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43 posts on "Federal Reserve"

September 22, 2020

Expanding the Toolkit: Facilities Established to Respond to the COVID-19 Pandemic



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First of three posts

The Federal Reserve’s response to the coronavirus pandemic has been unprecedented in its size and scope. In a matter of months, the Fed has, among other things, cut the federal funds rate to the zero lower bound, purchased a large amount of Treasury securities and agency mortgage‑backed securities (MBS) and, together with the U.S. Treasury, introduced several lending facilities. Some of these facilities are very similar to ones introduced during the 2007-09 financial crisis while others are completely new. In this post, we argue that the new facilities, while unprecedented, are a natural extension of the Fed’s toolkit, as they operate through similar economic mechanisms to prevent self-reinforcing bad outcomes. We also explain why these new facilities are particularly useful as part of the response to the pandemic, which is an economic shock very different from a financial crisis.

Continue reading "Expanding the Toolkit: Facilities Established to Respond to the COVID-19 Pandemic" »

August 24, 2020

Explaining the Puzzling Behavior of Short-Term Money Market Rates



Since 2008, the Federal Reserve has dramatically increased the supply of bank reserves, effectively adopting a floor system for monetary policy implementation. Since then, the behavior of short-term money market rates has been at times puzzling. In particular, short-term rates have been surprisingly firm in recent months, despite the large increase in reserves by the Fed as a part of its response to the coronavirus pandemic. In this post, we provide evidence that both the supply of reserves and the supply of short-term Treasury securities are important factors for explaining short-term rates.

Continue reading "Explaining the Puzzling Behavior of Short-Term Money Market Rates" »

Posted by Blog Author at 7:00 AM in Fed Funds, Federal Reserve, Liquidity, Treasury | Permalink | Comments (0)

August 20, 2020

Market Function Purchases by the Federal Reserve



Market Function Purchases by the Federal Reserve

In response to disorderly market conditions in mid-March 2020, the Federal Reserve began an asset purchase program designed to improve market functioning in the Treasury and agency mortgage-backed securities (MBS) markets. The 2020 purchases have no parallel, but there are several instances of large SOMA purchases undertaken to support Treasury market functions in earlier decades. This post recaps three such episodes, one in 1939 at the start of World War II, one in 1958 in connection with a poorly received Treasury financing, and a third in 1970, also in connection with a Treasury financing. The three episodes, together with the more recent intervention, demonstrate the Fed’s long-standing and continuing commitment to the maintenance of orderly market functioning in markets where it conducts monetary policy operations—formerly limited to the Treasury market, but now also including the agency MBS market.

Continue reading "Market Function Purchases by the Federal Reserve" »

Posted by Blog Author at 7:00 AM in Federal Reserve, Financial Markets, FOMC, Pandemic | Permalink | Comments (1)

July 17, 2020

MBS Market Dysfunctions in the Time of COVID-19



MBS Market Dysfunctions in the Time of COVID-19

The COVID-19 pandemic elevated financial market illiquidity and volatility, especially in March 2020. The mortgage-backed securities (MBS) market, which plays a critical role in the housing market by funding the vast majority of U.S. residential mortgages, also suffered a period of dysfunction. In this post, we study a particular aspect of MBS market disruptions by showing how a long-standing relationship between cash and forward markets broke down, in spite of MBS dealers increasing the provision of liquidity. (See our related staff report for greater detail.) We also highlight an innovative response by the Federal Reserve that seemed to have helped to normalize market functioning.

Continue reading "MBS Market Dysfunctions in the Time of COVID-19" »

July 16, 2020

Federal Reserve Agency CMBS Purchases



Federal Reserve Agency CMBS Purchases

On March 23, the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York initiated plans to purchase agency commercial mortgage-backed securities (agency CMBS) at the direction of the FOMC in order to support smooth market functioning of the markets for these securities. This post describes the deterioration in market conditions that led to agency CMBS purchases, how the Desk conducts these operations, and how market functioning has improved since the start of the purchase operations.

