To Keep Credit Flowing, the Fed Dusts Off Its Crisis Playbook
Steps the central bank took over the weekend make it feel as if it’s 2008 all over again, except everything is happening much faster.
If the Federal Reserve’s surprise Sunday evening announcement of sweeping efforts to guard the economy from coronavirus reminded you of the 2008 global financial crisis, you’re not alone.
In that episode, policymakers’ tendency to make surprise weekend announcements became a running joke. But the similarities between the Fed then and now go deeper than the timing of news conferences.
Think of what the Fed did over the weekend this way: It resurrected most of its aggressive, unconventional and extraordinary policies used to combat the global financial crisis. But this time, instead of doing so over about 16 months, from late 2007 through early 2009, it announced versions of them in a single weekend, before solid evidence of economic damage even materialized.
That’s quite a busy weekend of central banking.
The Fed is taking a “whatever it takes” approach to a crisis, using multiple tools at once — and the ones that matter most may not turn out to be the ones that end up in the headlines.
Cutting interest rates by 1.5 percentage points (including both Sunday’s action and an emergency rate cut 12 days earlier) isn’t going to be much help to millions of workers who may soon find themselves without a paycheck because of large-scale business shutdowns.
Rate cuts are the Fed’s main tool for stabilizing the economy. Now that the central bank has brought rates to zero and pledged to keep them there until it is confident the economy has weathered the storm, its main stabilization tool is spent.
To the degree more help for the economy is needed, it will have to fall to other actors in the government to provide it: public health authorities who might help contain the spread of the virus, and Congress, which can spend money to offset ill effects.
But the Fed still has other ways to keep recent problems evident in financial markets from causing an even deeper downturn. The Fed on Sunday stepped into its role as the global lender of last resort — the entity that will do whatever it takes to keep dollars moving through the United States economy and around the world.
One of the oldest roles for central banks, and the reason the Fed was created more than a century ago in the first place, has been to ensure that credit can still flow freely even when panic sets in and lenders are fearful.
In the last several days, financial markets have been freezing up in strange ways that suggest banks and other major players are hoarding dollars. That is driving up the interest rates that major corporations; state and local governments; and even individuals taking out a mortgage must pay for credit.
That tightening of credit, if unchecked, can steer an economy to recession even if the effects of the virus are contained. And it is what Mr. Powell signaled determination to stop.
To that end, the Fed on Sunday offered more generous terms at the “discount window,” where banks can borrow money at increasingly favorable rates by showing up and pledging collateral. It reopened so-called swap lines with leading global central banks, ensuring the flow of dollars can continue overseas despite a freeze-up in certain money markets.
In recent years the Fed’s quantitative easing programs of buying bonds have been discussed in the context of how they might help stabilize the economy. The new installment announced Sunday — $700 billion in planned purchases, if you’re counting — actually has more in common with the first rounds of bond buying announced in late 2008 and early 2009.
At that time, financial markets were going haywire, and Fed officials hoped that by flooding the system with liquidity — the newly created dollars used to buy hundreds of billions of dollars in bonds — they could speed a return to normal functioning.
That was exactly the rationale for the new actions Sunday.
Referring to the $700 billion in quantitative easing, Chair Jerome Powell said in his news conference that “the primary purpose of these securities purchases is to restore smooth market functioning so that credit can continue to flow,” with the economic boost from the usual channels of monetary policy more a secondary benefit.
The Fed stopped short, for now, of deploying some of the most unconventional tools in its lender-of-last-resort toolbox. During the 2008 crisis, a series of complex programs was enacted using emergency authority to funnel dollars into various corners of the credit markets, and the Fed may well need to use some of them again if the damage worsens.
Referring to programs created under that authority, Mr. Powell said, “That’s part of our playbook in any situation like this — so as I said, we’re prepared to use our authorities as is appropriate to support borrowing and lending in the economy.”
Mr. Powell has a big advantage over the former chair Ben Bernanke from a dozen years ago: He and his colleagues have had all these years to study, assess and build upon the tools that the Bernanke Fed invented and deployed to combat that crisis.
“We think we have plenty of policy space left, plenty of power left in our tools,” Mr. Powell said on Sunday. Over the coming weeks, the world will find out if he’s right.