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PRELIMINARY: The Impact of the Fed’s Response So Far

by Fernando M. Martin
Posted online May 1, 2020
Last updated May 29, 2020

As part of the measures undertaken to combat the COVID-19 pandemic, the Federal Reserve lowered its policy rate back to zero and opened a series of credit facilities designed to support the functioning of financial markets.1 In addition, the Fed announced policies aimed at relieving cash-flow stress for small and medium-sized businesses, as well as municipalities.2 Here, I discuss the actual implementation of Fed policy so far.

The first chart shows a decomposition of the (consolidated) assets of the Federal Reserve Banks. These data are published weekly by the Fed (Table H.4.1). As of May 27, the latest data point available, total assets are about $7.1 trillion. Since the end of February, assets have grown $2.9 trillion, a 71% increase. The majority of this increase, about $1.6 trillion, was due to purchases of Treasury securities, mostly notes and bonds (i.e., with a maturity longer than a year). Two other important, though much smaller, contributors to asset growth were mortgage-backed securities (MBS) and liquidity swaps with other central banks, roughly $450 billion each. The remaining components contributed a combined $400 billion; notably, repos and loans have increased only slightly, roughly $150 billion.

 

Chart 1

Chart 1: Federal Reserve Banks Assets

Source: FRED and author’s calculations. Data as of May 29.

 

An increase in assets implies a corresponding increase in liabilities. The second chart shows a decomposition of the liabilities of the Federal Reserve Banks. Not surprisingly, the purchase of Treasury securities was met with an increase in the reserves of depository institutions, also $1.6 trillion since the end of February. Bank reserves now amount to $3.3 trillion, the highest they have ever been. In contrast, currency in circulation has grown only $150 billion. Another big contributor to liabilities was the general account of the U.S. Treasury, which increased by more than $900 billion. This component will eventually contract and convert into currency and reserves, as the Treasury spends the proceeds from its recent debt issuance.

 

Chart 2

Chart 2: Federal Reserve Banks Liabilities

Source: FRED and author’s calculations. Data as of May 29.

 

While the Fed has been buying government debt, the Treasury has been running large deficits and, thus, issuing more debt. The third chart shows the net effect. During the current fiscal year, which started on October 1, 2019, debt in the hands of the public has increased almost $2.85 trillion. The definition of the public includes the Federal Reserve Banks. If we net out these holdings, there has been a modest increase in the government debt held by the non-Fed public, about $850 million. So far this fiscal year, the Federal Reserve has purchased more than $2 trillion in Treasury debt, $1.6 trillion since the end of February, as described above. Put differently, the Federal Reserve has bought 70% of the debt issued by the Treasury to the public during the current fiscal year.

 

Chart 3

Chart 3: Debt Held by the Public

Source: TreasuryDirect, FRED, and author’s calculations. Data as of May 29.

 

Fed intervention thus far has mostly consisted of absorbing longer-term Treasury debt from markets. These purchases have implied a corresponding increase in bank reserves. In effect, the Fed has transformed Treasury liabilities into central bank liabilities.

According to the latest estimates by the Congressional Budget Office, the deficit in fiscal year 2020 would reach $3.7 trillion.3 This would roughly equal an additional $850 billion in public debt during the remainder of the current fiscal year. It remains to be seen whether this new debt will end up being held by the private sector or be transformed into bank reserves.


Footnotes

1 See https://research.stlouisfed.org/publications/economic-synopses/2020/03/30/economic-realities-and-consequences-of-the-covid-19-pandemicpart-i-financial-markets-and-monetary-policy, https://research.stlouisfed.org/publications/economic-synopses/2020/04/21/central-bank-responses-to-covid-19.

2 For example, see https://www.federalreserve.gov/newsevents/pressreleases/monetary20200409a.htm, https://www.federalreserve.gov/newsevents/pressreleases/monetary20200427a.htm, https://www.federalreserve.gov/newsevents/pressreleases/monetary20200430a.htm.

3 See https://www.cbo.gov/publication/56350.

    

Preliminary, incomplete. To cite, please request author’s permission.  

© 2020, Federal Reserve Bank of St. Louis. These views do not reflect the opinion of the Federal Reserve Bank of St. Louis or the Federal Reserve System. 


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