COVID-19: Fed moves to protect US economy

The Federal Reserve has moved into overdrive to try to keep the US economy from suffering lasting damage from the coronavirus pandemic, announcing an emergency interest rate cut on March 3 and rolling out new efforts almost weekly since, including slashing rates to zero and relaunching large-scale asset purchases.

The US central bank, arguably the most powerful financial institution on Earth, has more than $5.3 trillion of assets on its books - the equivalent of roughly a quarter of annual U. S. economic output before the crisis.

Its stockpile of assets will grow much larger under the litany of programs it has launched, although some will be held in what are known as special- purpose vehicles, or SPVs, rather than directly by the central bank.

The Fed cut rates twice on an emergency basis this month, the first time it has done that since the financial crisis in 2008. The first cut of a half percentage point was on March 3 and the second of a full point was on March 15, which brought the Fed’s overnight borrowing rate for banks back to near zero. The reduction is meant to keep down the cost of loans for banks - and by extension their customers - to ensure borrowers have ample access to credit during the crisis.

The Fed first employed QE in the financial crisis, starting in 2008. The idea is that through large-scale purchases of various types of bonds - mostly Treasuries and mortgage-backed securities - it helps ensure that longer-term interest rates like those for mortgages and car loans remain low and helps keep major purchases affordable for consumers and businesses. When it cut rates back to near zero on

March 15, the Fed restarted these large-scale purchases and is now doing so with an open-ended commitment.

Banks in recent weeks have borrowed the most since 2009 from the Fed’s lending tool of last resort at the urging of the central bank. The so-called “discount window” is rarely used because banks are worried that using it could make them appear weak.

But policymakers have lowered the rate charged on the funding to 0.25% and extended the length of the loans offered from one day to 90 days. As of last Wednesday, banks had borrowed more than $50 billion.

The Fed has standing agreements with five other major foreign central banks - the Bank of Canada, European Central Bank, Bank of England, Bank of Japan and Swiss National Bank - that allows them to provide U.S. dollars to their financial institutions during times of stress.