Framing the Fed’s Policy Responses

Bloomberg has a nice rundown of the Fed’s aggressive policy responses, framed as falling into one of three categories:

  1. Lender of Last Resort
  2. Fiscal Partner
  3. Investor of Last Resort

Recommended reading:

The line between “investor of last resort” and “fiscal partner” is often blurry. For instance the new Municipal Liquidity Facility for buying up to $500 billion in municipal debt involves the Fed acting as an investor of last resort (directly buying bonds in the primary market, as opposed to merely lending against municipal bonds) to provide fiscal relief, with some financial backing provided by Congress via the CARES Act. And the novel lending objectives seem more important than Congress’s blessing and partnership.

I would underscore that the Fed quickly reactivated its 2007-09 playbook for lowering both short- and long-term interest rates as well as relaunching its alphabet soup of credit facilities—rather than having to invent the wheel—and then veered aggressively into the unchartered territory of buying loans and bonds directly (not merely conducting open market operations and lending against a wide array of collateral).

To the former point, “They have in a matter of weeks rolled out every program and more that former Federal Reserve Chair Ben Bernanke worked years to develop,” as economist and venerable Fed watcher Tim Duy aptly put it.

And if you’re interested in following the Fed’s moves more closely, Tim Duy’s Fed Watch blog is a must-read.

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