fed received foreign currencies and charged interest on the swaps. For the v fundamental banks that have permanent swap lines with the Fed—Canada, England, the Eurozone, Nippon, and Switzerland—the Fed lowered its involvement rate and extended the maturity of the swaps. Information technology also provided temporary swap lines to the primal banks of Australia, Brazil, Denmark, Mexico, New Zealand, Norway, Singapore, South Korea, and Sweden. In June 2021, the Fed extended these temporary swaps until December 31, 2021.

Encouraging Banks to Lend

Direct lending to banks: The Fed lowered the charge per unit that it charges banks for loans from its discount window by 2 percentage points, from 2.25% to 0.25%, lower than during the Groovy Recession. These loans are typically overnight—significant that they are taken out at the end of one mean solar day and repaid the following morn—just the Fed extended the terms to 90 days. At the discount window, banks pledge a wide diversity of collateral (securities, loans, etc.) to the Fed in exchange for greenbacks, so the Fed takes little (or no) risk in making these loans. The cash allows banks to keep functioning, since depositors can go along to withdraw coin and the banks can make new loans. However, banks are sometimes reluctant to borrow from the discount window because they fear that if word leaks out, markets and others will think they are in trouble. To counter this stigma, eight big banks agreed to borrow from the discount window in March 2020.
Temporarily relaxing regulatory requirements: The Fed encouraged banks—both the largest banks and customs banks—to dip into their regulatory capital and liquidity buffers to increase lending during the pandemic. Reforms instituted after the financial crisis require banks to concord additional loss-arresting capital to prevent futurity failures and bailouts. However, these reforms besides include provisions that permit banks to employ their capital buffers to support lending in downturns. The Fed supported this lending through a technical modify to its TLAC (total loss-absorbing capacity) requirement—which includes capital and long-term debt—to gradually stage in restrictions associated with shortfalls in TLAC. (To preserve capital, big banks also suspended buybacks of their shares.) The Fed also eliminated banks' reserve requirement—the percent of deposits that banks must concur every bit reserves to meet greenbacks demand—though this was largely irrelevant considering banks held far more the required reserves. The Fed restricted dividends and share buybacks of bank holding companies throughout the pandemic, but lifted these restrictions constructive June 30, 2021, for nearly firms based on stress test results. These stress tests showed that banks had ample uppercase to back up lending even if the economy performed far weaker than anticipated.

