Fed Tears Through Its 2008 Playbook to Counter Economic Hit of Virus

(Bloomberg) -- The Federal Reserve has sped through a litany of tools from its playbook during the 2008 financial crisis to support the economy. While they have rolled out several forceful measures, they still have tools and may consider brand new approaches.

Here’s the list of tools the Fed has used in the past two weeks and what could come next:

Cutting Rates

Check.

The Fed announced a rare, emergency interest rate cut on March 3 in between its regularly scheduled meetings and then on Sunday, slashed them again to near zero.

Forward Guidance

Under consideration.

The Federal Open Market Committee’s statement Sunday that it “expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” The guidance could be strengthened with language that suggests they will hold rates near zero for a long time, or until the economy achieves a numerical benchmark on inflation or employment. Outcome-based forward guidance was used during the financial crisis and has been discussed by Fed officials in recent months.

The market expects the Fed to maintain rates near zero through the end of 2021.

Quantitative Easing

Check.

The central bank said in its statement Sunday that “over the coming months” it will buy at least $500 million of U.S. Treasury securities and $200 billion in mortgage-backed securities. That language left the door open to even more purchases, and potentially for a monthly amount as they did in previous rounds of QE.

Yield Curve Control

Still possible.

This idea was floated by some officials during their debate over strategy and tools over the past several months. The idea is to cap longer-term yields with purchases to reinforce the central bank’s intent to hold rates low for a considerable period.

“The committee would commit to capping rates out the yield curve for a period consistent with its expectation for the duration of the outcome-based forward guidance,” Fed Governor Lael Brainard explained in a Feb. 21 speech. Ten-year Treasury yields jumped to over 1%, from a record low of 0.31% the week before, as the government considers massive stimulus that will force the Treasury to issue more debt.

Negative Interest Rates

Probably not happening.

Unlike its European counterparts, the Federal Reserve has for the past several years pushed back from negative interest rates saying the tool wouldn’t be well suited to the U.S. economy which has more market-based finance than other countries. “We do not see negative policy rates as likely to be an appropriate policy response here in the United States,” Federal Reserve Chairman Jerome Powell said at his Sunday press conference.

Expanding Liquidity Swaps

Under consideration.

On Sunday the Fed also said it would coordinate with five other central banks to make sure that dollars were available around the world. Foreign central banks swap their currencies for dollars from the Fed to provide liquidity to local banks that may have difficulty obtaining dollar funding. The Fed could also expand the list of central banks it provides dollars to through swap lines. During the last financial crisis some 14 central banks participated, including those in Brazil and New Zealand. Central banks this week agreed to extend the terms of the swaps to 84 days.

Lending to Non-Bank Borrowers

Check.

On Tuesday, the Fed unleashed its powers under 13(3) of the Federal Reserve act to provide even more cash. It instituted two emergency lending programs with the approval of the Treasury secretary to help keep credit flowing -- a Commercial Paper Funding Facility and a Primary Dealer Credit Facility.

In the CPFF, the Fed is backstopping the market for top-rated, dollar-denominated, three-month commercial paper in a move that supports America’s biggest corporations that utilize these IOUs to meet short-term cash flow needs and payroll. In the PDCF, the Fed is helping dealers finance illiquid assets by providing them cash collateralized by a range of securities beyond that include investment-grade corporate debt, asset-backed securities and even equities.

Repo Funding

Check.

The Fed’s has been dramatically boosting the amount of short term cash it lends to its dealers through repo operations, providing them both on an overnight basis and for as much as three months. Repo is a standard tool in the central bank’s arsenal, and it can be used quickly keep short-term funding markets function smoothly. In repos, the Fed lends cash to its primary dealers in exchange for government securities as collateral.

Regulatory Flexibility

Check.

The Federal Reserve and other U.S. regulators have been urging banks to meet the needs of people and businesses under financial strain because of the coronavirus, giving them direction that in doing so they wouldn’t fall afoul of examinations on risky loans. The central bank already, in another move to boost lending, said it would no longer require banks to hold reserves against customer deposits.

Currently, lenders must set aside cash equal to a percentage of their total deposits so that they have emergency funds on hand in case of a run on the bank. The Fed said it “reduced reserve requirement ratios to zero percent” effective March 26.

On Tuesday, the regulators rapidly instituted a new rule to give banks more comfort in extending their balance sheets to hard hit companies and consumers. Specifically, the agencies said they were giving banks increased flexibility to use their capital buffers to lend.

Cutting Discount Rate

Check.

This step is aimed at liquidity because it allows any bank to exchange a wide range of collateral for a short-term loans, usually overnight. On Sunday the Fed cut the rate on the discount window to 0.25% and let banks borrow from it for as much as 90 days.

TAF

Still possible.

The Fed could further ease conditions in bank funding markets by restarting the Term Auction Facility which gives them longer-term cash and allows them to avoid the stigma of using the discount window. TAF was created during the financial crisis and just last week former New York Fed President Bill Dudley mentioned it as a possible tool. It would provide term loans to banks.

Leverage, Accounting Changes

Under consideration.

The Federal Reserve and other Wall Street regulators are mulling changes to leverage limits and accounting rules as they look for ways to free up bank capital in response to the coronavirus crisis, Bloomberg reported Tuesday.

One option would be to further delay the impact of a recent accounting rule change for “current expected credit losses,” or CECL to ease pressure on banks, including a likely lengthening of its phase-in period. The bank regulators also have been weighing changes to leverage limits -- a key constraint on Wall Street.

Main Street Facilities

Emerging idea.

Democrats in Congress are encouraging the Fed to consider extending financial support to state and local governments, an action which could require a modification in the Federal Reserve Act if done with longer term municipal debt through open market operations. Others have called for a government-backed credit facility to help businesses and households have cash through the crisis.

Senator Mark Warner, a Virginia Democrat, proposed Tuesday a small-and-medium sized business credit facility where the Fed and Treasury would help expand bank lending capacity to those borrowers.

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