The pandemic coronavirus worsening the economic situation of the world is making it realize to the Federal Reserve Chairman Jerome Powell and America’s central bank to prepare for the meeting this week. The idea would be the calculations of the suffrage of the economy and creating the best way possible to tackle the crisis. This is not an easy task when the markets and industries are lockdowns. According to Chairman Jerome Powell, this could be the worst economic crisis since the Great Depression.
The Federal Reserve has pledged to pump more than $4tn (£3.2tn) into the financial system, slashing interest rates, relaxing banking rules, and dramatically expanding its lending since March. So far up till $2.2tn has been included in the sheet by the Fed’s which also replicate through other central banks such as Bank of England. The idea is to keep the money floating despite the freezing markets during the pandemic.
A professor of banking and the financial institution, Frederic Mishkin says, “They’ve taken basically what they did in the global financial crisis and now it’s on steroids.”
The Fed rushed dollars to foreign countries and financial firms. As the pandemic grew, the market holders and investors pull funds out of collapsing stock market and the people are looking up to hold the dollar for stability. Responding to this the Fed used emergency mechanisms and provides advanced funds to major financial institutions. It made it easier for foreign service banks to exchange currency in dollars.
After the crisis of 2007-9 Federal Reserve has increased the mechanisms for emergency cases. Now the Fed is trying to protect the bigger financial crisis according to Alan Blinder who is a professor of economics and public affairs at Princeton University.
“That’s not because they care about the bankers,” Prof Blinder says. “It’s because if the financial system started to implode, which it had started to do, that’s going to reverberate back onto the real economy and make things that much worse.”
The Fed offered to buy debt from big companies. To save big companies from going bankrupt, the Fed first offered $100bn of loan which extended within weeks up to $750bn. It also declared $100bn of other kinds of debts such as student loans, car financing loans, credit card debt, and “leveraged loans.”
“I think this is such a large external shock, that I think it is appropriate for the central bank to come in to provide liquidity and try to prevent some of the costs (to society),” says economist Nellie Liang, a senior fellow at the Brookings Institution and a former director of financial stability at the Fed.
The Fed is also lending to small businesses directly. Not to ignore the local business sector, Fed announced its own “Main Street” lending operation. It would go up to $600bn, giving four years of repayment and providing the mid-size firms from $1m to $25m. The Treasury Department also announces $75bn for the loans.
“It’s a big step for the Fed, but I think this crisis is unusual,” says Ms. Liang. “The issues are not just market liquidity they’re also liquidity for smaller firms that don’t often have access to the market so to the extent that the Fed can provide some support here, it seems important.” The Fed is also helping local governments. The Fed is providing $500bn in bonds and $35bn by the Treasury Department.