Continue reading "Federal Reserve Agency CMBS Purchases" »

July 07, 2020

A New Reserves Regime? COVID-19 and the Federal Reserve Balance Sheet



Aggregate reserves declined from nearly $3 trillion in August 2014 to $1.4 trillion in mid-September 2019, as the Federal Reserve normalized its balance sheet. This decline came to a halt in September 2019 when the Federal Reserve responded to turmoil in short-term money markets, with reserves fluctuating around $1.6 trillion in the early months of 2020. Then, in response to the COVID-19 pandemic, the Federal Reserve dramatically expanded its balance sheet, both directly, through outright purchases and repurchase agreements, and indirectly, as a consequence of the facilities to support market functioning and the flow of credit to the real economy. In this post, we characterize the increase in reserves between March and June 2020, describing changes to the distribution and concentration of reserves.

Continue reading "A New Reserves Regime? COVID-19 and the Federal Reserve Balance Sheet" »

June 30, 2020

Leverage Ratio Arbitrage All Over Again



Leverage limits as a form of capital regulation have a well-known, potential bug: If banks can’t lever returns as desired, they can boost returns on equity by shifting toward riskier, higher yielding assets. That reach for yield is the leverage rule “arbitrage.” But would banks do that? In a previous post, we discussed evidence from our working paper that banks did do just that in response to the new leverage rule that took effect in 2018. This post discusses new findings in our revised paper on when and how banks arbitraged.

Continue reading "Leverage Ratio Arbitrage All Over Again" »

Posted by Blog Author at 7:00 AM in Banks, Dodd-Frank, Federal Reserve, Regulation | Permalink | Comments (1)

June 29, 2020

Municipal Debt Markets and the COVID-19 Pandemic



In March, with the outbreak of the COVID-19 pandemic in the United States, the market for municipal securities was severely stressed: mutual fund redemptions sparked unprecedented selling of municipal securities, yields increased sharply, and issuance dried up. In this post, we describe the evolution of municipal bond market conditions since the onset of the COVID-19 crisis. We show that conditions in municipal markets have improved significantly, in part a result of the announcement and implementation of several Federal Reserve facilities. Yields have decreased substantially, mutual funds have received significant inflows, and issuance has rebounded. These improvements in municipal market conditions help ensure that state and local governments have better access to funding for critical capital investments.

Continue reading "Municipal Debt Markets and the COVID-19 Pandemic" »

Posted by Blog Author at 10:02 AM in Federal Reserve, Fiscal Policy | Permalink | Comments (0)

June 12, 2020

How Fed Swap Lines Supported the U.S. Corporate Credit Market amid COVID-19 Strains



The onset of the COVID-19 shock in March 2020 brought large changes to the balance sheets of the U.S. branches of foreign banking organizations (FBOs). Most of these branches saw sizable usage of committed credit lines by U.S.-based clients, resulting in increased funding needs. In this post, we show that branches of FBOs from countries whose central banks used standing swap lines with the Federal Reserve (“standing swap central banks”—SSCBs) met their increased funding needs by accessing dollars that flowed into the United States through their foreign parent banks. This volume of dollar inflows accounted for at least half of the late March aggregate take-up at SSCB dollar operations.

Continue reading "How Fed Swap Lines Supported the U.S. Corporate Credit Market amid COVID-19 Strains" »

May 20, 2020

The Paycheck Protection Program Liquidity Facility (PPPLF)



The Paycheck Protection Program Liquidity Facility (PPPLF)

This post is part of an ongoing series on the credit and liquidity facilities established by the Federal Reserve to support households and businesses during the COVID-19 outbreak.

On April 9, 2020, the Federal Reserve announced that it would take additional actions to provide up to $2.3 trillion in loans to support the economy in response to the COVID-19 crisis. Among the measures taken was the establishment of a new facility intended to facilitate lending to small businesses via the Small Business Administration's Paycheck Protection Program (PPP). Under the Paycheck Protection Program Liquidity Facility (PPPLF), Federal Reserve Banks are authorized to supply liquidity to financial institutions participating in the PPP in the form of term financing on a non-recourse basis while taking PPP loans as collateral. The facility was launched April 16, 2020. As of May 7, it had issued over $29 billion in loans (see the H.4.1 Statistical Release). This post lays out the background for the PPPLF and discusses its intended effects.

Continue reading "The Paycheck Protection Program Liquidity Facility (PPPLF)" »

Posted by Blog Author at 7:00 AM in Crisis, Federal Reserve, Pandemic | Permalink | Comments (0)
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