Fed takes unprecedented steps to prop up the economy
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The Federal Reserve announced new measures Monday aimed at preventing a full-on economic depression. The central bank will now buy unlimited amounts of Treasury bonds and mortgage-backed securities.
The Fed is also setting up special programs to support business and consumer lending. The overall goal is to keep money flowing in the U.S. economy.
Traditionally, the Fed responds to crises by injecting money into the banking system. But this is a different kind of crisis, according to Jeffrey Bergstrand, finance professor at Notre Dame.
“What’s different this time is it’s not a financial crisis, but we want to prevent a financial crisis,” he said. “What this move basically does is provide a line of credit, and it extends that line of credit outside just the banking sector.”
For example, to local governments. The Fed will buy municipal bonds so those governments can keep funding their operations. It will buy corporate bonds and provide bridge loans to help large companies keep paying their bills and their workers. A “Main Street” program will provide loans to small and midsize businesses.
Tim Duy, professor of economic at the University of Oregon, said this will do a lot to help companies having trouble accessing credit right now.
“The Fed’s role is to find any and all mechanisms they can to support the flow of credit in the economy to large, medium and small firms,” Duy said. “But that doesn’t actually fix the underlying problem.”
The underlying problem is the global COVID-19 pandemic. After the pandemic subsides, the problem will be getting people to spend money again.
Duy said that’s where the fiscal stimulus Congress is working on — with cash payments and grants — comes in. Karen Petrou, managing partner at Federal Financial Analytics, said the Fed could also do more for regular folks.
“The Fed is working from the belief that if you save the really big companies and really big financial institutions, the money will trickle down to the rest of us,” Petrou said. “That hasn’t happened yet.”
She proposes short-term, low-cost loans to households and the very small businesses she says the Fed is overlooking.
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