Monetary policy U. S.

Summary of the U. S. COVID-19 economic relief packages

This is a sister note to the one that I published yesterday. There are two streams of economic reliefs: fiscal policies by the U. S. government, and monetary policies by the Fed. This note covers the monetary policies that the Fed has taken so far to protect the economy through maximizing employment, and to maintain financial stability domestically as well as globally.

Mar 3: cut federal funds rate by 50 bps to 1 – 1.25% at an emergent FOMC meeting.

Mar 15: cut federal funds rate by 100 bps to 0 – 0.25% at a regular FOMC meeting.

Mar 15: increase credit flow via discount window, and by reducing restrictions on bank capital and liquidity buffer, and by decreasing bank reserve ratios. This makes banks having more cash to lend out.

Mar 15 and 19: enhance and establish the provision of liquidity via U. S. dollar liquidity swap line with many foreign central banks. This helps global financial stability especially in the U. S. dollar market.

March 17 and 18, the Fed invoked Federal Reserve Bank Law Section 13(3) to apply emergent monetary measures. These two measures allow the central bank to use less quality collaterals to provide extensive and broader lending.

  • Mar 17: establish a Primary Dealer Credit Facility, or PDCF. The facility will allow primary dealers to support smooth market functioning and facilitate the availability of credit to businesses households. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment grade debt securities, including commercial paper and municipal bonds, and a broad range of equity securities.
  • Mar 18: establish Money Market Mutual Fund Liquidity Facility, or MMLF. The Fed will make loans available to eligible financial institutions secured by high-quality assets purchased by the financial institution from money market mutual funds.

Mar 23: initiate QE infinity – The Fed “will continue to purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions.” This is to flood the market with cash by buying bonds and mortgage backed securities.

Apr 9: provide up to $2.3T in loans to support the economy including the government’s fiscal initiatives. The new lending programs are aimed at commercial loans, mortgages, cities, states and companies. Details are

  • to supply liquidity to financial institutions that participate the Small Businesses Administration’s Paycheck Protection Program.
  • to purchase up to $600B in loans of small and mid-sized businesses
  • through capital market, to expand the size and scope of the Primary and Secondary Market Corporate Credit Facilities and the Term Asset-Backed Securities Loan Facility (TALF). The total will be up to $850B.
  • to establish Municipal Liquidity Facility that will offer up to $500B in lending to states and municipalities.

The total liquidity provided by the Fed is already more than $2T so far. Depending on the depth of the on-going coronavirus pandemic, the Fed could further expand the size and scope of its many programs. Many people thought Fed’s balance sheet could be increased by $5T as a result of this turbulence.

If the U. S. government pursues infrastructure program, it is expected the Fed will provide much of the fund required.

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