As the global coronavirus pandemic wreaks economic destruction around the world, the U.S. government has taken a number of dramatic steps to keep money moving through the U.S. economy.
The Treasury Department on Friday announced that it would postpone the deadline for filing 2019 income taxes to July 15, from April 15. At the same time, the Federal Reserve has slashed interest rates and taken a number of steps that will allow it to continue pushing money into the hands of businesses and individual borrowers through all means available — some of which it has not yet activated.
So far, the Fed’s actions have done little to calm the stock market, which in the past week has wiped out the record gains achieved since President Donald Trump took office in January 2017. But the Fed and the Treasury still have a few more financial and monetary tools at their disposal to try to still the panic of investors.
The Treasury Department’s decision to delay the tax filing deadline could ease liquidity pressure on businesses and individuals who will be hit hard by the economic contraction the United States will inevitably suffer in the coming weeks and perhaps months.
Many of the moves the Fed has made so far to respond to the crisis will be broadly familiar to people who remember how the central bank handled the fallout of the 2007-08 financial crisis. The Fed kept interest rates as low as possible and launched a bond-buying program that was designed to help ensure that there was no cash shortage in the marketplace.
In that vein, the Fed announced on March 15 that it would cut the target for its benchmark interest rate to a range of zero to 0.25% and would purchase as much as $700 billion in Treasury and mortgage-backed securities in the coming months.
The ultra-low interest rate target will be a familiar one to most market participants, because it matches the level at which the Fed held rates for roughly seven years after the financial crisis, from late 2008 to late 2015. The rate change brings the U.S. central bank more closely in line with its European counterparts, some of which have had effectively negative rates since well before the onset of the novel coronavirus.
The bond-buying program effectively restarts the program of “quantitative easing” that the Fed pursued throughout the recovery from the financial crisis. By entering the market and buying up securities, the Fed will put further downward pressure on interest rates at the same time that it is pumping cash into the economy, both of which are meant to stimulate economic activity.
In addition, the Fed is reducing the rates at which it lends to banks through its “discount window” to 0.25% and extending the maturity of those loans to 90 days, in order to assure financial institutions across the country that they will have access to liquidity if and when they need it. The central bank also gave banks express permission to use their capital and liquidity buffers – funds held to protect against unexpected losses – to extend credit to borrowers in need of cash.
Early in the week, eight of the nation’s largest banks, including J.P. Morgan Chase, Wells Fargo and Citigroup, announced that they would borrow from the Fed – a move that will give smaller banks confidence to follow suit. In the past, banks have been reluctant to access the discount window, because investors viewed it as a sign of weakness.
In announcing its actions early in the week, the Fed issued a statement saying that the U.S. economy “came into this challenging period on a strong footing” and that the central bank is prepared to take further action if necessary. “The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals.”
It also signaled to investors that the drastic measures are not a short-term measure. “The committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”
While slashing interest rates and buying bonds are the most obvious weapons the Fed has at this time, there are a few other things in the central bank's arsenal. This week it announced a series of other moves meant to help stabilize the economy against the expected shock when businesses are forced to close down in order to avoid spreading the virus.