Fed Moves to Keep Credit Flowing and Money Markets Calm Amid Coronavirus Turmoil

“We will ensure that the supply of reserves in the banking system remains ample,” John C. Williams, the New York Fed president, said in a speech last week. “We are monitoring conditions in money markets closely.”

The actions are the Fed’s latest effort to insulate the economy and financial system from painful fallout as coronavirus spreads, threatening global growth and even the domestic expansion.

The Fed cut interest rates by half a percentage point last week in an emergency move, lowering its benchmark policy tool to a range of 1.0 to 1.25 percent. It is widely expected to slash rates by another half point by March 18, the conclusion of its next meeting. Many investors anticipate that the Fed, which cut rates to near zero during the financial crisis, will return to that level by April.

Many economists expect the Fed to do more to keep market plumbing functioning normally, perhaps by rolling out programs last used during the financial crisis.

“In our view much more will need to be forthcoming and very soon,” economists at Evercore ISI wrote in a note following the Fed’s announcement. They speculated that the central bank might extend its Treasury bill-buying program, which would help to keep the financial system flush with cash and potentially help to avert short-term funding disruptions.

The central bank could also activate so-called “swap lines,” the Evercore ISI economists said. The Fed has a history of using its agreements with global partners to help foreign central banks deliver U.S. dollar funding to financial institutions in their regions amid market stress.

The Fed has gotten creative in previous crises, using an alphabet soup of fixes in depths of the financial meltdown. That could happen again. When investors became reluctant to lend in the depths of the financial crisis, the Fed auctioned 28-day loans, and later 84-day loans, to banks that were still in decent shape. The program, known as the Term Auction Facility, spanned the end of 2007 to mid-2010 and allowed the Fed to get money flowing among a broader range of financial market players.

Article source: https://www.nytimes.com/2020/03/09/business/economy/fed-coronavirus.html