Written by Steven Hansen
The Federal Reserve is continuing to expand its support to mitigate the coronavirus caused economic disruption stating:
While great uncertainty remains, it has become clear that our economy will face severe disruptions. 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.
I was reading these releases while standing in the queue to enter Home Depot. Our local Home Depot is one of the largest in the U.S. – and I am considered a commercial customer at Home Depot. They were only letting in 100 people at a time, and my rough guess is that over half of the employees were not called in to work because of the reduced hours and shopper counts. Those of us who follow the economy are watching the daily ratcheting down of a once vibrant economy. There is no doubt in my mind, the U.S. has entered a recession – and we are just waiting for the data to confirm it.
This is a very serious situation, and just observing the frantic actions of the Federal Reserve scares me more than the daily media review of the number of new coronavirus cases. The media is not analyzing the actions of the Federal Reserve which the Fed is demonstrating the dire situation of the U.S. With this in mind, this post covers the actions of the Fed released today but likely occurred over the weekend.
Federal Reserve System publishes annual financial statements
Press Release – 3/23/2020
Federal Reserve Board announces technical change to support the U.S. economy and allow banks to continue lending to creditworthy households and businesses
Press Release – 3/23/2020
Federal Reserve issues FOMC statement
Press Release – 3/23/2020
Federal Reserve announces extensive new measures to support the economy
Press Release – 3/23/2020
Federal Reserve issues FOMC statement
The Federal Reserve is committed to use its full range of tools to support the U.S. economy in this challenging time and thereby promote its maximum employment and price stability goals.
The Federal Open Market Committee is taking further actions to support the flow of credit to households and businesses by addressing strains in the markets for Treasury securities and agency mortgage-backed securities. The Federal Reserve 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. The Committee will 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 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.
In connection with these plans, the Committee 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 1/4 percent. 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 percent, 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.”
Federal Reserve announces extensive new measures to support the economy
The Federal Reserve is committed to using its full range of tools to support households, businesses, and the U.S. economy overall in this challenging time. The coronavirus pandemic is causing tremendous hardship across the United States and around the world. Our nation’s first priority is to care for those afflicted and to limit the further spread of the virus. While great uncertainty remains, it has become clear that our economy will face severe disruptions. 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 Federal Reserve’s role is guided by its mandate from Congress to promote maximum employment and stable prices, along with its responsibilities to promote the stability of the financial system. In support of these goals, the Federal Reserve is using its full range of authorities to provide powerful support for the flow of credit to American families and businesses. These actions include:
- Support for critical market functioning. The Federal Open Market Committee (FOMC) will 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 and the economy. The FOMC had previously announced it would purchase at least $500 billion of Treasury securities and at least $200 billion of mortgage-backed securities. In addition, the FOMC will include purchases of agency commercial mortgage-backed securities in its agency mortgage-backed security purchases.
- Supporting the flow of credit to employers, consumers, and businesses by establishing new programs that, taken together, will provide up to $300 billion in new financing. The Department of the Treasury, using the Exchange Stabilization Fund (ESF), will provide $30 billion in equity to these facilities.
- Establishment of two facilities to support credit to large employers – the Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance and the Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds.
- Establishment of a third facility, the Term Asset-Backed Securities Loan Facility (TALF), to support the flow of credit to consumers and businesses. The TALF will enable the issuance of asset-backed securities (ABS) backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA), and certain other assets.
- Facilitating the flow of credit to municipalities by expanding the Money Market Mutual Fund Liquidity Facility (MMLF) to include a wider range of securities, including municipal variable rate demand notes (VRDNs) and bank certificates of deposit.
- Facilitating the flow of credit to municipalities by expanding the Commercial Paper Funding Facility (CPFF) to include high-quality, tax-exempt commercial paper as eligible securities. In addition, the pricing of the facility has been reduced.
In addition to the steps above, the Federal Reserve expects to announce soon the establishment of a Main Street Business Lending Program to support lending to eligible small-and-medium sized businesses, complementing efforts by the SBA.
The PMCCF will allow companies access to credit so that they are better able to maintain business operations and capacity during the period of dislocations related to the pandemic. This facility is open to investment grade companies and will provide bridge financing of four years. Borrowers may elect to defer interest and principal payments during the first six months of the loan, extendable at the Federal Reserve’s discretion, in order to have additional cash on hand that can be used to pay employees and suppliers. The Federal Reserve will finance a special purpose vehicle (SPV) to make loans from the PMCCF to companies. The Treasury, using the ESF, will make an equity investment in the SPV.
The SMCCF will purchase in the secondary market corporate bonds issued by investment grade U.S. companies and U.S.-listed exchange-traded funds whose investment objective is to provide broad exposure to the market for U.S. investment grade corporate bonds. Treasury, using the ESF, will make an equity investment in the SPV established by the Federal Reserve for this facility.
