Which Of The Following Actions By The Fed Would Lead To An Increase In The Money Supply

Editor'south Note:

Jeffrey Cheng, Tyler Powell, and David Skidmore contributed to before versions of this post.

The coronavirus crunch in the United States—and the associated business closures, upshot cancellations, and piece of work-from-home policies—triggered a deep economic downturn. The sharp wrinkle and deep uncertainty about the grade of the virus and economy sparked a "dash for cash"—a desire to hold deposits and but the most liquid assets—that disrupted financial markets and threatened to make a dire state of affairs much worse. The Federal Reserve stepped in with a wide assortment of actions to keep credit flowing to limit the economical impairment from the pandemic. These included large purchases of U.S. government and mortgage-backed securities and lending to support households, employers, financial market participants, and land and local governments. "Nosotros are deploying these lending powers to an unprecedented extent [and] … volition go on to apply these powers forcefully, proactively, and aggressively until we are confident that nosotros are solidly on the road to recovery," Jerome Powell, chair of the Federal Reserve Board of Governors, said in April 2022. In that aforementioned month, Powell discussed the Fed'south goals during a webinar at the Brookings' Hutchins Centre on Fiscal and Monetary Policy. This post summarizes the Fed'due south actions though the terminate of 2022.

HOW DID THE FED Support THE U.S. Economic system AND Fiscal MARKETS?

Easing Monetary Policy

Federal funds rate: The Fed cut its target for the federal funds rate, the rate banks pay to borrow from each other overnight, by a total of 1.five percentage points at its meetings on March 3 and March 15, 2022. These cuts lowered the funds charge per unit to a range of 0% to 0.25%. The federal funds rate is a criterion for other short-term rates, and also affects longer-term rates, and so this move was aimed at supporting spending past lowering the toll of borrowing for households and businesses.
Forward guidance: Using a tool honed during the Neat Recession of 2007-09, the Fed offered forward guidance on the future path of involvement rates. Initially, it said that it would keep rates near zero "until it is confident that the economy has weathered recent events and is on track to attain its maximum employment and price stability goals." In September 2022, reflecting the Fed's new monetary policy framework, it strengthened that guidance, proverb that rates would remain depression "until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some fourth dimension." By the terminate of 2022, inflation was well to a higher place the Fed's 2% target and labor markets were nearing the Fed's "maximum employment" target. At its December 2022 meeting, the Fed's policy-making committee, the Federal Open Market Committee (FOMC), signaled that almost of its members expected to heighten interest rates in three one-quarter percentage point moves in 2022.
Quantitative easing (QE): The Fed resumed purchasing massive amounts of debt securities, a key tool it employed during the Great Recession. Responding to the acute dysfunction of the Treasury and mortgage-backed securities (MBS) markets after the outbreak of COVID-19, the Fed's actions initially aimed to restore smooth functioning to these markets, which play a critical role in the flow of credit to the broader economy as benchmarks and sources of liquidity. On March 15, 2022, the Fed shifted the objective of QE to supporting the economic system. It said that it would buy at least $500 billion in Treasury securities and $200 billion in government-guaranteed mortgage-backed securities over "the coming months." On March 23, 2022, it made the purchases open-ended, proverb information technology would buy securities "in the amounts needed to support smoothen market place functioning and effective transmission of monetary policy to broader financial atmospheric condition," expanding the stated purpose of the bail buying to include bolstering the economy. In June 2022, the Fed set its rate of purchases to at least $80 billion a month in Treasuries and $forty billion in residential and commercial mortgage-backed securities until farther find. The Fed updated its guidance in December 2022 to indicate it would slow these purchases once the economy had made "substantial further progress" toward the Fed's goals of maximum employment and price stability. In November 2022, judging that test had been met, the Fed began tapering its pace of nugget purchases by $10 billion in Treasuries and $5 billion in MBS each month. At the subsequent FOMC meeting in December 2022, the Fed doubled its speed of tapering, reducing its bond purchases by $twenty billion in Treasuries and $10 billion in MBS each month.

