Report

What did the Fed do in response to the COVID-19 crisis?

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Editor's Note:

Jeffrey Cheng, Tyler Powell, and David Skidmore contributed to earlier versions of this post.

Eric Milstein

Research Analyst - The Hutchins Center on Fiscal and Monetary Policy

The coronavirus crisis in the United States—and the associated business closures, event cancellations, and work-from-home policies—triggered a deep economic downturn. The sharp contraction and deep uncertainty about the course of the virus and economy sparked a “dash for cash”—a desire to hold deposits and only the most liquid assets—that disrupted financial markets and threatened to make a dire situation much worse. The Federal Reserve stepped in with a broad array of actions to keep credit flowing to limit the economic damage from the pandemic. These included large purchases of U.S. government and mortgage-backed securities and lending to support households, employers, financial market participants, and state and local governments. “We are deploying these lending powers to an unprecedented extent [and] … will continue to use these powers forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery,” Jerome Powell, chair of the Federal Reserve Board of Governors, said in April 2020. In that same month, Powell discussed the Fed’s goals during a webinar at the Brookings’ Hutchins Center on Fiscal and Monetary Policy. This post summarizes the Fed’s actions though the end of 2021.

HOW DID THE FED SUPPORT THE U.S. ECONOMY AND FINANCIAL MARKETS?

Easing Monetary Policy

Supporting Financial Markets

Encouraging Banks to Lend

Supporting Corporations and Businesses

Supporting Households and Consumers

Supporting State and Municipal Borrowing

WHY WERE THE FED’S ACTIONS IMPORTANT?

Steps taken by federal, state, and local officials to mitigate the spread of the virus limited economic activity, leading to a sudden and deep recession with millions of jobs lost. The Fed’s actions ensured that credit continued to flow to households and businesses, preventing financial market disruptions from intensifying the economic damage.

In many other countries, most credit flows through the banking system. In the U.S., a substantial amount of credit flows through capital markets, so the Fed worked to keep them functioning as smoothly as possible. As one of our colleagues, Don Kohn, former Federal Reserve Vice Chair, said in March 2020:

“The Treasury market in particular is the foundation for trading in many other securities markets in the U.S. and around the world; if it’s disrupted, the functioning of every market will be impaired. The Fed’s purchase of securities is explicitly aimed at improving the functioning of the Treasury and MBS markets, where market liquidity had been well below par in recent days.”

But targeting the Treasury market proved insufficient, given the severity of the COVID recession and the disruption of flows of credit across other financial markets. So the Fed intervened directly in the markets for corporate and municipal debt to ensure that key economic actors could raise funds to pay workers and avoid bankruptcies. These measures aimed to help businesses survive the crisis and resume hiring and production when the pandemic ebbed.

Banks also needed support to keep credit flowing. When financial markets are clogged, firms tend to draw on bank lines of credit, which can lead banks to pull back on lending or selling Treasury and other securities. The Fed supplied unlimited liquidity to financial institutions so they could meet credit drawdowns and make new loans to businesses and households feeling financial strains.


The authors did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. They are not currently an officers, directors, or board members of any organization with a financial or political interest in this article. Prior to his consulting work for Brookings, Dave Skidmore was employed by the Board of Governors of the Federal Reserve System.