WASHINGTON–The Federal Reserve continues to announce new resources and tools aimed at helping the economy as the coronavirus pandemic shuts down big segments of the United States.
The Federal Open Market Committee said its latest move to support the flow of credit to households and businesses is aimed at addressing strains in the markets for Treasury securities and agency mortgage-backed securities. The Federal Reserve said it will continue to purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions.
In addition, the Committee said it will also include purchases of agency commercial mortgage-backed securities in its agency mortgage-backed security purchases.
“In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations,” the Fed said. “The Committee will continue to closely monitor market conditions, and will assess the appropriate pace of its securities purchases at future meetings.”
Voting (by notation) for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles.
In a related set of actions, the Federal Reserve announced additional measures to support the flow of credit to households and businesses. More information can be found on the Federal Reserve Board's website.
Policy Initiative
In connection with these plans, the Committee said it voted unanimously to authorize and direct the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive:
- "Effective March 23, 2020, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 0% to ¼%. The Committee directs the Desk to increase the System Open Market Account holdings of Treasury securities and agency mortgage-backed securities (MBS) in the amounts needed to support the smooth functioning of markets for Treasury securities and agency MBS. The Committee also directs the Desk to include purchases of agency commercial mortgage-backed securities in its agency mortgage-backed security purchases.
- “The Committee also directs the Desk to continue conducting term and overnight repurchase agreement operations to ensure that the supply of reserves remains ample and to support the smooth functioning of short-term U.S. dollar funding markets. In addition, the Committee directs the Desk to conduct overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 0.00%, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
- The Committee directs the Desk to continue rolling over at auction all principal payments from the Federal Reserve's holdings of Treasury securities and to reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month in agency mortgage-backed securities. Small deviations from these amounts for operational reasons are acceptable.
- The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions.
Technical Change
The Federal Reserve Board on Monday also announced a technical change to support the U.S. economy and allow banks to continue lending to creditworthy households and businesses.
The interim final rule will phase in gradually, as intended, the automatic restrictions associated with a firm's "total loss absorbing capacity," or TLAC, buffer requirements, if the levels decline, the Fed said. TLAC is an additional cushion of capital and long-term debt that could be used to recapitalize a bank if it is in distress. The change will facilitate the use of firms' buffers to promote lending activity to households and businesses.
“Over the past decade, U.S. banks of all sizes have built up substantial levels of capital and liquidity in excess of their minimum requirements,” the Fed said. “The technical change mirrors an interim final rule announced last week by the bank regulatory agencies that applies to a firm's capital levels.”
‘Encouraged by Increase’
Meanwhile, the Federal Reserve Board said it is “encouraged by the notable increase in discount window borrowing this week,” with banks demonstrating a willingness to use the discount window as a source of funding to support the flow of credit to households and businesses.
The Fed noted the uptick follows the recent changes to the discount window it announced as well as the federal banking regulators' recent statement encouraging financial institutions to use the discount window. In that statement, the Federal Reserve and other federal regulatory agencies underscored the role of the discount window.
“By providing ready access to funding, the discount window helps depository institutions manage their liquidity risks efficiently and avoid actions that have negative consequences for their customers, such as withdrawing credit during times of market stress,” the Fed said. “The Federal Reserve welcomes continued use of the discount window by banks to help them channel credit to households and businesses.”