Fed unbound: Balm for markets, economy

The Federal Reserve has taken unprecedented steps to lessen the impact of the coronavirus pandemic on global financial markets and the US economy.

Beginning with an emergency interest-rate cut announced March 3, the Fed has run through its 2008-09 crisis playbook and leapt into uncharted territory.

The steps include massive bond purchases, a slew of emergency facilities to bolster credit markets, actions with foreign central banks to ease the supply of dollars world wide and programs for lending directly to American businesses.

Here is a summary of those steps:

RATE CUTS

After a half-point cut on March 3, the Federal Open Market Committee held another unscheduled meeting on March 15 and lowered the target range for the benchmark federal funds rate to 0-0.25% —matching the near-zero rates of the financial crisis. They also pledged to keep rates there until the economy is “on track to achieve its maximum employment and price stability goals.”

BANK REGULATIONS

Starting March 9, the Fed announced measures for banks like lower capital and liquidity requirements, an elimination of reserve requirements and clearance to modify loan terms without consequence.

REPO EXPANSION

In three steps starting March 9, the New York Fed began offering additional liquidity to short-term funding markets. They are currently offering $1 trillion a day in overnight repurchase agreements and plan approximately $4 trillion in term repo during the cycle that ends April 13.

QUANTITATIVE EASING (QE)

On March 12 the central bank returned to broad Treasury bond purchases, using $60 billion a month that was previously directed to Treasury bills to help boost bank reserves. Then on March 23 the Federal Open Market Committee declared QE unlimited, agreeing to purchase assets “in the amounts needed to support the smooth functioning of markets.” They also added commercial MBS to the buying list.

SWAP LINES

The Fed has expanded the agreements it has with foreign central banks that allow it to exchange currencies, in this case pumping dollars out globally to ease access to the currency. On March 15 and March 20, the Fed enhanced existing swap lines with five major central banks, including the ECB, BOJ and BOE, and on March 19 it created new, temporary swap lines with nine additional central banks.

COMMERCIAL PAPER FUNDING FACILITY (CPFF)

Fed announced an emergency facility on March 17 to purchase shortterm company IOUs directly from US corporate and municipal issuers. The total of eligible securities exceeds $1 trillion. The program is backstopped with $10 billion from the Treasury.

PRIMARY DEALER CREDIT FACILITY (PDCF)

Operational on March 20, this emergency facility buys a wide range of securities, including investment-grade corporate debt, municipal debt, and mortgageand asset-backed securities from primary dealers.

MONEY MARKET FUND LIQUIDITY FACILITY (MMFLF)

Up and running on March 23, this emergency facility finances the purchase of of high-quality assets from US money market mutual funds, including government debt, commercial paper and municipal debt. Eligible securities are estimated at $600 billion to $700 billion, according to Fed officials, backstopped with $10 billion from the Treasury.

PRIMARY MARKET CORPORATE CREDIT FACILITY (PMCCF)

Announced March 23, this emergency facility will buy investmentgrade corporate debt directly from US issuers. Fed gives no size for total program. Backstopped with $10 billion from the Treasury.

SECONDARY MARKET CORPORATE CREDIT FACILITY (SMCCF)

Announced March 23, this emergency facility will purchase investment-grade corporate debt from US issuers in the secondary market, and in ETFs that invest in that debt. Fed gives no size for total program. Backstopped with $10 billion from the Treasury.

TERM ASSET-BACKED SECURITIES LOAN FACILITY (TALF)

Announced March 23, this emergency facility will use $100 billion to purchase securities backed by credits to consumers and small businesses, including credit-card receivables, student loans, auto loans and leases, equipment loans and some small business loans. Backstopped with $10 billion from the Treasury.