Federal Reserve Policy in the Pandemic

FEDERAL RESERVE POLICY IN THE PANDEMIC Stephen G. Cecchetti 2 3 J U LY 2 0 2 0

The Shift in Federal Reserve Policy • Traditional central bank tools • Interest rates • Asset purchases • Lending

• Crisis management tools

• Emergency lending to solvent banks and nonbanks • Buy and sell securities (and accept them as collateral when lending) • Lend directly to the nonfinancial sector

Stephen G. Cecchetti

2

Federal Reserve Balance Sheet: Assets Jul 15

Change since Mar 11

Treasurys

$4,253 bn

+ 1,728 bn

MBS

$1,948 bn

+ 576 bn

$ 155 bn

+ 155 bn

$ 93 bn

+$93 bn

U.S. Dollar Swaps* Loans

* Swaps peaked at $449bn in late May

F.12

Source: Federal Reserve Board, H.4.1 release.

Stephen G. Cecchetti

3

Federal Reserve Balance Sheet: Liabilities Jul 15

F.13

Change since Mar 11

Currency

$1,982 bn

+163 bn

Reserves

$2,733 bn

$953 bn

Government

$1,740 bn

+1,368 bn

Source: Federal Reserve Board, H.4.1 release.

Stephen G. Cecchetti

4

Federal Reserve’s Wartime Interventions Revived from 2007-09:

New in 2020:

1.

2.

3.

4.

5.

6.

7.

8. Municipal bonds 9. Corporate bonds (2 programs) 10.Main street loans (5 programs) 11.Paycheck protection program

U.S. dollar swaps Treasury bonds Mortgage-backed securities Commercial paper Money market mutual funds Primary dealers Asset-backed securities

Stephen G. Cecchetti

5

Federal Reserve Wartime Interventions Liquidity to intermediaries

Program Objective

Maintain market function

Ensure credit availability

U.S. dollar swaps to central banks Treasury bond purchase

Treasury bond purchase

Lending to banks to purchase money market mutual fund assets

MBS purchases

MBS purchases

Commercial paper purchases

Commercial paper purchases

Lending to primary dealers

Municipal bond purchases

Asset-backed securities lending Corporate bond purchases

Corporate bond purchases Main street lending to nonfin Lending to banks making loans to the paycheck protection program

Yellow shading indicates program is providing credit to the nonfinancial sector.

Stephen G. Cecchetti

6

Summary of Federal Reserve Credit Programs Initial Announcement Mar 17 Mar 17 Mar 18 Mar 23 Mar 23 Apr 9

Policy Tool Commercial Paper Funding Facility Primary Dealer Credit Facility Money Market Mutual Fund Liquidity Facility Term Asset-Backed Securities Loan Facility Corporate Credit Facilities Municipal Liquidity Facility

Maximum Credit Size Protection Not $10 b specified Not Collateralized specified by securities Not $10 b specified

Balance on July 15 $2.1 b $1.7 b $18.6 b

$10 b

$0.9 b

$850 b

$75 b

$11.2 b (80% ETFs)

$500 b

$35 b

$1.2 b

$100 b

Apr 9

Main Street Facilities

$600 b

$75 b

$0.01b

Apr 9

Paycheck Protection Program Lending Facility

Entire program

Full gov’t guarantee

$68.0 b

Market Size/ Current Size CP outstanding $757 b Primary Dealer Repo $2.0 t Prime funds $1.1 t ABS outstanding $1.8 t Corporate bonds outstanding $11.0 t Munis outstanding $3.9 t Total Bus & Farm Loans > $1 m is $2.9 t PPP currently $521 b