Supporting Financial Markets

Lending to securities firms: Through the Principal Dealer Credit Facility (PDCF), a program revived from the global financial crisis, the Fed offered low interest rate loans upwardly to 90 days to 24 large fiscal institutions known every bit primary dealers. The dealers provided the Fed with diverse securities every bit collateral, including commercial paper and municipal bonds. The goal was to help these dealers go on to play their role in keeping credit markets functioning during a fourth dimension of stress. Early on in the pandemic, institutions and individuals were inclined to avoid risky assets and hoard greenbacks, and dealers encountered barriers to financing the rising inventories of securities they accumulated as they made markets. To re-institute the PDCF, the Fed had to obtain the approving of the Treasury Secretary to invoke its emergency lending authority nether Department 13(3) of the Federal Reserve Act for the beginning time since the 2007-09 crisis. The program expired on March 31, 2022.
Backstopping money market mutual funds: The Fed also re-launched the crunch-era Coin Market Mutual Fund Liquidity Facility (MMLF). This facility lent to banks against collateral they purchased from prime money market funds, which invest in Treasury securities and corporate curt-term IOUs known every bit commercial paper. At the onset of COVID-nineteen, investors, questioning the value of the individual securities these funds held, withdrew from prime coin market funds en masse. To run across these outflows, funds attempted to sell their securities, but marketplace disruptions made information technology hard to find buyers for even high-quality and shorter-maturity securities. These attempts to sell the securities but drove prices lower (in a "fire sale") and closed off markets that businesses rely on to raise funds. In response, the Fed fix the MMLF to "help money market funds in meeting demands for redemptions past households and other investors, enhancing overall marketplace functioning and credit provision to the broader economic system." The Fed invoked Department 13(3) and obtained permission to administrate the program from Treasury, which provided $ten billion from its Exchange Stabilization Fund to cover potential losses. Given limited usage, the MMLF expired on March 31, 2022.
Repo operations: The Fed vastly expanded the scope of its repurchase agreement (repo) operations to funnel cash to money markets. The repo market place is where firms borrow and lend greenbacks and securities brusk-term, commonly overnight. Since disruptions in the repo marketplace can affect the federal funds charge per unit, the Fed's repo operations fabricated cash available to primary dealers in substitution for Treasury and other government-backed securities. Before coronavirus turmoil hitting the market, the Fed was offering $100 billion in overnight repo and $twenty billion in two-week repo. Throughout the pandemic, the Fed significantly expanded the program—both in the amounts offered and the length of the loans. In July 2022, the Fed established a permanent Standing Repo Facility to backstop money markets during times of stress.
Foreign and International Monetary Authorities (FIMA) Repo Facility: Sales of U.S. Treasury securities by foreigners who wanted dollars added to strains in coin markets. To ensure foreigners had access to dollar funding without selling Treasuries in the market, the Fed in July 2022 established a new repo facility called FIMA that offers dollar funding to the considerable number of foreign central banks that practise not have established swap lines with the Fed. The Fed makes overnight dollar loans to these central banks, taking Treasury securities as collateral. The central banks tin can then lend dollars to their domestic financial institutions.
International swap lines: Using some other tool that was important during the global fiscal crisis, the Fed made U.S. dollars bachelor to foreign central banks to improve the liquidity of global dollar funding markets and to assistance those authorities support their domestic banks who needed to raise dollar funding. In exchange, the Fed received foreign currencies and charged interest on the swaps. For the 5 cardinal banks that have permanent swap lines with the Fed—Canada, England, the Eurozone, Japan, and Switzerland—the Fed lowered its interest rate and extended the maturity of the swaps. Information technology also provided temporary swap lines to the central banks of Commonwealth of australia, Brazil, Kingdom of denmark, Mexico, New Zealand, Norway, Singapore, Republic of korea, and Sweden. In June 2022, the Fed extended these temporary swaps until December 31, 2022.

