Policy Responses to Coronavirus

MONETARY POLICY: RECENT FEDERAL RESERVE ACTIONS TO SUPPORT THE U.S. ECONOMY AND FINANCIAL MARKETS.

March 3, 2020:

• Federal Open Market Committee (FOMC) reduced overnight federal funds rate 50bps to a new range of 1.0% – 1.25%.  This was the first intermeeting policy move since 2008.

March 12, 2020:

• The New York Fed’s Open Market Desk announced weekly 1-month and 3-month term repo operations for the remainder of the month sized at $500 billion each.  Additionally, their $60 billion of monthly reserve maintenance Treasury bill purchases will now be spread across the Treasury maturity spectrum through mid-April. 

March 15, 2020:

• FOMC reduced overnight federal funds rate 100bps to a new range of 0.00% – 0.25%.

  • 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 (forward guidance, in our view).

• FOMC expands its balance sheet with purchase of at least $500 billion of Treasury securities and at least $200 billion of agency mortgage-backed securities.

• Reserve requirement ratio reduced to zero.

• To encourage banks to utilize the discount window, the FOMC lowered the primary credit rate by 150bps to 0.25% and extended the maturity for up to 90 days to help meet demands for credit from households and businesses.

March 17, 2020:

• Created the Commercial Paper Funding Facility 2020 (CPFF) which will “provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV) that will purchase unsecured and asset-backed commercial paper rated A1/P1 directly from eligible companies.”

• Created the Primary Dealer Credit Facility (PDCF) which “will offer overnight and term funding with maturities up to 90 days.  Credit extended to primary dealers under this facility may be collateralized by a broad range of investment grade debt securities, including commercial paper and municipal bonds, and a broad range of equity securities.”

March 18, 2020:

• Established the Money Market Mutual Fund Liquidity Facility (MMLF) through which “the Federal Reserve Bank of Boston will make loans available to eligible financial institutions secured by high-quality assets purchased by the financial institution from money market mutual funds.”

March 19, 2020:

• Established temporary U.S. dollar liquidity arrangements with 9 other central banks in amounts up to $60 billion each.

  • “These facilities, like those already established between the Federal Reserve and other central banks, are designed to help lessen strains in global U.S. dollar funding markets, thereby mitigating the effects of these strains on the supply of credit to households and businesses, both domestically and abroad.”

  • This is in addition to the standing arrangements the Fed already has with the BoC, ECB, BoE, BoJ and SNB.

March 20, 2020:

• The Federal Reserve expanded the MMLF “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” to support liquidity and functioning of municipal money markets.

• In a coordinated action, the Federal Reserve, BoC, BoJ, ECB and SNB announced an update to the U.S. dollar liquidity swap lines.  “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.”

March 23, 2020:

• QE purchases expanded to “in the amounts needed” from $500 billion UST and $200bn agency MBS.  Also added agency CMBS within the agency MBS portion of the program.

• Primary Market Corporate Credit Facility (PMCCF) – established to provide credit to larger corporations, “the facility is open to investment grade companies and will provide bridge financing for four years.”

• Secondary Market Corporate Credit Facility (SMCCF) – established to provide credit to larger corporations, “the SMCCF will purchase in the secondary market corporate bonds issued by investment grade U.S. companies and U.S.-listed exchange-traded funds whose investment objective is to provide broad exposure to the market for U.S. investment grade corporate bonds.”

• Term Asset-Backed Securities Loan Facility (TALF) – “Under the TALF, the Federal Reserve will lend on a non-recourse basis to holders of certain AAA-rated ABS backed by newly or recently originated consumer and small business loans.”  (student loans, auto loans, credit card loans, loans guaranteed by the SBA)

• Expanded the Money Market Mutual Fund Liquidity Facility (MMLF) to include additional security types, including municipal variable rate demand notes (VRDNs) and bank certificates of deposit.

• Expanded the Commercial Paper Funding Facility (CPFF) to include high-quality, tax-exempt commercial paper.

Importantly, the Bank of Canada, the European Central Bank, the Bank of England, the Bank of Japan and other central banks around the world have undertaken similar measures such as reducing lending rates, expanding bond purchase programs and other measures to support their domestic economies and the global financial markets.

Bottom Line: The Federal Reserve has dusted off its playbook from the 2008 financial crisis and appears poised to again utilize its full authority and toolkit to support the functioning of financial markets and the flow of credit to U.S. households and businesses.  We remain very confident the Fed will do everything within its power and authority to support the U.S. economy and would expect additional tools to be employed if/when financial market and/or economic conditions warrant. 

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FISCAL POLICY:  RECENT GOVERNMENT ACTIONS TO PROTECT U.S. CITIZENS AND PROVIDE FINANCIAL RELIEF.

March 6, 2020:

• President Trump signs an $8.3 billion spending bill for virus prevention efforts and vaccine research.

March 13, 2020:

• President Trump declares coronavirus a national emergency which frees up nearly $50 billion in disaster funds to fight the spread of the virus.

March 18, 2020:

• Congress passed the Families First Coronavirus Response Act.

  • “This bill responds to the coronavirus outbreak by providing paid sick leave and free coronavirus testing, expanding food assistance and unemployment benefits, and requiring employers to provide additional protections for health care workers.”

• Treasury Department and IRS provided guidance for deferred income tax payments from April 15th to July 15, 2020.

  • Allows individuals and other non-corporate tax filers to defer up to $1 million and corporate filers to defer up to $10 million in tax payments to July 15th.  The tax return filing deadline remains April 15th.  This action is estimated to free up approximately $300 billion in liquidity to the economy over the short run. 

Looking Ahead: We expect Congress and the Trump Administration to agree on a stimulus package that could reach $1 trillion or more and may include direct payments to households as well as support to small businesses and other industries most negatively impacted by the coronavirus pandemic.  We believe this crisis will resolve itself and the U.S. economy will return to growth; however between now and then the uncertainty over the near term outlook and magnitude of economic decline will make policy decisions critically important to support all aspects of our economy and the well-being of our citizens.

Source:  Federal Reserve, home.treasury.gov, New York Fed, http://www.congress.gov.