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  • - [Narrator] In March, the Federal Reserve signaled

  • it would do practically anything to help

  • the American economy fend off a recession.

  • - So the Fed has two main roles.

  • The one we most think about is of monetary policy,

  • which basically means raising interest rates

  • and lowering interest rates to try

  • and keep the economy on an even keel.

  • The other role it has is what we would call

  • it's a lender of last resort role.

  • In fact, that is a role for which most central banks,

  • including the Fed, were originally created.

  • - [Narrator] The Fed says it will use its full range

  • of tools to support the U.S. economy

  • during the coronavirus pandemic.

  • Here are the tools.

  • Tool number one, interest rates.

  • On March 15th, the central bank dropped

  • its interest rate target.

  • - [Jerome] Today, we reduced the target range

  • for our policy interest rate by one percentage point,

  • bringing it close to zero, and said that we expect

  • to maintain the rate at this level until we're confident

  • that the economy has weathered recent events.

  • - [Narrator] Historically, the Fed has cut interest rates

  • in an effort to stimulate growth,

  • but that's only one of its tools.

  • - In most recessions in the past,

  • the Fed has to lower interest rate by an average

  • of five percentage points to turn things around

  • and get the economy growing again.

  • It came into this crisis

  • with interest rates already very low

  • at only around one and a half percentage points

  • and it's already cut them to zero.

  • So it is effectively out of ammunition.

  • - [Narrator] Having lost the use of its main tool,

  • here's some of the other tools the Fed can use.

  • Tool number two, government bonds.

  • On Monday, March 23rd, the Fed said

  • it would buy $375 billion in Treasury securities

  • and $250 billion in mortgage-backed securities

  • in just one week.

  • The Fed has done this before, in 2008.

  • Between then and 2014, the central bank's asset sheet grew.

  • Then spending plateaued and the Fed started

  • to wind down its balance sheet.

  • But the Fed's buying in March leaves the bank

  • with more than four and a half trillion dollars in assets.

  • The central bank has said, that moving forward,

  • the purchases of government securities

  • are essentially unlimited.

  • - As that tends to lower long term interest rates,

  • that brings down things like mortgage rates directly,

  • so it has been buying bonds.

  • The only problem is that bond rates are down below 1%

  • and so there isn't a lot of juice it can put

  • into the economy by pushing those down further.

  • So right now, the Fed's monetary policy role

  • is largely out of ammunition.

  • However, the Fed can do a lot through the lender

  • of last resort role.

  • In fact, we have seen it do a lot.

  • - [Narrator] As lender of last resort,

  • the Fed can make more money available

  • to the financial system to make sure

  • that it has cash to operate smoothly.

  • In mid-March, the Fed made $1.5 trillion available in a bid

  • to prevent unusual disruptions in the repo market.

  • In these transactions, the Fed lends cash

  • and accepts government bonds

  • or mortgage-backed securities as collateral.

  • Financial institutions can use the money for a variety

  • of short-term operations, all of which are necessary

  • for bond markets to operate normally.

  • You can think of this cash injection as grease for the gears

  • that keep the financial system humming.

  • - Now typically, bond dealers do not need a lot of help

  • from the Federal Reserve, but in stressful times they,

  • like a lot of other big companies, find it's difficult

  • to find someone to lend them money.

  • So the Fed steps in and lends them the money.

  • It's important that it do so, because if it didn't,

  • you would see long term interest rates,

  • including on your mortgages, going up a lot.

  • - [Narrator] Tool number four, discount window lending.

  • In March, the Fed eased the rules for accessing its channel

  • to lend cash directly to commercial banks.

  • Commercial banks typically finance loans with cash

  • they get from deposits and private lenders,

  • but if those sources aren't available, they can,

  • in a pinch, borrow from the Fed.

  • - The way the Fed lends to banks, it basically asks them

  • to come to its so-called discount window.

  • - [Narrator] This interest rate is typically higher

  • than the federal funds target.

  • That encourages banks to borrow from each other

  • and to not rely on the Fed.

  • - [Narrator] But on March 16th,

  • the Fed lowered the discount rate to .25 percent,

  • which is near the upper range of the federal funds target.

  • - If banks are worried about people thinking they're weak,

  • they're not gonna go to the discount window,

  • even if they need the money

  • because there's a stigma attached to it.

  • So what the Fed wants to do now is,

  • hey, we're really worried about the economy,

  • come to our discount window and borrow.

  • Please don't worry about stigma.

  • And just to make sure you don't have to worry about stigma,

  • we're actually gonna lower the rate on discount window loans

  • to roughly the same rate you'd have to pay out

  • on the regular markets.

  • And that's what they've done.

  • - [Narrator] Tool number five, commercial paper.

  • On March 17th, the Fed relaunched

  • its commercial paper funding facility.

  • This facility will help the Fed lend cash

  • directly to businesses.

  • That money is then used for day-to-day business operations,

  • like payroll.

  • - So the Fed never saw itself as being the main source

  • of funding for private enterprise.

  • It always wanted the economy to primarily be

  • a market-based economy where private companies

  • would borrow from private lenders.

  • The only reason that it's stepping in to play this role

  • is because we're going through an economic crisis.

  • If these private firms cannot get funding

  • from their usual place, there outta be a way

  • to get it from the Fed.

  • - [Narrator] Tool number six, swap lines.

  • - [Narrator] The Fed can also send money abroad

  • to backstop foreign central banks.

  • - So the dollar is a very special currency.

  • Companies and banks and investors who don't do business

  • in the United States, all agree to do business in dollars

  • because it's kind of like the lingua franca of currencies.

  • However, when you have a crisis,

  • this causes a bit of a vulnerability.

  • At times like this, the Fed sees that part of its role

  • as lender of last resort is to lend

  • to the rest of the world.

  • - [Narrator] In March 2020, the Fed ramped up a program

  • that can make more U.S. dollars available overseas

  • at near zero interest rates.

  • - And these loans that the Fed makes to other central banks

  • are called swap lines.

  • - [Narrator] In March, the Fed extended swap lines

  • to several banks across the globe.

  • - If the world needs dollars,

  • the Fed will print those dollars

  • and it will lend them those dollars.

  • It's not in the interest of the United States

  • that companies in all our trading partners

  • go out of business because that will ultimately

  • not just hurt their economies, it will hurt our economy

  • because we rely on them as customers

  • and we rely on them as suppliers.

  • - [Narrator] Though the Fed has exhausted

  • its monetary tools, it continues to work

  • to backstop financial markets.

  • - [Greg] They're trying to ensure that,

  • on top of this health crisis and economic crisis,

  • we do not also have a financial crisis.

  • (calm music)

- [Narrator] In March, the Federal Reserve signaled

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What the Federal Reserve Can Do to Fight Recession WSJ

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    洪子雯 posted on 2020/03/28
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