Encouraging Banks to Lend

Direct lending to banks: The Fed lowered the charge per unit that it charges banks for loans from its disbelieve window by 2 pct points, from 2.25% to 0.25%, lower than during the Swell Recession. These loans are typically overnight—pregnant that they are taken out at the end of one day and repaid the following forenoon—but the Fed extended the terms to ninety days. At the discount window, banks pledge a wide variety of collateral (securities, loans, etc.) to the Fed in substitution for cash, so the Fed takes little (or no) hazard in making these loans. The greenbacks allows banks to keep functioning, since depositors tin can continue to withdraw money and the banks can make new loans. However, banks are sometimes reluctant to borrow from the discount window because they fear that if discussion leaks out, markets and others will think they are in trouble. To counter this stigma, 8 large banks agreed to borrow from the discount window in March 2022.
Temporarily relaxing regulatory requirements: The Fed encouraged banks—both the largest banks and community banks—to dip into their regulatory uppercase and liquidity buffers to increase lending during the pandemic. Reforms instituted later the financial crunch require banks to concord boosted loss-arresting capital to prevent future failures and bailouts. However, these reforms also include provisions that allow banks to use their capital buffers to back up lending in downturns. The Fed supported this lending through a technical change to its TLAC (full loss-absorbing capacity) requirement—which includes uppercase and long-term debt—to gradually phase in restrictions associated with shortfalls in TLAC. (To preserve uppercase, big banks also suspended buybacks of their shares.) The Fed likewise eliminated banks' reserve requirement—the percentage of deposits that banks must hold as reserves to meet cash demand—though this was largely irrelevant because banks held far more the required reserves. The Fed restricted dividends and share buybacks of depository financial institution holding companies throughout the pandemic, but lifted these restrictions effective June xxx, 2022, for about firms based on stress test results. These stress tests showed that banks had ample capital to support lending even if the economic system performed far weaker than anticipated.

