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The Federal Reserve’s Response to COVID-19: Policy Issues

CRS report – The Federal Reserve’s Response to COVID-19: Policy Issues, Updated February 8, 2021: “The Coronavirus Disease 2019 (COVID-19) pandemic has caused widespread disruptions to the economy. The Federal Reserve (Fed) took multiple policy actions in response to the crisis, and Congress took the unprecedented step of providing up to $500 billion to the Treasury to support Fed programs through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act; P.L. 116-136). The Fed acted to promote economic and financial stability in both its monetary policy and its lender of last resort roles. Some of these actions were intended to stimulate economic activity by reducing interest rates,and others were intended to provide liquidity so firms have access to needed funding. The Fed acted as a lender of last resort for banks by making short-term loans through the discount window, which it encouraged banks to access and made the borrowing terms more attractive when the pandemic began. Because foreign banks are reliant on U.S. dollar funding but cannot borrow from the discount window, the Fed has also allowed foreign central banks to swap their currencies for U.S. dollars so that the central banks can lend those dollars to banks in their jurisdictions. Swaps outstanding peaked at nearly $450 billion in May 2020 but have been below $100 billion since August 2020. The Fed set up a series of emergency facilities in response to COVID-19 to expand its lender of last resort role to other sectors of the economy. The Fed created facilities to assist commercial paper markets, corporate bond markets, money market mutual funds, primary dealers, asset-backed securities, states and municipalities, and a Main Street Lending Program for mid-size businesses and nonprofits. It also created a facility to make funds available for lenders to make loans to small businesses through the Paycheck Protection Program (another CARES Act program). The Fed charged interest and fees to use these facilities that may increase its net income, but the facilities expose taxpayers to the risk of losses if borrowers default or securities fall in value. Assistance outstanding under these facilities peaked at nearly $200 billion in April 2020 but hovered around $100 billion for the rest of the year.Treasury pledged $215 billion to backstop potential losses on these facilities.The Fed can ease overall liquidity conditions by entering into repurchase agreements (repos), which are economically equivalent to short-term collateralized loans.In response to the crisis, the Fed has made $1 trillion in overnight repos available at auction every day and has made an additional $500 billion in longer-term repos available at least once a week. Actual take-up rates, however, were much lower and have been zero since June 2020…”

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