As the United States sinks into a coronavirus recession, the Federal Reserve uses its almost unlimited power to generate money to cushion the fall.
“The Fed is doing everything it can to keep the financial markets functioning and credit to households and businesses,” former Fed Chair Janet Yellen said at a forum hosted by the Brookings Institution .
Since mid-March, the Fed has purchased more than $ 1.2 trillion in treasury bills and mortgage-backed securities, and the central bank has made it clear that it will continue to buy as much as necessary to prevent credit markets to hang.
With the help of the Treasury Department, the Fed is also entering non-traditional markets. He will now lend money directly to businesses. And he’s preparing to roll out a Main Street program to help finance small businesses.
“The Federal Reserve is doing everything it can to contain a health crisis that does not turn into an economic or financial crisis,” said Greg McBride, chief financial analyst at Bankrate.com. “The # 1 challenge for the Fed is to make the plumbing of the financial markets work properly. “
The actions of the Fed made a difference, keeping the financial pipes from getting clogged, although credit was even more difficult to find than before the crisis. The challenge now is whether the central bank can reach out to mainstream businesses whose customers have suddenly disappeared.
The $ 2 trillion relief bill passed by Congress to combat the fallout from the coronavirus includes $ 454 billion to support the Fed’s lending programs. This should allow the central bank to inject up to $ 4 trillion into the economy. It’s more than the Fed spent on its bond buying program in the six years after the financial crisis.
Although the central bank has already used up some of its firepower by lowering interest rates to almost zero, Fed President Jerome Powell insists that he and his colleagues still have powerful weapons at their disposal.
“With regard to these loans, we will not run out of ammunition,” Powell told NBC. Today to show. “Where credit does not flow, we have the capacity in this unique circumstance to step in and provide these loans. “
This is important at a time when countless businesses are closing and millions of workers are losing their jobs. Goldman Sachs forecasts that the US economy will shrink at an annual rate of 34% over the next three months, thanks to a deliberate effort to slow the spread of the virus.
“This is a situation in which people are asked to withdraw from economic activity,” said Powell. “Close their businesses, stay home from work. “
By shoveling money out the door, the Fed hopes to keep the economy on air long enough to survive the pandemic.
“In principle, if we control the viral threat quickly enough, economic activity can resume,” Powell told NBC.
The Fed has moved much faster in recent weeks than it did during the financial crisis a dozen years ago.
“It’s a little crazy to see how much they’ve done almost as much this week as they did in several months in 2008,” said Michael Feroli, chief economist at JPMorgan, during a week in which the Fed unveiled several new lending programs. “Now they have the advantage of being able to just dust off Bernanke’s playbook. “
Some of the Fed’s new lending efforts are being recycled from those that then President Ben Bernanke and his colleagues put in place during the financial crisis. But the Main Street program currently on the drawing board would push the central bank into new territory – making money available to midsize businesses to keep them afloat during the coronavirus shutdown.
“The more the economy goes down, the bigger the hangover and the harder it will be for the economy to rebound,” said McBride.
“What the Fed is trying to do is provide as much liquidity and demand capital in the markets so that businesses can continue to operate, banks can continue to lend and consumers can still have access to credit” , he added.
Copyright NPR 2020.