The Federal Reserve has taken unprecedented historic actions over the last three months in an effort to save the US economy from what many fear will be another Great Depression sparked by the coronavirus crisis.
The Fed has embarked on the largest asset buying binge in the history of the world over the last three months. The Fed’s balance sheet now tops $7 trillion, and it looks increasingly likely the central bank is not nearly done yet. Many now believe the Fed’s balance sheet could top $10 trillion by year-end. That’s scary!
Here’s the timeline on the Fed’s unprecedented actions this year:
On January 28-29, the Federal Reserve held its first monetary policy meeting of the New Year. The Fed bosses concluded that 2020 would be a year marked by steady economic growth and continued strength in the already tight labor market. Fed Chairman Powell expressed “cautious optimism,” in contrast to a rocky 2019 when the Fed had to cut interest rates three times.
Then on February 28, in an abrupt turn, Powell released a short statement pledging the Fed would “act as appropriate” in the face of economic impacts from the coronavirus outbreak. By then, stock market losses had accelerated, risk premiums on corporate bonds widened dramatically and the US Treasury market was hit by deep illiquidity.
On March 2, the Fed held an emergency policy meeting by videoconference and unanimously decided to cut interest rates by 50 basis points (0.50%) as “a clear signal to the public that policymakers recognized the potential economic significance of the situation and were willing to move decisively.”
On Sunday, March 15, after another emergency meeting by videoconference, the Fed slashed rates by 100 basis points to near zero (0.00%-0.25%), changed its forward guidance on rates, restarted large-scale asset purchases and launched coordinated swap lines with five major foreign central banks, among other measures.
In its post-meeting statement, the Fed warned that the coronavirus will take a serious “toll on U.S. economic activity in the near term” and made clear the central bank was “prepared to use its full range of tools to support the flow of credit to households and businesses.”
In the last half of March, the Fed launched a range of new measures to increase liquidity in financial markets and promised “unlimited, open-ended large-scale asset purchases,” including purchases of commercial paper and corporate and municipal bonds. The Fed initiated numerous other unprecedented actions in the last half of March.
On March 31, the Fed established a new temporary repo facility that allows foreign banks to exchange Treasury securities they own for US dollars. This unprecedented action increased the availability of US dollars and would be in operation for six months, unless extended.
On April 1, the Fed officially relaxed capital requirements for banks holding $250 million or more in consolidated assets (including insured deposits). On May 15, the Fed relaxed lending requirements for many more banks.
On April 6, the Fed announced the creation of three new emergency lending facilities designed to help implement the CARES Act (Coronavirus Aid, Relief and Economic Security Act) to assist the Treasury Department and the Small Business Administration.
Specifically, the Fed pledged to purchase Paycheck Protection Program (PPP) loans from banks, thus freeing those lenders to make even more loans to small businesses in need.
On April 9, the Fed rolled out a $2.3 trillion emergency lending effort to bolster local governments and small and mid-sized businesses.
On April 23, the Fed announced it would provide “transparent disclosure” on companies receiving financial aid – including names, amount(s) borrowed and interest rate charged. The Fed also announced it was increasing the availability of intraday credit and expanded access to the PPP loan facility.
In May, the Fed continued to buy various assets including Treasuries, mortgage-backed securities, commercial paper, corporate and municipal bonds. On May 11, the Fed announced it would begin buying selected Exchange Trade Funds (ETFs), marking the first time in the central bank’s history that it would purchase financial instruments rated below “investment grade.”
Two weeks ago, the Fed announced it would begin to buy Treasuries across all maturities, including 30-year Treasury bonds. And that these purchases would be of unlimited size and scope. Wow!
The bottom line is: Fed borrowing is totally out of control! Its balance sheet has topped $7 trillion and appears to be headed for $10 trillion or more by year-end, if this historic buying binge continues.
Clearly, Chairman Powell and his fellow members on the Fed policy committee see something coming down the road which is much worse than most economists, forecasters and the stock markets do. Either that or they’ve lost their minds – or both!
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