The Federal Reserve’s Response to the Covid-19 Pandemic Explained
Though these measures can often be separated, or labeled, as Wall street vs Main street, the truth is these steps are crucial for every American, even if their impact is several steps removed from a stimulus check in the mail. If these major Fed programs and tools are interrupted it can cause the mass closure of businesses, large and small, that are already struggling to stay open and maintain their workforces. We view the quick implementation of all these economic safeguards as a sign of government cooperation and the aggregation of lessons learned from past financial crises, both recent and historical. As Ben Bernanke, the former Fed chair, said (in so many words) during the Great Recession: We didn’t set out to save Wall Street, but in order to save Main Street, we had to save Wall Street. Below, we explain just some of the steps the Federal Reserve and the US Treasury Department have taken so far to stem the fallout from Covid-19. Though some of these measures are complex, they are essential to all areas of the economy and ultimately, our client’s investments.
Near-Zero Interest Rates
Federal funds rate: The Fed has cut its target for the federal funds rate, the rate banks pay to borrow from each other overnight, by a total of 1.5 percentage points since March 3, bringing it down to a range of 0 percent to 0.25 percent. The federal funds rate is a benchmark for other short-term rates, and affects longer-term rates, so this move is aimed at lowering the cost of borrowing on mortgages, auto loans, home equity loans, and other loans.
Forward guidance: Using a tool honed during the Great Recession of 2007-2009, the Fed offered forward guidance on the future path of its key interest rate, signaling that rates will likely remain low.
Supporting Financial Market Functioning
Securities purchases (QE): The Fed initially said it would buy at least $500 billion in Treasury securities and $200 billion in government-guaranteed mortgage-backed securities, but, on March 23, it made the purchases open-ended.
Lending to securities firms: Through the Primary Dealer Credit Facility (PDCF), the Fed will offer low interest rate loans to 24 large financial institutions known as primary dealers to preserve liquidity for all investors.
Backstopping money market mutual funds: The Fed has re-launched the crisis-era Money Market Mutual Fund Liquidity Facility (MMLF), “will assist money market funds in meeting demands for redemptions by households and other investors, enhancing overall market functioning and credit provision to the broader economy.
Encouraging Banks to Lend
Direct lending to banks: The Fed lowered the rate that it charges banks for loans from its discount window by 1.5 percentage points, from 1.75 percent to 0.25 percent, lower than during the Great Recession. The cash allows banks to keep functioning: depositors can continue to withdraw money, and the banks can make new loans.
Temporarily relaxing regulatory requirements: The Fed is encouraging banks-both the largest banks and community banks-to dip into their regulatory capital and liquidity buffers, so they can increase lending during the downturn.
Supporting Corporations and Businesses
Direct lending to major corporate employers: In a significant step beyond its crisis-era programs, which focused mainly on financial market functioning, the Fed on March 23 established two new facilities to support highly rated U.S. corporations. The Primary Market Corporate Credit Facility (PMCCF) allows the Fed to lend directly to corporations by buying new bond issuances and providing loans.
Commercial Paper Funding Facility CPFF): Through the CPFF, another reinstated crisis-era program, the Fed buys commercial paper, lending directly to corporations and supporting a $1.2 trillion market in which firms finance day-to-day operations.
Supporting loans to small-and mid-sized businesses:
The Fed on April 9 announced the Main Street New Loan Facility and the Main Street Expanded Loan Facility. Through banks, the two programs offer four-year loans to U.S. businesses with up to 10,000 employees or revenues of less than $2.5 billion. Loan repayments can be deferred for one year.
Supporting Households and Consumers
The Fed on March 23 restarted the crisis-era Term Asset-Backed Securities Loan Facility (TALF). Through this facility, the Fed supports lending to households, consumers, and small businesses by lending to holders of asset-backed securities collateralized by new loans. These loans include student loans, auto loans, credit card loans, and loans guaranteed by the SBA.
Supporting State and Municipal Borrowing
Direct lending to municipal governments: During the 2007-2009 financial crisis, the Fed resisted backstopping municipal and state borrowing, seeing that as the responsibility of the Administration and Congress. But, in the current crisis, the Fed on April 9 established the Municipal Liquidity Facility to lend directly to state and local governments.
Supporting municipal bond liquidity: The Fed is also using two of its credit facilities to backstop munis. It expanded the eligible collateral for the MMLF to include highly rated municipal debt.