- [Narrator] In March, the Federal Reserve signaled
it would do practically anything to help
the American economy fend off a recession.
- So the Fed has two main roles.
The one we most think about is of monetary policy,
which basically means raising interest rates
and lowering interest rates to try
and keep the economy on an even keel.
The other role it has is what we would call
it's a lender of last resort role.
In fact, that is a role for which most central banks,
including the Fed, were originally created.
- [Narrator] The Fed says it will use its full range
of tools to support the U.S. economy
during the coronavirus pandemic.
Here are the tools.
Tool number one, interest rates.
On March 15th, the central bank dropped
its interest rate target.
- [Jerome] Today, we reduced the target range
for our policy interest rate by one percentage point,
bringing it close to zero, and said that we expect
to maintain the rate at this level until we're confident
that the economy has weathered recent events.
- [Narrator] Historically, the Fed has cut interest rates
in an effort to stimulate growth,
but that's only one of its tools.
- In most recessions in the past,
the Fed has to lower interest rate by an average
of five percentage points to turn things around
and get the economy growing again.
It came into this crisis
with interest rates already very low
at only around one and a half percentage points
and it's already cut them to zero.
So it is effectively out of ammunition.
- [Narrator] Having lost the use of its main tool,
here's some of the other tools the Fed can use.
Tool number two, government bonds.
On Monday, March 23rd, the Fed said
it would buy $375 billion in Treasury securities
and $250 billion in mortgage-backed securities
in just one week.
The Fed has done this before, in 2008.
Between then and 2014, the central bank's asset sheet grew.
Then spending plateaued and the Fed started
to wind down its balance sheet.
But the Fed's buying in March leaves the bank
with more than four and a half trillion dollars in assets.
The central bank has said, that moving forward,
the purchases of government securities
are essentially unlimited.
- As that tends to lower long term interest rates,
that brings down things like mortgage rates directly,
so it has been buying bonds.
The only problem is that bond rates are down below 1%
and so there isn't a lot of juice it can put
into the economy by pushing those down further.
So right now, the Fed's monetary policy role
is largely out of ammunition.
However, the Fed can do a lot through the lender
of last resort role.
In fact, we have seen it do a lot.
- [Narrator] As lender of last resort,
the Fed can make more money available
to the financial system to make sure
that it has cash to operate smoothly.
In mid-March, the Fed made $1.5 trillion available in a bid
to prevent unusual disruptions in the repo market.
In these transactions, the Fed lends cash
and accepts government bonds
or mortgage-backed securities as collateral.
Financial institutions can use the money for a variety
of short-term operations, all of which are necessary
for bond markets to operate normally.
You can think of this cash injection as grease for the gears
that keep the financial system humming.
- Now typically, bond dealers do not need a lot of help
from the Federal Reserve, but in stressful times they,
like a lot of other big companies, find it's difficult
to find someone to lend them money.
So the Fed steps in and lends them the money.
It's important that it do so, because if it didn't,
you would see long term interest rates,
including on your mortgages, going up a lot.
- [Narrator] Tool number four, discount window lending.
In March, the Fed eased the rules for accessing its channel
to lend cash directly to commercial banks.
Commercial banks typically finance loans with cash
they get from deposits and private lenders,
but if those sources aren't available, they can,
in a pinch, borrow from the Fed.
- The way the Fed lends to banks, it basically asks them
to come to its so-called discount window.
- [Narrator] This interest rate is typically higher
than the federal funds target.
That encourages banks to borrow from each other
and to not rely on the Fed.
- [Narrator] But on March 16th,
the Fed lowered the discount rate to .25 percent,
which is near the upper range of the federal funds target.
- If banks are worried about people thinking they're weak,
they're not gonna go to the discount window,
even if they need the money
because there's a stigma attached to it.
So what the Fed wants to do now is,
hey, we're really worried about the economy,
come to our discount window and borrow.
Please don't worry about stigma.
And just to make sure you don't have to worry about stigma,
we're actually gonna lower the rate on discount window loans
to roughly the same rate you'd have to pay out
on the regular markets.
And that's what they've done.
- [Narrator] Tool number five, commercial paper.
On March 17th, the Fed relaunched
its commercial paper funding facility.
This facility will help the Fed lend cash
directly to businesses.
That money is then used for day-to-day business operations,
like payroll.
- So the Fed never saw itself as being the main source
of funding for private enterprise.
It always wanted the economy to primarily be
a market-based economy where private companies
would borrow from private lenders.
The only reason that it's stepping in to play this role
is because we're going through an economic crisis.
If these private firms cannot get funding
from their usual place, there outta be a way
to get it from the Fed.
- [Narrator] Tool number six, swap lines.
- [Narrator] The Fed can also send money abroad
to backstop foreign central banks.
- So the dollar is a very special currency.
Companies and banks and investors who don't do business
in the United States, all agree to do business in dollars
because it's kind of like the lingua franca of currencies.
However, when you have a crisis,
this causes a bit of a vulnerability.
At times like this, the Fed sees that part of its role
as lender of last resort is to lend
to the rest of the world.
- [Narrator] In March 2020, the Fed ramped up a program
that can make more U.S. dollars available overseas
at near zero interest rates.
- And these loans that the Fed makes to other central banks
are called swap lines.
- [Narrator] In March, the Fed extended swap lines
to several banks across the globe.
- If the world needs dollars,
the Fed will print those dollars
and it will lend them those dollars.
It's not in the interest of the United States
that companies in all our trading partners
go out of business because that will ultimately
not just hurt their economies, it will hurt our economy
because we rely on them as customers
and we rely on them as suppliers.
- [Narrator] Though the Fed has exhausted
its monetary tools, it continues to work
to backstop financial markets.
- [Greg] They're trying to ensure that,
on top of this health crisis and economic crisis,
we do not also have a financial crisis.
(calm music)