- [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)
