The inevitable and unavoidable result of the extraordinary measures taken to curb the tragic health effects of the coronavirus has been a strong shock to the economy. Protecting human health and wellbeing must be paramount at the moment. Unfortunately, major damage to the economy also extracts a high human toll in the form of layoffs and job losses, bankruptcies, and financial stress. These issues, in turn, increase harms ranging from domestic abuse to depression. Obviously, the more that can be done to mitigate the damage, the better.
Enter the Federal Reserve. The Fed’s role is defined by its long-standing mandate to promote maximum employment and stable prices, while providing stability within the financial system. In times like these, the Fed can do (and is doing) a lot to keep things going.
The Fed indicated it “is committed to using its full range of tools to support households, businesses, and the U.S. economy overall in this challenging time.” The statement also noted that “aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate.”
The Federal Reserve is using its full range of tools to assure the flow of credit to American families and businesses. Actions include supporting market functioning through purchases of Treasury securities and mortgage-backed securities and even short-term commercial paper, as well as through new financing programs. Credit availability has been enhanced, target interest rates have dropped to basically zero, and bank reserve requirements have been eliminated. Many of these tools have been used before, but a new provision passed by Congress allows the Fed to make loans directly to companies across industries and the US. Most recently (at least as I am writing), the Fed is buying Paycheck Protection Program loans, thus allowing them to be funded without exhausting bank resources.
Simply stated, all stops have been pulled out to support a return to economic health. These monetary tools are complemented by the major fiscal stimulus package passed by Congress, and these aggressive policy actions can help stem the economic damage and enhance the recovery once the virus begins to subside.
Alas, the Fed’s moves will do little to boost the economy immediately. That is not the purpose. Rather, they will (1) maintain the integrity and functionality of the financial system during the crisis and (2) help accelerate the recovery later. These are critical aims.
The primary focus currently must remain protecting human health. In the midst of the chaos, the Fed is taking strong and decisive action. It may be largely unseen, but it is essential to our current and future wellbeing. Stay safe!