Question

In: Economics

As the U.S. economy underwent a historic shutdown due to the pandemic, the Federal Reserve was...

As the U.S. economy underwent a historic shutdown due to the pandemic, the Federal Reserve was uncharacteristically bold and swift in pushing out initiatives, facilities, and decisions that have monumental and unusual impacts on the economy, many of these actions go beyond the usual mandate of monetary policy. Please do a little research (including going to the Fed's website) and itemize these actions, along with a brief statement of what each of them does; then add a statement about what you think could be any downside of these actions.

Note: Answer has to be in 250-300 words. please do not copy and paste. try to write in your own words.

Solutions

Expert Solution

It could get a bit lengthy but it is important to understanding detail what steps have been taken by the Fed to combat the slowdown in the economy. You can pick and chose steps you feel are important to create the 250-300 words answer. The answer seems to be intimidating but believe me this is the best indepth explanation you can get..

Below is the detailed account with dates about what actions have been taken by the Fed on the monetary as well as fiscal side:

The U.S. Federal Reserve has taken a number of significant measures to provide monetary stimulus:

On March 3, 2020, it made an unscheduled cut to the fed funds rate. It slashed rates by 0.5%, double the amount of its recent moves, and the largest cut since the 2008 financial crisis.

On March 12, the Fed massively expanded reverse repo operations, adding $1.5 trillion of liquidity to the banking system. This means that the Fed extended the amount of short term loans to banks to keep money markets (markets for very short term loans) stable and allow banks to have more cash on hand.

On March 15,

  • It cut interest rates by a full percentage point, down to a range of 0.00% to 0.25%. This dropped the fed funds rate to the level it was before the rate increases starting in 2015.
  • The Federal Reserve restarted quantitative easing with the purchase of $500 billion in treasuries and $200 billion in mortgage-backed securities.
  • The Fed lowered the interest rate on the discount window by 1.5% to 0.25%. The discount window is another way the Fed lends to banks.
  • The Fed, as part of a transition to a different type of bank reserves system, lowered reserve requirements to zero, effective March 26. This transition to a new system was already happening but the Fed says this will also help to loosen credit markets.
  • The Fed encouraged banks to use their capital and liquidity buffers to lend, which are funds kept in reserve for tough time.

On March 16, the Federal Reserve increased reverse repo operations by another $500 billion.

On March 17,

  • The Commercial Paper Funding Facility (CPFF) which allows the Fed to create a corporation which can purchase commercial paper, short-term, unsecured loans made by businesses for everyday expenses. The Treasury authorized up to $10 billion from the Treasury's Exchange Stabilization Fund (ESF) to help cover loan losses incurred under this program.9 The program will end on March 17, 2021 unless it is extended. This is actually a re-launch of a program originally launched during the Great Recession, when many businesses were hurt when liquidity in the commercial paper markets dried up.
  • The Primary Dealer Credit Facility (PDCF). Starting March 20, the PDCF will offer short-term loans to banks secured by collateral such as municipal bonds or investment-grade corporate debt.

On March 18, the Federal Reserve announced the Money Market Mutual Fund Liquidity Facility (MMLF). This is a new program, to lend money to banks so they can purchase assets from money market funds, like with the CPFF, the Treasury is offering up to $10 billion to cover loan losses the Fed incurs from the program. In addition, lending under the program will not effect bank capital requirements. The program is scheduled to run until the end of September.1 This is similar to the AMLF program launched in 2008 after the collapse of Lehman Brothers caused a major money market fund to fail.

On March 23, the Federal Reserve released another raft of monetary stimulus including:

  • Expanding its asset purchases of both treasuries and mortgage backed securities by an additional $625 billion this week, and committed to continue purchasing however many assets are needed to "support the smooth functioning of markets"1
  • Expanding the scope of what Mortgage-backed securities it will purchase, now including agency commercial mortgage-backed securities. This means they will buy mortgages backed by government agencies like Fannie Mae for commercial properties like offices.1
  • Establishing the Primary Market Corporate Credit Facility (PMCCF) to buy bonds and loans banks give to large businesses.1
  • Establishing the Secondary Market Corporate Credit Facility (SMCCF) to purchase bonds and bond ETFs to provide liquidity for the corporate bond market.
  • Re-establishing the Term Asset-Backed Securities Loan Facility (TALF) to purchase asset-backed securities backed by things such as auto loans, student loans, or small business loans.19
  • Each of these special purpose vehicles will run until September 30, 2020 unless extended, and the Treasury department will make an initial equity investment of $10 billion in each program from the ESF. In total they will provide up to $300 billion in new financing.
  • Expanding the MMLF to include more different types of money market funds.
  • Expanding the CPFF to include a wider variety of commercial paper assets, and a reduction in the interest rates for loans from the CPFF.
  • It announced that it will soon be rolling out the a "Main Street Business lending Program'" to support small and medium businesses.

On March 31st, amid other technical changes, the Federal Reserve lowered capital requirements for banks

On April 6, the Fed announced that it will establish another lending facility to help provide financing to expand the Small Business Administration's loan program under the stimulus bill.

