User:Novem Linguae/Drafts/U.S. Federal Reserve response to COVID-19

The Fed's role
Fed Chair Jerome Powell said in May 2020, "the Fed has lending powers, not spending powers." Traditionally, financial assistance that goes beyond short-term liquidity to solvent financial firms (fiscal policy) has been the purview of the federal government, not the Fed. Congress decided in the CARES Act to provide most of the $500 billion for economic stabilization to support Fed—instead of Treasury—programs, however. In principle, the Fed’s lender of last resort powers are intended to address illiquidity, not insolvency (i.e., when a business is no longer viable). As the COVID-19 pandemic persists, losses threaten to shift liquidity problems to solvency problems, arguably blurring the line between lending and spending.

First months of the pandemic
The COVID-19 pandemic caused widespread disruptions to the U.S. economy. The Federal Reserve (Fed) took multiple policy actions in response to the crisis, and the U.S. Congress took the unprecedented step of providing up to $500 billion to the Department of the Treasury to support Fed programs through the Coronavirus Aid, Relief, and Economic Security Act (H.R. 748, CARES Act), signed into law as P.L. 116-136 on March 27, 2020.

The Fed took a number of steps to promote economic and financial stability in both its monetary policy and its lender of last resort roles. Some of these actions were intended to stimulate economic activity by reducing interest rates, and others were intended to provide liquidity so firms had access to needed funding. The Fed acts as a lender of last resort for banks by making short-term loans through the discount window, which it encouraged banks to access and made the borrowing terms more attractive when the pandemic began. Because foreign banks are reliant on U.S. dollar funding but cannot borrow from the discount window, the Fed has also allowed foreign central banks to swap their currencies for hundreds of billions of U.S. dollars so that the central banks can lend those dollars to banks in their jurisdiction.

The Fed set up a series of emergency facilities (financial assistance programs offered by lending institutions to help companies acquire capital) in response to COVID-19 to expand its lender of last resort role to other sectors of the economy. The Fed created facilities to assist commercial paper markets, corporate bond markets, money market mutual funds, primary dealers, asset-backed securities, states and municipalities, and businesses with up to 15,000 employees or $5 billion in revenues. It also created a facility to make funds available for lenders to make loans to small businesses through the Paycheck Protection Program (another CARES Act program). The Fed charges interest and fees to use these facilities that may increase its net income, but the facilities expose U.S. taxpayers to the risk of losses if borrowers default or securities fall in value. As of June 2020, the Treasury Department pledged $215 billion to backstop potential losses on these facilities.

The Fed can ease overall liquidity conditions by entering into repurchase agreements (repos), which are economically equivalent to short-term collateralized loans. In response to the crisis, the Fed made $1 trillion in overnight repos available at auction every day, and made an additional $500 billion in longer-term repos available at least once a week. Actual take-up rates, however, were much lower.

The Fed lowered interest rates to stimulate interest-sensitive spending. In March 2020, it reduced short-term interest rates to a range of 0% to 0.25%. The Fed "expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals." Because rates were already comparatively low before March, reducing rates provided relatively limited additional monetary stimulus. To provide more stimulus, the Fed also made large-scale purchases of Treasury securities and mortgage-backed securities in an effort to reduce interest rates generally. Those purchases also added more liquidity to the financial system. The Fed used this tool—popularly referred to as quantitative easing (QE)—in the 2007-2009 financial crisis, but its 2020 purchases were larger. In April 2020, the Fed’s securities holdings increased by about $1.2 trillion. The Fed financed these activities by expanding its balance sheet, which surpassed its all-time high by March 2020 and exceeded $7 trillion by May 2020.

Treasury ends some Fed programs
In November 2020, Treasury Secretary Steve Mnuchin announced that he would end some of the Federal Reserve's emergency funding programs. The Federal Reserve initially objected, but eventually agreed. These programs went largely unused, but the Fed argued that they were important to have available to "shore up market confidence" and to serve as a backstop. The programs in question were the municipal liquidity facility (for states and municipalities), and the Main Street lending program (for small and medium-sized businesses). These programs amounted to around $454 billion.