Supporting Corporations and Businesses

Direct lending to major corporate employers: In a significant stride beyond its crisis-era programs, which focused primarily on financial market functioning, the Fed established ii new facilities to support the menstruum of credit to U.S. corporations on March 23, 2022. The Primary Market Corporate Credit Facility (PMCCF) allowed the Fed to lend directly to corporations past buying new bail bug and providing loans. Borrowers could defer interest and principal payments for at to the lowest degree the kickoff half dozen months so that they had greenbacks to pay employees and suppliers (but they could not pay dividends or buy back stock). And, nether the new Secondary Market Corporate Credit Facility (SMCCF), the Fed could buy existing corporate bonds besides as exchange-traded funds investing in investment-grade corporate bonds. An orderly secondary market was seen equally helping businesses access new credit in the master market. These facilities immune "companies admission to credit so that they are better able to maintain business organization operations and chapters during the catamenia of dislocations related to the pandemic," the Fed said. Initially supporting $100 billion in new financing, the Fed announced on April nine, 2022, that the facilities would be increased to backstop a combined $750 billion of corporate debt. And, every bit with previous facilities, the Fed invoked Section 13(3) of the Federal Reserve Act and received permission from the U.S. Treasury, which provided $75 billion from its Substitution Stabilization Fund to cover potential losses. Belatedly in 2022, after the recovery from the pandemic was nether way, and despite the Fed'due south misgivings, Treasury Secretary Steven Mnuchin decided that the last bond and loan purchases for the corporate credit facilities would take place no later on than Dec 31, 2022. The Fed objected to the cutoff, preferring to keep the facilities available until there was a firmer assurance that financial atmospheric condition would not deteriorate over again. The Fed said on June 2, 2022 that it would gradually sell off its $13.7 billion portfolio of corporate bonds, which information technology completed in December 2022.
Commercial Newspaper Funding Facility (CPFF): Commercial paper is a $1.ii trillion market in which firms issue unsecured short-term debt to finance their solar day-to-day operations. Through the CPFF, another reinstated crisis-era program, the Fed bought commercial paper, essentially lending directly to corporations for up to three months at a rate one to 2 pct points college than overnight lending rates. "By eliminating much of the chance that eligible issuers will not exist able to repay investors by rolling over their maturing commercial paper obligations, this facility should encourage investors to in one case over again engage in term lending in the commercial newspaper market," the Fed said. "An improved commercial paper market will enhance the ability of businesses to maintain employment and investment as the nation deals with the coronavirus outbreak." As with other not-bank lending facilities, the Fed invoked Section 13(3) and received permission from the U.Due south. Treasury, which put $ten billion into the CPFF to cover whatever losses. The Commercial Paper Funding Facility lapsed on March 31, 2022.
Supporting loans to minor- and mid-sized businesses: The Fed'southward Chief Street Lending Program, appear on Apr 9, 2022, aimed to back up businesses too big for the Small Business Assistants's Paycheck Protection Program (PPP) and too small for the Fed's 2 corporate credit facilities. The program was subsequently expanded and broadened to include more potential borrowers. Through iii facilities—the New Loans Facility, Expanded Loans Facility, and Priority Loans Facility—the Fed was prepared to fund upwardly to $600 billion in v-yr loans. Businesses with up to 15,000 employees or upwards to $5 billion in annual acquirement could participate. In June 2022, the Fed lowered the minimum loan size for New Loans and Priority Loans, increased the maximum for all facilities, and extended the repayment period. Equally with other facilities, the Fed invoked Section 13(3) and received permission from the U.S. Treasury, which through the CARES Deed put $75 billion into the three Main Street Programs to cover losses. Borrowers are subject to restrictions on stock buybacks, dividends, and executive compensation. (See here for additional operational details.) Secretarial assistant Mnuchin, once more over the Fed's objections, decided that the Master Street facility would stop taking loan submissions on December xiv, 2022, equally it was prepare to make its final purchases by January eight, 2022. The Fed too established a Paycheck Protection Program Liquidity Facility that facilitated loans made under the PPP. Banks lending to small businesses could infringe from the facility using PPP loans every bit collateral. The PPP Liquidity Facility closed on July 30, 2022.
Supporting loans to non-profit institutions: In July 2022, the Fed expanded the Main Street Lending Program to not-profits, including hospitals, schools, and social service organizations that were in audio financial condition before the pandemic. Borrowers needed at least 10 employees and endowments of no more than $iii billion, among other eligibility atmospheric condition. The loans were for 5 years, but payment of master was deferred for the showtime 2 years. As with loans to businesses, lenders retained 5 percent of the loans. This improver to the Main Street program lapsed with the residuum of the facility on January 8, 2022.

Supporting Households and Consumers

Term Asset-Backed Securities Loan Facility (TALF): Through this facility, reestablished on March 23, 2022, the Fed supported households, consumers, and small businesses past lending to holders of asset-backed securities collateralized by new loans. These loans included pupil loans, motorcar loans, credit card loans, and loans guaranteed by the SBA. In a stride across the crisis-era plan, the Fed expanded eligible collateral to include existing commercial mortgage-backed securities and newly issued collateralized loan obligations of the highest quality. Like the programs supporting corporate lending, the Fed said the TALF would initially support up to $100 billion in new credit. To restart it, the Fed invoked Section thirteen(3) and received permission from the Treasury, which allocated $10 billion from the Exchange Stabilization Fund to finance the program. Without an extension, this facility stopped making purchases on Dec 31, 2022, at Secretary Mnuchin'southward gild.

