What the Fed is doing to keep the economy alive: NPR


Led by Jerome Powell, the Federal Reserve moved quickly and creatively to pump money into the rapidly declining US economy.

Mandel Ngan / AFP via Getty Images

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Mandel Ngan / AFP via Getty Images

Led by Jerome Powell, the Federal Reserve moved quickly and creatively to pump money into the rapidly declining US economy.

Mandel Ngan / AFP via Getty Images

As the United States plunges into a coronavirus recession, the Federal Reserve is using its nearly limitless power to generate cash to cushion the fall.

“The Fed is doing all it can to keep financial markets functioning and credit available to households and businesses,” former Fed Chairman Janet Yellen said at a forum hosted by the Brookings Institution .

Since mid-March, the Fed has bought more than $ 1.2 trillion in Treasuries and mortgage-backed securities, and the central bank has made it clear that it will continue to buy as much as needed to avoid that credit markets do not seize up.

With the help of the Treasury Department, the Fed is also entering non-traditional markets. It will now lend money directly to businesses. And he is preparing to roll out a “Main Street” program to help finance small businesses.

“The Federal Reserve is really doing everything to prevent a health crisis from turning into an economic or financial crisis,” said Greg McBride, chief financial analyst at Bankrate.com. “The number one challenge for the Fed is to get the financial markets back on track.”

The Fed’s actions made the difference, keeping the financial pipes from clogging, even though credit is still more difficult to obtain than before the crisis. The challenge now is whether the central bank can extend its helping hand to mainstream businesses whose customers have suddenly disappeared.

The $ 2 trillion relief bill passed by Congress to combat the fallout from the coronavirus includes $ 454 billion to support the Fed’s lending programs. This should allow the central bank to inject up to $ 4 trillion into the economy. This is more than what the Fed spent on its bond buying program in the six years after the financial crisis.

Although the central bank has already exhausted some of its firepower by cutting interest rates to near zero, Fed Chairman Jerome Powell insists he and his colleagues still have powerful weapons. at their disposal.

“As far as these loans go, we’re not going to run out of ammunition,” Powell told NBC. Today spectacle. “Where the credit is not flowing, we have the capacity, in this unique circumstance, to step in and provide these loans.”

This is important at a time when countless businesses are closing their doors and millions of workers are losing their jobs. Goldman Sachs predicts that the US economy will contract at an annual rate of 34% over the next three months, thanks to a deliberate effort to slow the spread of the virus.

“It’s a situation where people are being asked to take a step back from economic activity,” Powell said. “Close their businesses, stay home after work.”

By dumping money out the door, the Fed is hoping to keep the economy on life support long enough to survive the pandemic.

“In principle, if we get the threat of the virus under control quickly enough, economic activity can resume,” Powell told NBC.

The Fed has acted much faster in recent weeks than it did during the financial crisis a dozen years ago.

“It’s kind of crazy how they’ve done almost as much this week as they did in several months in 2008,” said Michael Feroli, chief US economist at JP Morgan, during a week during from which the Fed unveiled several new loan programs. “Now they have the benefit of being able to just dust off Bernanke’s playbook.”

Some of the Fed’s new lending efforts are recycled from those that then-President Ben Bernanke and his colleagues put in place during the financial crisis. But the Main Street program now on the drawing board would push the central bank into new territory – making liquidity available to midsize businesses with the aim of keeping them afloat during the coronavirus shutdown.

“The more the economy has that downtime, the bigger the hangover and the harder it will be for the economy to bounce back,” McBride said.

“What the Fed is trying to do is provide as much liquidity and capital as is demanded in the markets, so that businesses can keep operating, banks can keep lending, and consumers can still have it. access to credit, ”he added.


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