As the global coronavirus pandemic wreaks economic destruction around the world, the U.S. government has taken a number of dramatic steps to keep money moving through the U.S. economy.
The Treasury Department on Friday announced that it would postpone the deadline for filing 2019 income taxes to July 15, from April 15. At the same time, the Federal Reserve has slashed interest rates and taken a number of steps that will allow it to continue pushing money into the hands of businesses and individual borrowers through all means available — some of which it has not yet activated.
So far, the Fed’s actions have done little to calm the stock market, which in the past week has wiped out the record gains achieved since President Donald Trump took office in January 2017. But the Fed and the Treasury still have a few more financial and monetary tools at their disposal to try to still the panic of investors.
The Treasury Department’s decision to delay the tax filing deadline could ease liquidity pressure on businesses and individuals who will be hit hard by the economic contraction the United States will inevitably suffer in the coming weeks and perhaps months.
Similar tactics from 2007-08 crisis
Many of the moves the Fed has made so far to respond to the crisis will be broadly familiar to people who remember how the central bank handled the fallout of the 2007-08 financial crisis. The Fed kept interest rates as low as possible and launched a bond-buying program that was designed to help ensure that there was no cash shortage in the marketplace.
In that vein, the Fed announced on March 15 that it would cut the target for its benchmark interest rate to a range of zero to 0.25% and would purchase as much as $700 billion in Treasury and mortgage-backed securities in the coming months.
The ultra-low interest rate target will be a familiar one to most market participants, because it matches the level at which the Fed held rates for roughly seven years after the financial crisis, from late 2008 to late 2015. The rate change brings the U.S. central bank more closely in line with its European counterparts, some of which have had effectively negative rates since well before the onset of the novel coronavirus.
A return to 'quantitative easing'
The bond-buying program effectively restarts the program of “quantitative easing” that the Fed pursued throughout the recovery from the financial crisis. By entering the market and buying up securities, the Fed will put further downward pressure on interest rates at the same time that it is pumping cash into the economy, both of which are meant to stimulate economic activity.
In addition, the Fed is reducing the rates at which it lends to banks through its “discount window” to 0.25% and extending the maturity of those loans to 90 days, in order to assure financial institutions across the country that they will have access to liquidity if and when they need it. The central bank also gave banks express permission to use their capital and liquidity buffers – funds held to protect against unexpected losses – to extend credit to borrowers in need of cash.
Big banks turn to the Fed
Early in the week, eight of the nation’s largest banks, including J.P. Morgan Chase, Wells Fargo and Citigroup, announced that they would borrow from the Fed – a move that will give smaller banks confidence to follow suit. In the past, banks have been reluctant to access the discount window, because investors viewed it as a sign of weakness.
In announcing its actions early in the week, the Fed issued a statement saying that the U.S. economy “came into this challenging period on a strong footing” and that the central bank is prepared to take further action if necessary. “The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals.”
It also signaled to investors that the drastic measures are not a short-term measure. “The committee 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.”
Other Fed tools
While slashing interest rates and buying bonds are the most obvious weapons the Fed has at this time, there are a few other things in the central bank's arsenal. This week it announced a series of other moves meant to help stabilize the economy against the expected shock when businesses are forced to close down in order to avoid spreading the virus.
On Wednesday, the Fed announced that in conjunction with the Treasury Department, it would launch a Commercial Paper Funding Facility, which will allow businesses to retain access to short-term funding and provide liquidity for the money market funds where many Americans keep some of their savings. At the same time, it announced the launch of a Primary Dealer Credit Facility, another way of providing liquidity to large financial institutions.
Assisting other central banks
On Thursday, the central bank announced that it was establishing a Money Market Mutual Fund Liquidity Facility, which will make it easier for commercial banks to push cash into money market funds by purchasing assets held by those funds. At the same time, the Fed announced that it had expanded a program that allows other central banks around the world to trade their own currency for dollars in order to keep the global flow of dollars – in which many international transactions are denominated – flowing smoothly.
On Friday, the Fed announced an expansion of its program to ensure the flow of dollars through international markets, through a joint agreement with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank to increase the frequency of dollar swap transactions.
Also on Friday, the central bank signaled that it would extend the Money Market Mutual Fund Liquidity Facility to include financing for asset purchases from state and tax-exempt municipal funds.
Pushing interest rates below zero
Looking further ahead, there are a few more things the Fed could consider doing. Other central banks, primarily in Europe, have pushed interest rates below zero – effectively charging a fee rather than interest on deposits.
Other central banks have also launched programs that tie long-term low-cost funding to specific kinds of loans, such as those made to small businesses and individuals. Alternatively, the Fed could provide funding for those loans by accepting asset-backed securities based on them as collateral.