Supporting State and Municipal Borrowing

Direct lending to land and municipal governments: During the 2007-09 financial crisis, the Fed resisted backstopping municipal and land borrowing, seeing that as the responsibility of the administration and Congress. But in this crisis, the Fed lent straight to state and local governments through the Municipal Liquidity Facility, which was created on April 9, 2022. The Fed expanded the list of eligible borrowers on April 27 and June 3, 2022. The municipal bond market was under enormous stress in March 2022, and state and municipal governments found it increasingly hard to borrow as they battled COVID-19. The Fed'southward facility offered loans to U.Due south. states, including the District of Columbia, counties with at to the lowest degree 500,000 residents, and cities with at to the lowest degree 250,000 residents. Through the program, the Fed made $500 billion available to government entities that had investment-class credit ratings equally of April viii, 2022, in substitution for notes tied to future taxation revenues with maturities of less than 3 years. In June 2022, Illinois became the start government entity to tap the facility. Under changes announced that month, the Fed allowed governors in states with cities and counties that did not meet the population threshold to designate up to 2 localities to participate. Governors were likewise able to designate 2 acquirement bond issuers—airports, toll facilities, utilities, public transit—to be eligible. The New York Metropolitan Transportation Dominance (MTA) took advantage of this provision in August, borrowing $451 meg from the facility. The Fed invoked Section xiii(three) with the approval of the U.S. Treasury, which used the CARES Act to provide $35 billion to embrace any potential losses. (Encounter here for additional details.) The Municipal Liquidity Facility stopped purchases on December 31, 2022 when information technology lost Treasury back up, per Secretarial assistant Mnuchin's decision. The New York MTA secured a second loan from the facility on Dec 10, 2022, borrowing $two.9 billion earlier lending halted.
Supporting municipal bail liquidity: The Fed also used two of its credit facilities to backstop muni markets. It expanded the eligible collateral for the MMLF to include municipal variable-rate demand notes and highly rated municipal debt with maturities of up to 12 months. The Fed also expanded the eligible collateral of the CPFF to include loftier-quality commercial paper backed by tax-exempt state and municipal securities. These steps allowed banks to funnel cash into the municipal debt market, where stress had been building due to a lack of liquidity.

WHY WERE THE FED'Due south ACTIONS IMPORTANT?

Steps taken by federal, state, and local officials to mitigate the spread of the virus express economic activity, leading to a sudden and deep recession with millions of jobs lost. The Fed'due south actions ensured that credit continued to period to households and businesses, preventing financial market place disruptions from intensifying the economic damage.

In many other countries, most credit flows through the cyberbanking system. In the U.South., a substantial amount of credit flows through upper-case letter markets, so the Fed worked to keep them functioning as smoothly as possible. As one of our colleagues, Don Kohn, former Federal Reserve Vice Chair, said in March 2022:

"The Treasury market in particular is the foundation for trading in many other securities markets in the U.S. and effectually the world; if it's disrupted, the functioning of every market will be dumb. The Fed's purchase of securities is explicitly aimed at improving the functioning of the Treasury and MBS markets, where market place liquidity had been well below par in contempo days."

But targeting the Treasury market proved bereft, given the severity of the COVID recession and the disruption of flows of credit across other fiscal markets. So the Fed intervened directly in the markets for corporate and municipal debt to ensure that key economic actors could raise funds to pay workers and avoid bankruptcies. These measures aimed to help businesses survive the crunch and resume hiring and production when the pandemic ebbed.

Banks also needed support to keep credit flowing. When financial markets are clogged, firms tend to draw on bank lines of credit, which can lead banks to pull back on lending or selling Treasury and other securities. The Fed supplied unlimited liquidity to fiscal institutions so they could meet credit drawdowns and brand new loans to businesses and households feeling financial strains.

The authors did not receive financial back up from any firm or person for this article or from whatsoever house or person with a fiscal or political interest in this article. They are not currently an officers, directors, or board members of whatever organization with a financial or political involvement in this article. Prior to his consulting piece of work for Brookings, Dave Skidmore was employed by the Board of Governors of the Federal Reserve System.