Supporting Corporations and Businesses

Direct lending to major corporate employers: In a significant step beyond its crunch-era programs, which focused primarily on fiscal market place functioning, the Fed established 2 new facilities to support the flow of credit to U.S. corporations on March 23, 2020. The Main Market Corporate Credit Facility (PMCCF) immune the Fed to lend direct to corporations past buying new bond problems and providing loans. Borrowers could defer involvement and main payments for at least the first six months so that they had greenbacks to pay employees and suppliers (simply they could non pay dividends or buy back stock). And, nether the new Secondary Market Corporate Credit Facility (SMCCF), the Fed could purchase existing corporate bonds as well as exchange-traded funds investing in investment-grade corporate bonds. An orderly secondary marketplace was seen as helping businesses access new credit in the primary market. These facilities allowed "companies access to credit so that they are ameliorate able to maintain business operations and capacity during the period of dislocations related to the pandemic," the Fed said. Initially supporting $100 billion in new financing, the Fed announced on April ix, 2020, that the facilities would be increased to backstop a combined $750 billion of corporate debt. And, as with previous facilities, the Fed invoked Section xiii(3) of the Federal Reserve Act and received permission from the U.S. Treasury, which provided $75 billion from its Exchange Stabilization Fund to embrace potential losses. Late in 2020, afterwards the recovery from the pandemic was under way, and despite the Fed'south misgivings, Treasury Secretary Steven Mnuchin decided that the final bond and loan purchases for the corporate credit facilities would take place no later than December 31, 2020. The Fed objected to the cutoff, preferring to keep the facilities available until in that location was a firmer balls that fiscal weather would not deteriorate once more. The Fed said on June two, 2021 that it would gradually sell off its $thirteen.vii billion portfolio of corporate bonds, which information technology completed in December 2021.
Commercial Paper Funding Facility (CPFF): Commercial paper is a $1.2 trillion marketplace in which firms event unsecured short-term debt to finance their day-to-day operations. Through the CPFF, another reinstated crisis-era program, the Fed bought commercial paper, substantially lending directly to corporations for up to iii months at a rate one to 2 percentage points college than overnight lending rates. "By eliminating much of the gamble that eligible issuers will not be able to repay investors past rolling over their maturing commercial paper obligations, this facility should encourage investors to once again engage in term lending in the commercial paper market," the Fed said. "An improved commercial newspaper market volition enhance the ability of businesses to maintain employment and investment equally the nation deals with the coronavirus outbreak." As with other non-banking concern lending facilities, the Fed invoked Section thirteen(iii) and received permission from the U.S. Treasury, which put $ten billion into the CPFF to embrace whatsoever losses. The Commercial Paper Funding Facility lapsed on March 31, 2021.
Supporting loans to small- and mid-sized businesses: The Fed'due south Chief Street Lending Program, announced on April 9, 2020, aimed to support businesses also large for the Pocket-size Business Administration's Paycheck Protection Programme (PPP) and too small-scale for the Fed's two corporate credit facilities. The program was subsequently expanded and broadened to include more potential borrowers. Through three facilities—the New Loans Facility, Expanded Loans Facility, and Priority Loans Facility—the Fed was prepared to fund up to $600 billion in v-year loans. Businesses with up to fifteen,000 employees or upwards to $5 billion in annual revenue could participate. In June 2020, the Fed lowered the minimum loan size for New Loans and Priority Loans, increased the maximum for all facilities, and extended the repayment period. As with other facilities, the Fed invoked Department 13(three) and received permission from the U.S. Treasury, which through the CARES Act put $75 billion into the iii Main Street Programs to cover losses. Borrowers are subject to restrictions on stock buybacks, dividends, and executive compensation. (See here for additional operational details.) Secretary Mnuchin, once more over the Fed's objections, decided that the Main Street facility would stop taking loan submissions on December 14, 2020, equally it was gear up to make its final purchases by January 8, 2021. The Fed also established a Paycheck Protection Plan Liquidity Facility that facilitated loans made under the PPP. Banks lending to small businesses could infringe from the facility using PPP loans every bit collateral. The PPP Liquidity Facility airtight on July 30, 2021.
Supporting loans to non-profit institutions: In July 2020, the Fed expanded the Main Street Lending Program to not-profits, including hospitals, schools, and social service organizations that were in sound financial condition before the pandemic. Borrowers needed at least ten employees and endowments of no more than than $3 billion, amongst other eligibility conditions. The loans were for 5 years, only payment of principal was deferred for the kickoff 2 years. As with loans to businesses, lenders retained 5 percent of the loans. This addition to the Main Street program lapsed with the rest of the facility on Jan 8, 2021.

Supporting Households and Consumers

Term Asset-Backed Securities Loan Facility (TALF): Through this facility, reestablished on March 23, 2020, the Fed supported households, consumers, and pocket-size businesses by lending to holders of asset-backed securities collateralized by new loans. These loans included student loans, auto loans, credit card loans, and loans guaranteed by the SBA. In a pace beyond the crisis-era program, the Fed expanded eligible collateral to include existing commercial mortgage-backed securities and newly issued collateralized loan obligations of the highest quality. Like the programs supporting corporate lending, the Fed said the TALF would initially support up to $100 billion in new credit. To restart it, the Fed invoked Section xiii(three) and received permission from the Treasury, which allocated $10 billion from the Commutation Stabilization Fund to finance the program. Without an extension, this facility stopped making purchases on December 31, 2020, at Secretary Mnuchin'due south society.

