The Federal Reserve Follows a Familiar Playbook

Markets are still in flux after the Federal Reserve and its counterparts around the world took aggressive, coordinated action over recent days to insert liquidity into the monetary system. In the U.S., the steps included the following:

• A cut of 100 basis-point in the Federal Funds rate (the rate that banks lend to each other) to a range of 0%-0.25%;
• A cut in the discount rate (the rate the Fed lends to banks) to 0.25%;
• A new $700 billion “quantitative easing” program, whereby the Fed will inject cash into the financial system by buying Treasury and mortgage-backed securities on the open market;
• An increase in overnight repo operations of at least $175 billion, two-week repos of at least $45 billion, one month term repos of $500 billion and three-month repos of $500 billion;
• The establishment of a Commercial Paper Funding Facility to support the commercial paper market for short-term business funding.

We do not believe these moves, together with substantial fiscal stimulus expected from the Federal Government, will fully stave off the recessionary pressures caused by the coronavirus, but we believe it will provide the economy with all of the liquidity it needs to build a foundation for recovery. The government understands that market-based economies are dependent on the availability of liquidity to fund business operations, so it is taking aggressive steps to ensure that the financial system can support industries through the crisis. Since business increasingly occurs across borders, these steps were taken in coordination with other central banks.

The aggressive steps reflect lessons learned in the 2008-09 global financial crisis. Our economy survived and recovered from that shock in large part because of Federal Reserve intervention, along with the associated fiscal stimulus measures by government. We have confidence that the coronavirus shock presents a manageable crisis, following a similar playbook.

Meanwhile, we are redoubling our efforts to understand our exposures to this shock, course correct where necessary, and take advantages of the price dislocations that result from volatile markets.

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