In an effort to prop up the U.S. economy, promote employment, and stabilize prices during the COVID-19 upheaval, the Federal Reserve is pulling the trigger on its “full range of tools.”
The Fed’s Open Market Committee (FOMC) is at the forefront of the changes, taking action towards supporting the flow of credit to households and purchasing Treasury securities and agency mortgage-backed securities.
How far is the Fed prepared to take it? “In the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions,” the agency said in a press release.
“The Committee will include purchases of agency commercial mortgage-backed securities in its agency mortgage-backed security purchases. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will continue to closely monitor market conditions, and will assess the appropriate pace of its securities purchases at future meetings.”
Added security for creditworthy consumers
The Federal Reserve Board also announced on Monday that it’s made a “technical change” to support the domestic economy and permit banks to continue making loans to financially trustworthy households and businesses.
Simply put, that “technical change” allows the Fed to provide additional cushions for emergency capital and long-term debt to help recapitalize a bank if it finds itself close to the brink. The agency notes that this rule is strictly precautionary.
“Over the past decade, U.S. banks of all sizes have built up substantial levels of capital and liquidity in excess of their minimum requirements,” the Fed remarked, showing confidence that banks have the wherewithal to withstand some pressure. However, if the economy starts to tank, the Fed is prepared to phase that rule in gradually.
Is the Fed just printing money?
If you’re thinking that the Fed is just running the money-printing presses ad nauseam, you’re basically correct. In actuality, the FOMC sets the target for the fed funds rate every month. To make sure that target is hit as close to dead center as possible, the Fed uses something called “open market operations.” That process allows the Fed to buy or sell securities from its member banks.
“It creates credit out of thin air to buy these securities. This has the same effect as printing money,” said Kimberly Amadeo of TheBalance. “That adds to the reserves the banks can lend and results in the lowering of the fed funds rate. Knowledge of the current fed funds rate is important because this rate is a benchmark in financial markets.”
The takeaway for the consumer is that the Fed is going to do whatever is absolutely necessary to keep the U.S. economy from failing.
One such action was an emergency rate cut of 0.5 percent just a couple of weeks ago when the pandemic was picking up steam. Last week, the Fed’s Board of Governors also told banks that the agency is giving them additional flexibility and wants the banks to use that latitude to help consumers and businesses.