Money, Banking and Financial Markets

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Posts tagged MMLF
The Fed Goes to War: Part 3

For the second time this century, the Federal Reserve is a crisis manager. In this role, policymakers can lend to solvent but illiquid intermediaries (as the lender of last resort). They can backstop financial markets (as a market maker of last resort). And, when all else fails, they can take the place of dysfunctional private-sector intermediaries.

During the first financial crisis of the 21st century, the Fed’s response shifted from one role to the next as the crisis intensified. Yet, even compared to that massive crisis response, the Fed’s recent moves are breathtaking—in speed, scale and scope.

Indeed, with its most recent announcements on April 9, the Federal Reserve is committed to an unprecedented course of action to ensure the flow of credit to virtually every part of the economy. In carrying out its obligations under the newly enacted CARES Act, the Fed is effectively transforming itself into a state bank that allocates credit to the nonfinancial sectors of the economy.

Yet, picking winners and losers is not a sustainable assignment for independent technocrats. It is a role for fiscal authorities, not central bankers. Instead of using the Fed as an off-balance sheet vehicle for the federal government, we hope that Congress will shift these CARES Act obligations from the Federal Reserve to the Treasury, where they belong….

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Steve Cecchetti and Kim SchoenholtzCARES Act, Coronavirus, COVID-19, Crisis management, Crisis mitigation, Federal Resere balance sheet, Lender of Last resort, Balance sheet, Market maker of last resort, Commercial Paper Funding Facility, CPFF, Primary Dealer Credit Facility, PDCF, Money Market Mutual Fund Liquidity Facility, MMLF, Primary Market Corporate Credit Facility, PMCCF, Secondary Market Corporate Credit Facility, SMCCF, Term Asset-Backed Securities Loan Facility, TALF, Municipal Liquidity Facility, MLF, Main Street New Loan Facility, MSNLF, Main Street Expanded Loan Facility, MSELF, Paycheck Protection Program Lending Facility, PPPLF
The Fed Goes to War: Part 2

In this note, we update our earlier comment on the first set of Fed actions that appeared on March 23 just as a slew of new ones arrived.

While most of the changes represent simple extensions of previous tools, the Fed also has introduced facilities that are going to involve it deeply in the allocation of credit to private nonfinancial firms. Choices of whom to fund are inherently political, and hence destined to be controversial. Engaging in such decisions will make it far more difficult for the Fed eventually to return to the standard of central bank independence that it has guarded for decades. We urge the Fed to limit its involvement in the allocation of credit to the private nonfinancial sector. And, should Congress deem it necessary, we encourage them to provide explicit authorization to the Treasury (along with the resources) to take on this crisis role.

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Kim SchoenholtzFederal Reserve, Monetary policy, Financial stability policy, QE, Quantitative easing, New monetary policy tools, PMCCF, SMCCF, TALF, MMLF, CPFF, Large-scale asset purchases, LSAPs, LOLR, Lender of last resort, Market maker of last resort, TAF, MBS, ABS, Transparency, Accountability, Central bank independence, Exchange Stabilization Fund, ESF
The Fed Goes to War: Part 1

Over the past two weeks, the Federal Reserve has resurrected many of the policy tools that took many months to develop during the Great Financial Crisis of 2007-09 and several years to refine during the post-crisis recovery. The Fed was then learning through trial and error how to serve as an effective lender of last resort (see Tucker) and how to deploy the “new monetary policy tools” that are now part of central banks’ standard weaponry.

The good news is that the Fed’s crisis management muscles remain strong. The bad news is that the challenges of the Corona War are unprecedented. Success will require extraordinary creativity and flexibility from every part of the government. As in any war, the central bank needs to find additional ways to support the government’s efforts to steady the economy. A key challenge is to do so in a manner that allows for a smooth return to “peacetime” policy practices when the war is past.

In this post, we review the rationale for reintroducing the resurrected policy tools, distinguishing between those intended to restore market function or substitute for private intermediation, and those meant to alter financial conditions to support aggregate demand….

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Steve Cecchetti and Kim SchoenholtzLender of last resort, LOLR, Expired monetary policy tools, New monetary policy tools, Coronavirus, COVID-19, Federal Reserve Act, FRA Section 13(3), Quantitative easing, QE, Targeted asset purchases, TAP, VIX, Volatility, Commercial paper, CPFF, Primary dealer, PDCF, Money market mutual fund, MMMF, MMLF, Central bank independence, Helicopter money, Fiscal dominance