March 15, 2020
The Federal Reserve (Fed) took four immediate actions in reaction to economic risks from the coronavirus (COVID-19) outbreak:

  • The Fed cut the federal funds target rate by a full percentage point to effectively zero, or a range of 0.00% to 0.25%.
  • The Fed will restart the bond buying program—known as quantitative easing (QE)—to purchase at least $700 billion in coming months, along with fully reinvesting any maturities of current bond
  • The Fed coordinated with five key central banks to provide liquidity for global banks and markets, using US dollar liquidity swap
  • For US banks and markets, the Fed took several additional steps to provide liquidity, including lowering discount window rates, encouraging banks to tap their capital and liquidity buffers, and eliminating reserve requirements.

These are large and aggressive monetary actions, and we agree that bold moves are warranted given the speed of the global economic deterioration that has occurred in the past weeks.

What Happened

The Fed made a series of aggressive monetary moves on the afternoon of Sunday, March 15, unleashing several tools last used to address the Great Recession. It slashed the federal funds target rate by a full percentage point (1.00%) to a range of 0.00% to 0.25%. That effectively takes rates to zero, a level last seen in December 2015 and having started in December 2008 during the Great Recession.

The Fed will ramp up quantitative easing (QE) by purchasing at least $700 billion of bonds in coming months, split by $500 billion in US treasuries and remaining $200 billion in mortgage-backed securities (MBS). It will also fully reinvest any maturities of current bond holdings, which it had been restricting for some time. This will expand its balance sheet.

The Fed coordinated with five key central banks—the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank—to use US dollar liquidity swap arrangements to provide liquidity for global banks and markets. Similar swap lines were used extensively from 2007 to February 2010, and revisited several times since, such as during the euro crisis in 2010.

Lastly, the Fed took several additional steps to provide ample liquidity for US banks and markets. It lowered discount window rates, encouraging banks to tap their capital and liquidity buffers, and eliminating reserve requirements. These moves are meant to stabilize primary markets—such as US Treasuries and municipal bonds—that are not functioning properly. Moreover, these actions buttress funding in short-term markets, such as money markets and commercial paper, asset-backed commercial paper, repurchase agreements, securities lending, etc. Many of these markets and sub-markets experienced pricing dislocations during the past couple of weeks.

Key Points from the Powell Press Conference

During his conference call with members of the press, Chair Powell stated that the rate-setting committee held a call today in lieu of the regular two-day meeting scheduled for this coming Tuesday and Wednesday.

In his prepared remarks, Chair Powell made clear that while the US economy entered this period on solid footing, the rapid economic deterioration globally due to the COVID-19 situation posed evolving risks to economic activity.

When asked about negative policy rates, Powell said that the Fed did not see negative policy rates as appropriate for the US, having just undertaken an extensive study of possible tools to use during crises.

Lastly, Chair Powell acknowledged that monetary policy can only do so much. Certainly, while the Fed’s actions would help markets function properly and ensure the general flow of credit to businesses and individuals, fiscal stimulus would be much more useful for Main Street. Some of the proposed fiscal policy measures, which are in the works by Congress and the White House, include paid sick leave, enhanced jobless benefits, and increased food assistance, which would help support hourly workers disproportionately impacted by the fallout from COVID-19 shutdowns. Also, there is said to be more funding for Medicare, which would help states deal with the increased health care costs.

Bottom Line

These are large and aggressive monetary actions, and we agree that bold moves were warranted given the speed of the global economic deterioration that has occurred in the past weeks. These moves cannot stop the spread of the coronavirus nor avoid a recession, but they can hasten the recovery. That said, the Fed appears ready to do whatever it takes.

In our view, these actions should support markets and promote proper functioning. Moreover, lower interest rates and easier financial conditions should make it much easier for consumers and companies to weather the storm, and should boost growth once activity does eventually resume.

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