Tuesday, September 22, 2020

Federal Reserve Facilities

In Liberty Street Economics' Expanding the Toolkit: Facilities Established to Respond to the COVID-19 Pandemic, Anna Kovner and Antoine Martin provide a helpful overview of the Fed's liquidity and credit facilities.

The liquidity facilities -- Primary Dealer Credit Facility, Commercial Paper Funding Facility, and Money Market Mutual Fund Liquidity Facility -- "support financial intermediaries, such as primary dealers and money market funds, or money markets, such as the commercial paper market" generally for less than one year.

The credit facilities -- Municipal Liquidity Facility, Main Street Lending  Program, Primary and Secondary Market Corporate Credit Facilities, Term Asset-Backed Securities Loan Facility, and Paycheck Protection Program Liquidity Facility -- "support corporations, states, and municipalities more directly and the terms of the loans are longer."

The point of these facilities is to "break the vicious cycle that makes panics self-fulfilling" -- the negative outcome in a world with "multiple equilibria."


In contrast to the CBO director, who is concerned about potential tipping points for interest rates and debt, economists at the Federal Reserve, which sets rates and can buy government debt at the cost of a keystroke, seem more concerned with the moral hazard that might result from Fed interventions. They'll publish more about that on Thursday.

In short, as long as the Federal Reserve is committed to avoiding vicious cycles, the interesting question in regards to government debt levels is probably not Can the Fed keep interest rates low if investors start to dump Treasuries (it can) but rather At what cost?

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