The Federal Reserve’s Fight Against COVID-19
The COVID-19 pandemic has taken a toll on the U.S. economy. In order to combat the economic effects of it, the Federal Reserve has implemented numerous inflationary policies.
A quick background on the Federal Reserve
The Federal Reserve is the United States’ central bank, in control of their monetary policies. Contrary to popular belief, this central bank is private, independent from the government. However, it is the bank of the United States government and regulates financial institutions. As of federalreserve.gov, it boosts their economy through five functions:
- “Conducts the nation’s monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy;”
- “Promotes the stability of the financial system and seeks to minimize and contain systemic risks through active monitoring and engagement in the U.S. and abroad;”
- “Promotes the safety and soundness of individual financial institutions and monitors their impact on the financial system as a whole;”
- “Fosters payment and settlement system safety and efficiency through services to the banking industry and the U.S. government that facilitate U.S.-dollar transactions and payments;”
- “Promotes consumer protection and community development through consumer-focused supervision and examination, research and analysis of emerging consumer issues and trends, community economic development activities, and the administration of consumer laws and regulations.”
The most common monetary policy they use is interest rates. By decreasing interest rates, money effectively becomes cheaper as it becomes easier to take out loans. This increases consumer spending, which boosts the economy.
What are some of the many inflationary policies the Federal Reserve implemented since the spread of COVID-19?
On March 15, the Federal Reserve cut the federal funds rates to 0%. As most consumer interest rates follow the federal funds rate, this drop allowed for money to be more cheap, and easily accessible to those interested in taking out a loan.
Quantitative Easing was introduced in the financial crisis, as a way of ending the previous recession. It’s where the central bank is able to inject money into the economy, by a large-scale purchasing of long-term securities such as government bonds. Doing so allows institutions to unload their assets for cash. Starting from March 15, the federal reserve restarted their QE program, and as of March 23, allowed for the purchase of commercial mortgage-backed securities.
The U.S. dollar is a world currency, heavily used across the globe. As a result, swap lines are used. Starting from March 19, with central bank liquidity swaps, central banks can swap their currency for the USD, later to be undone. These swap lines are “designed to improve liquidity conditions in dollar funding markets in the United States and abroad by providing foreign central banks with the capacity to deliver U.S. dollar funding to institutions in their jurisdictions during times of market stress.” Currently, the countries that can access these swap lines are Canada, England, Europe, Japan, Switzerland, with the Federal Reserve extending it to Australia, Brazil, Denmark, Mexico, New Zealand, Norway, Singapore, South Korea, and Sweden.
Primary Market Corporate Credit Facility (PMCCF)
By lending money to special purpose vehicles (SPV), the Federal Reserve can buy original corporate debt from companies through corporate bonds.
Secondary Market Corporate Credit Facility (SMCCF)
By lending money to SPV’s, the Federal Reserve can buy existing corporate debt through corporate bonds and bond ETF’s on the secondary market.
Both the PMCCF and SMCCF started on March 23, 2020. The buying of the corporate debt will be managed by BlackRock.
Term Asset-Backed Securities Loan Facility (TALF)
TALF is a SPV that the Federal Reserve lends money to. Starting from March 23, this program issued asset-backed securities. Backed by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration, this program aims to increase consumer spending.
Municipal Liquidity Facility (MLF)
Not to be confused with Money Market Mutual Fund Liquidity Facility (MMLF).
Starting from May 15, the Federal Reserve is purchasing up to $500 billion short term municipal notes to help state and local governments. To be eligible, the U.S. counties must have at least 500,000 residents, and U.S. cities must have at least 250,00 residents.
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