So, far, the Fed has done an enormous amount of heavy lifting to try to keep the U.S. – and global – economy afloat during this unprecedented crisis, which – just so far – easily dwarfs the 2008 financial crisis in severity. As scary as things were back then, with many of the largest financial institutions in the world threatened with collapse, we didn’t have to worry about thousands of people dying as a result. This crisis is far worse, and we still haven’t the vaguest notion of how bad it still might get.

Let’s review all of the various Fed moves since the beginning of this month, then let’s talk about what else it might be able to do:

• On March 3, the Fed held its first of what would be two emergency meetings this month, announcing a 50-basis point rate cut in its benchmark federal funds rate to a range of 1% to 1.25%. That move bombed.
• It followed that up less than two weeks later on March 15 – a Sunday no less – with another 50 bp cut, to a range of 0.25% to zero. That also had little effect.
• At the same time, the Fed said it would increase “over coming months” its holdings of Treasury securities by at least $500 billion and its holdings of mortgage-backed securities by at least $200 billion. However, by the end of last week, the Fed had already bought about $275 billion of those securities. As the Wall Street Journal pointed out, “this means the Fed will have bought more than half of the $500 billion in Treasury securities in one week with little sign of restored market functioning, pointing to a growing likelihood for a much more aggressive round of purchases.”
• The Fed created a Money Market Mutual Fund Lending Facility that would make loans to banks secured by assets from money market funds, similar to what it did during the 2008 crisis, although this time, it would be purchasing a broader range of assets. On Friday, it extended the facility to include short-term debt issued by cities and states.
• The Fed also said it was creating a new Primary Dealers Credit Facility that would provide major players in the government securities market with short-term loans.

As bold as all of these moves have been, have they actually done anything to restore public and investor confidence? Hardly. While the Fed has driven already low-interest rates back down to zero, it doesn’t mean very much when nobody wants to own any financial assets – whether it’s Treasury bonds or gold or anything else. Not blaming the Fed, but there’s only so much it can do when just about everyone is acting like the world is coming to an end.

But is there more it can do, either under its existing powers or some new Congressional mandate? Continue reading "Does The Fed Have Any Ammo Left?" →