Supporting Country and Municipal Borrowing

Directly lending to land and municipal governments: During the 2007-09 financial crisis, the Fed resisted backstopping municipal and state borrowing, seeing that as the responsibility of the administration and Congress. But in this crunch, the Fed lent directly to land and local governments through the Municipal Liquidity Facility, which was created on April ix, 2020. The Fed expanded the list of eligible borrowers on Apr 27 and June 3, 2020. The municipal bond market was nether enormous stress in March 2020, and state and municipal governments plant it increasingly difficult to borrow equally they battled COVID-nineteen. The Fed's facility offered loans to U.S. states, including the District of Columbia, counties with at least 500,000 residents, and cities with at least 250,000 residents. Through the program, the Fed made $500 billion available to authorities entities that had investment-grade credit ratings as of Apr 8, 2020, in exchange for notes tied to future taxation revenues with maturities of less than three years. In June 2020, Illinois became the first authorities entity to tap the facility. Under changes announced that calendar month, the Fed allowed governors in states with cities and counties that did not see the population threshold to designate up to two localities to participate. Governors were also able to designate 2 acquirement bail issuers—airports, toll facilities, utilities, public transit—to be eligible. The New York Metropolitan Transportation Authority (MTA) took advantage of this provision in August, borrowing $451 million from the facility. The Fed invoked Section 13(3) with the approval of the U.S. Treasury, which used the CARES Act to provide $35 billion to embrace whatsoever potential losses. (See here for additional details.) The Municipal Liquidity Facility stopped purchases on Dec 31, 2020 when it lost Treasury back up, per Secretary Mnuchin'south determination. The New York MTA secured a 2nd loan from the facility on December 10, 2020, borrowing $ii.nine billion earlier lending halted.
Supporting municipal bail liquidity: The Fed also used two of its credit facilities to backstop muni markets. Information technology expanded the eligible collateral for the MMLF to include municipal variable-rate need notes and highly rated municipal debt with maturities of up to 12 months. The Fed also expanded the eligible collateral of the CPFF to include loftier-quality commercial paper backed by revenue enhancement-exempt state and municipal securities. These steps immune banks to funnel cash into the municipal debt market, where stress had been building due to a lack of liquidity.

WHY WERE THE FED'S ACTIONS Of import?

Steps taken by federal, land, and local officials to mitigate the spread of the virus limited economic activity, leading to a sudden and deep recession with millions of jobs lost. The Fed'south actions ensured that credit continued to flow to households and businesses, preventing financial market place disruptions from intensifying the economic harm.

In many other countries, most credit flows through the banking organisation. In the U.S., a substantial amount of credit flows through capital markets, then the Fed worked to keep them functioning as smoothly as possible. As one of our colleagues, Don Kohn, former Federal Reserve Vice Chair, said in March 2020:

"The Treasury marketplace in particular is the foundation for trading in many other securities markets in the U.S. and around the world; if information technology's disrupted, the operation of every market will be impaired. The Fed's purchase of securities is explicitly aimed at improving the functioning of the Treasury and MBS markets, where market liquidity had been well beneath par in recent days."

Merely targeting the Treasury market proved insufficient, given the severity of the COVID recession and the disruption of flows of credit beyond other fiscal markets. And then the Fed intervened directly in the markets for corporate and municipal debt to ensure that central economic actors could raise funds to pay workers and avoid bankruptcies. These measures aimed to help businesses survive the crisis and resume hiring and product when the pandemic ebbed.

Banks likewise needed support to keep credit flowing. When financial markets are clogged, firms tend to depict on banking concern lines of credit, which can lead banks to pull back on lending or selling Treasury and other securities. The Fed supplied unlimited liquidity to fiscal institutions so they could meet credit drawdowns and make new loans to businesses and households feeling fiscal strains.

The authors did non receive financial back up from any business firm or person for this article or from any firm or person with a financial or political interest in this article. They are not currently an officers, directors, or board members of whatsoever organization with a financial or political involvement in this article. Prior to his consulting work for Brookings, Dave Skidmore was employed by the Board of Governors of the Federal Reserve System.

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Source: https://www.brookings.edu/research/fed-response-to-covid19/

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