Under the TALF, the Federal Reserve will lend on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans. The Federal Reserve will lend an amount equal to the market value of the ABS less a haircut and will be secured at all times by the ABS. Treasury, using the ESF, will also make an equity investment in the SPV established by the Federal Reserve for this facility. The TALF, PMCCF and SMCCF are established by the Federal Reserve under the authority of Section 13(3) of the Federal Reserve Act, with approval of the Treasury Secretary.
These actions augment the measures taken by the Federal Reserve over the past week to support the flow of credit to households and businesses. These include:
- The establishment of the CPFF, the MMLF, and the Primary Dealer Credit Facility;
- The expansion of central bank liquidity swap lines;
- Steps to enhance the availability and ease terms for borrowing at the discount window;
- The elimination of reserve requirements;
- Guidance encouraging banks to be flexible with customers experiencing financial challenges related to the coronavirus and to utilize their liquidity and capital buffers in doing so;
- Statements encouraging the use of daylight credit at the Federal Reserve.
Taken together, these actions will provide support to a wide range of markets and institutions, thereby supporting the flow of credit in the economy.
The Federal Reserve will continue to use it full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals.
Term Sheet – Primary Market Corporate Credit Facility (PDF)
Term Sheet – Secondary Market Corporate Credit Facility (PDF)
Term Sheet – Term Asset-Backed Securities Loan Facility (PDF)
Term Sheet – Money Market Mutual Fund Liquidity Facility (PDF)
technical change to support the U.S. economy and allow banks to continue lending to creditworthy households and businesses
The Federal Reserve Board on Monday 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. 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 technical change mirrors an interim final rule announced last week by the bank regulatory agencies that applies to a firm’s capital levels.
[to read the technical changes click here]
Treasury Securities and Agency Mortgage-Backed Securities Operations
Effective March 23, 2020, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to increase the System Open Market Account (SOMA) 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 FOMC also directed the Desk to purchase agency commercial mortgage-backed securities (CMBS).
Consistent with this directive, the Desk has updated its plans regarding purchases of Treasury securities and agency MBS during the week of March 23, 2020. Specifically, the Desk plans to conduct operations totaling approximately $75 billion of Treasury securities and approximately $50 billion of agency MBS each business day this week, subject to reasonable prices. The Desk will begin agency CMBS purchases this week.
The Desk stands ready to adjust the size and composition of its purchase operations as appropriate to support the smooth functioning of the Treasury, agency MBS, and agency CMBS markets.
Detailed information on the purchase schedules for Treasury securities and agency MBS can be found on the Treasury Securities Operational Details and Agency MBS Operation Schedule pages, respectively. Additional details on eligible securities and the overall size and scope of agency CMBS purchases will be released in coming days.
Federal Reserve Financial Statements
The Federal Reserve System on Monday released the 2019 combined annual audited financial statements for the Federal Reserve Banks, as well as statements for the 12 individual Federal Reserve Banks and the Board of Governors. An independent public accounting firm engaged by the Board has issued unqualified opinions on the financial statements and on the Board’s and each Bank’s internal controls over financial reporting. The audited financial statements provide information about the assets, liabilities, and earnings of the Reserve Banks and the Board as of December 31, 2019.
The Federal Reserve Banks’ 2019 earnings were approximately $55.5 billion, representing a decrease of $7.6 billion from 2018. The Reserve Banks provided for remittances to the U.S. Treasury of $54.9 billion in 2019. Interest income on securities acquired through open market operations totaled $102.7 billion, a decrease of $9.5 billion from the previous year. Interest expense on depository institutions’ reserve balances during the year was $34.9 billion, a decrease of $3.5 billion from the previous year. Interest expense on securities sold under agreements to repurchase was $6.0 billion, an increase of $1.5 billion from the previous year. Reserve Bank operating expenses were $7.4 billion, including assessments of $2.2 billion for Board expenses, currency costs, and the operations of the Bureau of Consumer Financial Protection.
Total Reserve Bank assets as of December 31, 2019, were approximately $4.2 trillion, an increase of $116 billion from the previous year. Total Reserve Bank assets were composed primarily of $4.1 trillion of securities under agreements to resell, U.S. Treasury securities, and federal agency and government-sponsored enterprise mortgage-backed securities acquired through open market operations. The Federal Reserve Bank of New York provides additional detailed information about open market operations and securities holdings on an ongoing basis on its website at www.newyorkfed.org/markets/pomo_landing.html.
The Board engages KPMG LLP, an independent public accounting firm, to conduct annual audits of these financial statements in accordance with auditing standards issued by the American Institute of Certified Public Accountants, the Public Company Accounting Oversight Board, and, for the Board of Governors audit only, the Generally Accepted Government Auditing Standards. The public accounting firm also conducts audits of internal controls over financial reporting for the 12 individual Federal Reserve Banks and the Board of Governors.
The Federal Reserve System financial statements are available on the Federal Reserve Board’s website at www.federalreserve.gov/monetarypolicy/bst_fedfinancials.htm.