The Fed must act faster


The Federal Reserve has become the first player in the US economy. Normally, the Fed is concerned about the safety of the financial system. But its fate as an independent central bank may depend on its ability to preserve the real economy.

To be successful, the Fed must put aside normal concerns about credit risk and pick winners and losers. It is clear that no moral hazard issues arise from this virus outbreak. The Fed must act quickly to put liquidity in the hands of business owners. Small businesses constitute almost 50% of the country’s workforce. Many only have a three or four week cash flow cushion. They need the money now.

The Fed is the perfect vehicle to save the economy. It has political confidence, is made up of qualified professionals, and has the 2008 experience to draw from. More importantly, it can create money and operate with negative capital. The Fed can still pay its bills.

The Fed first responded to the crisis in the week of March 15 by massively increasing liquidity. Its balance sheet has since grown by more than 30% to $ 6.1 trillion. The Fed also lent using the discount window, while minimizing potential stigma for bank borrowers.

In the weeks that followed, the Fed recreated several facilities that were successful in 2008: purchases of highly rated commercial paper, loans to banks to buy money market fund assets, loans to primary dealers and purchases of a range of asset-backed products. securities (with a welcome expansion to commercial mortgages on April 9).

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