In response to the market fallout from the COVID-19 Pandemic, the U.S. Federal Reserve has rolled out many emergency actions this week in efforts with other major banks to ease the global dollar funding crunch. Below is a timeline and summaries for the roll outs:
March 15th, 2020
The Fed Funds Rate Cut to Zero
The federal funds rate is the target interest rate at which banks borrow and lend excess reserves from one another on an overnight basis. A committee of the Federal Reserve sets a target federal funds rate eight times a year, based on prevailing economic conditions. It is used as a benchmark for short-term lending. On March 15th, the Fed took the bold step and lowered the federal fund rate to 0 percent. Press release
Besides lowering the federal fund rate to 0 percent, the Fed also deployed its Quantitative easing (QE) weapon consisting of a $700 billion purchase of long-term Treasury debt and mortgage-backed securities. Quantitative easing (QE) according to experts, is a form of extraordinary monetary policy used by central banks to quickly increase the domestic money supply and spur economic activity. The last time this was used was during the 2007-2008 financial crisis.
Federal Reserve Discount Window
The discount window is a central bank lending facility to help commercial banks manage short-term liquidity needs. Banks may borrow directly from the central bank's discount window paying the federal discount rates. According to the Federal Reserve, “Federal Reserve lending to depository institutions (the "discount window") plays an important role in supporting the liquidity and stability of the banking system and the effective implementation of monetary policy. By providing ready access to funding, the discount window helps depository institutions manage their liquidity risks efficiently and avoid actions that have negative consequences for their customers...” Press release
Flexibility in Bank Capital Requirements
Bank Capital and Liquidity Buffers/Reserve Requirements
The Federal Reserve is encouraging banks to use their capital and liquidity buffers as they lend to households and businesses who are affected by the coronavirus. Since the global financial crisis of 2007-2008, U.S. bank holding companies have built up substantial levels of capital and liquidity in excess of regulatory minimums and buffers. According to the Federal Reserve, “These capital and liquidity buffers are designed to support the economy in adverse situations and allow banks to continue to serve households and businesses. The Federal Reserve supports firms that choose to use their capital and liquidity buffers to lend and undertake other supportive actions in a safe and sound manner.”
For many years, reserve requirements played a central role in the implementation of monetary policy by creating a stable demand for reserves. The Federal Open Market Committee (FOMC) has reduced reserve requirement ratios to zero percent effective on March 26, the beginning of the next reserve maintenance period. This action eliminates reserve requirements for thousands of depository institutions and will help to support lending to households and businesses.
Coordinated International Action to Lower Pricing on U.S. Dollar
According to the Federal Reserve, “The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank created a coordinated action to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements.” The central banks have agreed to lower the pricing on the standing U.S. dollar liquidity swap arrangements by 25 basis points, so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 25 basis points.
March 17th, 2020
Creation of a Commercial Paper Funding Facility (CPFF)
On March 17th, 2020, the Federal Reserve Board announced that it will establish a Commercial Paper Funding Facility (CPFF) to support the flow of credit to households and businesses. Commercial paper markets directly finance a wide range of economic activity, supplying credit and funding for auto loans and mortgages as well as liquidity to meet the operational needs of a range of companies. The Federal Reserve said that by ensuring the smooth functioning of this market, particularly in times of strain, they are providing credit that will support families, businesses, and jobs across the economy. Press release
Creation of a Primary Dealer Credit Facility (PDCF)
The Federal Reserve also announced that it will establish a Primary Dealer Credit Facility, or PDCF. The facility will allow primary dealers to support smooth market functioning and facilitate the availability of credit to businesses and households. Press release
March 18th, 2020
Creation of a Money Market Mutual Fund Liquidity Facility (MMLF)
On March 18th, 2020, the Fed Reserve announced that it would establish a facility offering collateralized loans to large banks who buy assets from money market mutual funds. A money market mutual fund is a form of mutual fund that invests only in highly liquid instruments and as a result offers high liquidity with a low level of risk. Again, the Fed will accept a wide range of permissible capital, including corporate paper, to encourage these investors to participate in the money market mutual fund market, and the market more generally. Press release
March 19th, 2020
U.S. Dollar Liquidity Swap Arrangements Extended to More International Central Banks
On March 19th, 2020, The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank announced a coordinated action to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements. These central banks have agreed to lower the pricing on the standing U.S. dollar liquidity swap arrangements by 25 basis points, so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 25 basis points. Press release
March 20th, 2020
Frequency of U.S. Dollar Liquidity Swap Operations Updated
The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing a coordinated action to further enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements.
To improve the swap lines' effectiveness in providing U.S. dollar funding, these central banks have agreed to increase the frequency of 7-day maturity operations from weekly to daily. These daily operations will commence on Monday, March 23, 2020, and will continue at least through the end of April. The central banks also will continue to hold weekly 84-day maturity operations. Press release
MMLF Will Now Accept Municipal Debt
The Federal Reserve Board today expanded its program of support for the flow of credit to the economy by taking steps to enhance the liquidity and functioning of crucial state and municipal money markets. Through the Money Market Mutual Fund Liquidity Facility, or MMLF, the Federal Reserve Bank of Boston will now be able to make loans available to eligible financial institutions secured by certain high-quality assets purchased from single state and other tax-exempt municipal money market mutual funds. Press release
The Federal Reserve is stepping up to the plate with these emergency actions, however, according to Powell, they can only do so much. “We have the tools that we have,” Powell said on Sunday. “I think we use them quite aggressively for the benefit of the public. But this is a multifaceted problem, and it requires answers from different parts of the government,” Powell stated after meeting with Nancy Pelosi.
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