On April 9, it provided details for its loan program and announced a slew of others which it says will extend up to $2.3 trillion in loans. The programs include the following:

  • Its small business loan program, the Paycheck Protection Program Facility, will extend loans to banks who are loaning money to small businesses with up to 500 employees under the Paycheck Protection Program under the CARES Act.
  • The Municipal Liquidity Facility, which purchase up to $500 billion in municipal bonds form states, counties, and cities around the country. The Treasury Department put up $35 billion in initial equity investment from the ESV. 2
  • The Main Street Lending Program, which will lend up to $600 billion to businesses affected by the COVID-19 pandemic with up to 10,000 employees or up to $2.5 billion. The treasury department will put up $75 billion in initial equity.
  • It expanded the range of bonds that the PMCCF and SMCCF can purchase to include bonds with lower credit ratings as well as expanding the range of assets the TALF program can purchase.
  • It also expanded the size of the PMCCF and SMCCF. They can now purchase up to $750 billion in bonds, up from $200 billion.This came with an expansion of the Treasury Department initial equity investment from $20 billion to $75 billion.

Above are the steps taken by the Fwd in the entire month of March to deal with the COVID19 situation. But we should remember that this crisis is not a financial one in act the financial mess is an effect of a global health pandemic. The fed alone cannot deal with the situation. the fed can utmost is to stimulate the markets to generate demand and supply. However as we know that most of the businesses have been closed and the one's open are not working at 100% capacity. The Oil has fallen to $20/barrel is a good indicator. The amount of trade happening is very limited. In this kind of a scenario it is very difficult to bring the economy back on track. As the demand and supply has dried up the economic activity has come to a grinding halt. For eg we cannot go to a restaurant to have a meal, we cannot go for a movie or cannot go to a amusement park, the hotels are vacant and the tourists are nowhere to be seen. There are many more things we cannot do and the businesses which support them have collapsed. The only way economic activity can be revived is by easing some of the restrictions to allow some economic activity. as we see the unemployment jobless claims have gone up to historic highs and the govt will not be sustain this for long as all its revenue sources have dried up including taxes. Hence I think even after these major steps taken by the Fed it is for the Govt to fight this crisis and provide the economy with supply chain relief and ease the restrictions when the situation improves.


Related Solutions

In 2009, the U.S. economy was in a severe recession. The Federal Reserve had lowered the...
In 2009, the U.S. economy was in a severe recession. The Federal Reserve had lowered the federal funds rate to about 0 percent, but still wanted to stimulate the economy more. The inflation rate in 2009 was about –1%, but households’ and businesses’ inflation expectations for the upcoming year were higher and positive, about 1.5%. a) First, do households’ and businesses’ investment demand depend on the ex ante or ex post real interest rate? Briefly explain why. b) Draw an...
Due to the Coronavirus Pandemic, the Federal Reserve lowered the short-term interest rates. We are also...
Due to the Coronavirus Pandemic, the Federal Reserve lowered the short-term interest rates. We are also expected to have a huge reduction in our aggregate output temporarily. Describe how these two factors will affect the profits of commercial banks and the various risks that they have. Explain your answer clearly.
The pandemic has resulted in a historic decline in output in the Australian and global economy....
The pandemic has resulted in a historic decline in output in the Australian and global economy. Australia’s GDP declined by 7% in the June quarter. This is the largest economic fall since the 1930s (RBA 2020). i. Should the Reserve Bank of Australia (RBA) implement a Contractionary Monetary Policy OR an Expansionary Monetary Policy? ii. Explain how the selected policy (i) would influence household consumption, private investment, and net exports (X-M) to correct the Australian economy. ( 100-125 words) Part...
Discussion Board Post: How can the Federal Reserve Bank intervention stimulate the U.S. economy?
Discussion Board Post: How can the Federal Reserve Bank intervention stimulate the U.S. economy?
If the Federal Reserve wants to increase the money supply in the economy using Reserve Requirement...
If the Federal Reserve wants to increase the money supply in the economy using Reserve Requirement (RR), what does it do?
To contract the economy with open market operation, the federal reserve will
To contract the economy with open market operation, the federal reserve will
Due to the pandemic of COVID-19 in the U.S., the price of U.S. crude oil contracts...
Due to the pandemic of COVID-19 in the U.S., the price of U.S. crude oil contracts for May 2020 delivery has turned negative for the first time in history. For instance, West Texas Intermediate (WTI) crude oil contracts for May fell 301.97 percent to -$36.90 per barrel. State your understanding of this phenomenon and carefully explain your arguments with economic tools and/or economic intuition, including the aspects of 1.   demand for oil by households; 2.   demand for oil by non-household...
Briefly explain the role of the central bank (Federal Reserve) in the economy.
Briefly explain the role of the central bank (Federal Reserve) in the economy.
Visit the Meeting calendars, statements, and minutes section of the U.S. Federal Reserve Federal Open Market...
Visit the Meeting calendars, statements, and minutes section of the U.S. Federal Reserve Federal Open Market Committee. If this page does not load, type "FOMC meetings" in the "Search" box located on the U.S. Federal Reserve home page. Next, select a date from any year and click on the “Statement” link. Respond to the following questions by writing 1-2 paragraphs for each item: What action did the Committee take on this date? What comments (if any) were made with respect...
There are some politicians in the U.S. Congress that believe the Federal Reserve should be less...
There are some politicians in the U.S. Congress that believe the Federal Reserve should be less independent from the U.S. government. Some say this would be a disaster for the U.S. economy. Do you agree or not with those who seek to reduce central bank independence? Why? Explain your answer in a comprehensive way, providing any data available and making reference to studies available on this issue.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT