Fed takes action to keep credit flowing, calm money markets amid coronavirus turmoil
WASHINGTON – The Federal Reserve attempted to isolate Main Street and Wall Street from the economic fallout from the coronavirus on Monday, encouraging banks to work with affected customers while taking steps to keep money flowing smoothly between financial institutions.
The Fed, along with other regulators, said Monday afternoon that it “encourages financial institutions to meet the financial needs of customers and members affected by the coronavirus.” Regulators added that “cautious efforts that are consistent with safe and sound lending practices should not be subject to criticism from examiners” – suggesting that supervisors will understand if banks are flexible with customers who experience credit disruptions. income or other virus related issues.
The announcement came hours after the Federal Reserve Bank of New York announced it would increase the amount of short-term loans it offers to banks, in an attempt to keep cash flowing through the financial system.
The Fed’s efforts to preserve normalcy came as markets continued to plunge amid uncertainty over the economic fallout from the virus. The infection now has sickened more than 110,000 people, and as it spreads to the United States and Europe, concerns are growing about a drastic slowdown in growth. That, combined with falling oil prices, sent global markets into turmoil – Wall Street had its worst day in a decade on Monday.
This is the central bank’s latest offensive in an attempt to mitigate the fallout from the coronavirus. Policymakers had already cut interest rates by half a percentage point last week in an emergency measure, lowering the Fed’s benchmark policy tool to a range of 1.0 to 1.25 %. President Jerome H. Powell and colleagues try to protect the U.S. economy before a slowdown – caused by worker quarantines, weaker tourism, and sluggish markets – takes hold .
The central bank is also trying to make sure that the markets themselves are functioning properly. The New York Fed has pledged to increase its daily supply of overnight repurchase agreements – mostly short-term loans to qualifying banks – to at least $ 150 billion, from $ 100 billion between Monday and Thursday. It is also increasing its two-week loan supply from tomorrow, to at least $ 45 billion from at least $ 20 billion.
The measures “aim to ensure that the supply of reserves remains plentiful and to mitigate the risk of pressures on the money market”, the New York Fed said in a press release.
“They should help support the smooth functioning of funding markets as market players implement business resilience plans in response to the coronavirus,” the statement said, while adding that the Fed would “continue to adjust” operations as needed.
The Fed had already been active in the market for short-term loans between banks and financial institutions – called the buyout market, or “repo”, for months, starting after rates in this obscure but important plumbing corner of the financial system rose in September. He had recently reduced the size of his injections as the markets calmed down.
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But demand at its own pace repo transactions surged as markets swayed, fueling investor speculation that the Fed may increase the size of its offerings.
Officials also bought $ 60 billion in short-term treasury bills each month to buffer the financial system’s bank reserves, mostly deposits with the Fed. The objective was to maintain a good flow of liquidity so that borrowing costs in the money markets remain under control.
“We will ensure that the supply of reserves in the banking system remains sufficient,” John C. Williams, chairman of the New York Fed, said in a speech last week. “We are closely monitoring conditions in the money markets.”
Many economists expect the Fed to do more to protect growth while keeping the financial plumbing functioning normally.
The Fed is expected to largely cut rates by half a point by March 18, the conclusion of its next meeting. Many investors expect the Fed, which cut rates to near zero during the financial crisis, will return to that level by April.
And with regard to the functioning of the market, “in our opinion, a lot more needs to be done and very soon,” the economists of Evercore ISI wrote in a note on Monday. They speculated that the central bank could expand its treasury bill purchasing program, which would help keep the financial system on top of liquidity and potentially help avoid short-term funding disruptions.
The central bank could also activate so-called swap lines, Evercore economists said. The Fed has a habit of using its agreements with global partners to help foreign central banks provide US dollar funding to financial institutions in their regions amid tensions in the markets.
The Fed has been creative in previous crises, using alphabet soup of fixes in the depths of the financial crisis. It could happen again. When investors became reluctant to lend during the financial crisis, the Fed auctioned off 28-day and then 84-day loans to banks that were still in good shape. The program, known as Ease of term auctions, spanned from late 2007 to mid-2010 and allowed the Fed to circulate money among a wider range of financial market participants.
But such efforts will only lessen the damage. They can’t fix supply line disruptions or send quarantined workers back to the office, or stop the spread of a virus.
“Monetary policy is probably not particularly effective at the moment,” wrote Goldman Sachs chief economist Jan Hatzius in a note. “Fiscal policy is probably the most powerful tool.”