Fed rewrites crisis playbook

The Federal Reserve is rewriting its crisis playbook as the central bank takes unprecedented steps to prevent a historic downturn.

As the coronavirus pandemic unleashes economic turmoil across the U.S., the Fed is approaching the limits of its legal authority to keep credit flowing to American households and businesses facing financial peril.

“The coronavirus pandemic is causing tremendous hardship across the United States and around the world,” the Fed said in a statement Monday. “Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate.”

The Fed said it would purchase as many Treasury bonds and mortgage-backed securities as it deems necessary to stabilize financial markets, opening the door to buying trillions of dollars in debt to stimulate the world’s largest economy.

The central bank also announced it would set up three new facilities to purchase corporate and consumer debt to help companies access financing during the economic fallout from the pandemic. That will soon be followed by a lending program for small and midsize businesses.

Taken together, the Fed’s actions send a message to weary investors, anxious business owners and sparring lawmakers that the central bank will do anything in its power to protect the economy from a financial freefall.

“This is a signal of their commitment to do whatever it takes,” said David Beckworth, senior research fellow at George Mason University who served as a Treasury Department economist during the George W. Bush administration. “This is a big, bold step for the Fed.”

Over the past three weeks, the Fed has steadily ramped up its efforts to bolster the U.S. economy and guide financial markets through an economic collapse that may rival the Great Depression in magnitude, if not length.

Hundreds of thousands of Americans are expected to lose their jobs as businesses across the U.S. shutter to mitigate the spread of the virus. The sudden halt in nearly all non-essential economic activity has spiked the demand for cash and fueled a mass selloff in bonds and other financial instruments that help credit move from banks to households and businesses.

As the economic toll of the pandemic became apparent, the Fed turned to its primary tools for boosting economic activity. The bank on March 15 zeroed-out its baseline interest rate range and announced it would purchase $700 billion in Treasury and mortgage bonds, reviving the “quantitative easing” used to jerk the economy out of the Great Recession.

The Fed has also brought back recession-era facilities to buy bonds from companies with high credit ratings now  facing severe financial distress due to the pandemic, and backstop certain mutual funds as investors flee for safety.

After running through the tools it used in the previous decade, the Fed turned a new page Monday, unveiling a slate of new programs to significantly expand its reach into the economy.

The Fed will open three facilities to make sure companies on the brink have access to credit: one to purchase newly issued corporate bonds and debt, another to purchase outstanding corporate bonds and another that would sell bonds backed by student loans, auto loans, credit card loans and loans guaranteed by the Small Business Administration to be purchased by the Fed.

“No one thing in and of itself is more important than the other. What’s important is the multi-pronged approach and the fact that they’re doing it because we’re in a crisis,” said Diane Swonk, chief economist at Grant Thorton. “This is first and foremost a health crisis and we can’t let it metastasize into depression, and seizing of credit markets is one way to make that happen really rapidly.”

Swonk added that the Fed’s aggressive action also helps dispel the notion that the central bank has run out of tools to fight a grueling economic downturn as Congress struggles to strike a deal on an economic rescue package.

“They have a lot left and they’re willing to use them,” Swonk said, “but they still can’t do it alone.”

Tense negotiations between Senate Republicans and Democrats are expected to stretch into Tuesday after both sides failed to strike a deal Monday. The Dow Jones Industrial Average and S&P 500 index each closed with losses of roughly 3 percent as concerns about the delay of the Senate stimulus deal lingered despite the Fed’s aggressive actions.

With the prospects of fiscal stimulus uncertain, some advocates have called on the Fed to go even further and purchase municipal bonds to help states and cities facing severe revenue shortfalls and spiking unemployment insurance costs.

“The priority really should be right now in the states and making sure that they can finance their way through this,” said Skanda Amarnath, director of research and analysis at Employ America, a progressive economic research and advocacy group.

“The Fed has shown in this latest set of moves that they are not just rehashing the financial crisis playbook.”