Fed Issues Monetary Policy Report for June 2020 (Part 4 of 5)

WASHINGTON, June 12 -- The Federal Reserve issued the following monetary policy report to Congress:

(Continued from Part 3 of 5)

Part 2: Monetary Policy

Monetary Policy Report submitted to the Congress on June 12, 2020, pursuant to section 2B of the Federal Reserve Act

The Federal Open Market Committee quickly reduced the federal funds rate to the effective lower bound...

In light of the effects of COVID-19 on the economy and on risks to the outlook, the Federal Open Market Committee (FOMC) lowered the target range for the federal funds rate by a total of 1-1/2 percentage points--from a range of 1-1/2 to 1-3/4 percent to one of 0 to 1/4 percent--over two meetings in early and mid-March (figure 46).21 Specifically, in early March, the Committee lowered the target range for the federal funds rate 1/2 percentage point, to 1 to 1-1/4 percent. In mid-March, the Committee further lowered the target range 1 percentage point, to 0 to 1/4 percent. 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. In connection with the changes in the target range, the Federal Reserve reduced the interest paid on reserve balances and decreased the interest rate offered on overnight reverse repurchase agreements at the two March meetings.

. . . and the FOMC increased the holdings of Treasury securities and agency mortgage-backed securities in the System Open Market Account

At its mid-March meeting, along with its decision to lower the target range for the federal funds rate, the FOMC emphasized that it is prepared to use its full range of tools to support the flow of credit to households and businesses, thereby promoting its maximum-employment and price-stability goals. To support the smooth functioning of markets for Treasury securities and agency mortgage-backed securities (MBS)--markets central to the flow of credit to households and businesses--the Committee announced that it would increase its holdings of Treasury securities by at least $500 billion and its holdings of agency MBS by at least $200 billion over coming months (figure 47). (See the box "Federal Reserve Actions to Ensure Smooth Functioning of Treasury and MBS Markets.") Later in March, the Committee announced that it would continue to purchase Treasury securities and agency MBS in the amounts needed to support smooth market functioning and the effective transmission of monetary policy to broader financial conditions (figure 48). The Committee also included agency commercial MBS in its purchases for the first time. In June, the Committee announced that, over coming months, the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial MBS at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions.

The Federal Reserve has continued rolling over at auction all principal payments from its holdings of Treasury securities. Before mid-March, to allow for a gradual runoff of agency securities, the Federal Reserve reinvested principal payments from agency debt and agency MBS of up to $20 billion per month in Treasury securities; agency MBS principal payments in excess of $20 billion each month were reinvested in agency MBS. Beginning in mid-March, the Committee announced it would reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency MBS back into agency MBS. (The box "Developments on the Federal Reserve's Balance Sheet" discusses changes in the size and composition of the Federal Reserve's balance sheet over the past year.)

The Federal Reserve eased lending terms for primary credit borrowing...

Primary credit is the Federal Reserve lending program available to depository institutions in generally sound financial condition. Amid increasing stress in funding markets in mid-March, the Federal Reserve announced several changes to the primary credit program. Importantly, the primary credit rate was set at the top of the target range for the federal funds rate rather than 50 basis points above the top of the range. The term of primary credit loans, which had previously been mainly overnight advances, was extended to allow depository institutions to borrow for up to 90 days. Federal Reserve communication encouraged the use of the discount window to help meet the demand for credit from households and businesses.

Discount window borrowing under the primary credit program increased significantly following these developments. Primary credit outstanding reached a peak of around $50 billion in late March 2020--its highest level since the financial crisis and well above the typical level of around $10 million that prevailed in 2019. Use of primary credit was fairly widespread, with discount window loans being extended to institutions across a range of size categories. Overall, the outstanding amount of primary credit loans declined to about $10 billion by early June.

. . . and undertook actions with other central banks to support U.S. dollar funding markets

The Federal Reserve announced coordinated actions with other central banks to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements and the establishment of temporary U.S. dollar liquidity arrangements (swap lines) with nine additional central banks. (See the box "Developments Related to Financial Stability" in Part 1 for a more detailed discussion of the swap lines.) The size of the swap lines increased from close to zero in mid-March to almost $450 billion by the end of April. The Federal Reserve also established a temporary repo facility for foreign and international monetary authorities.

The FOMC is committed to using its tools to promote maximum employment and price stability

The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term and pose considerable risks to the economic outlook over the medium term. The FOMC is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum-employment and price-stability goals. The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and it will use its tools and act as appropriate to support the economy.

The Federal Reserve has continued to review its strategic framework for monetary policy

In 2019, the Federal Reserve began a broad review of the monetary policy strategy, tools, and communication practices it uses to pursue its statutory dual-mandate goals of maximum employment and price stability. A key component of the review was a series of public Fed Listens events. The Federal Reserve held 14 events around the country in 2019 to consult with a range of organizations on the effects that labor market conditions, inflation, and interest rates have on them and their communities. In light of the rapidly changing public health and economic environments due to COVID-19, the Federal Reserve convened another event in May 2020 to get an update. The Federal Reserve has released a report on its Fed Listens initiative.22 The lessons learned from the Fed Listens initiative were never more important than they are today as Americans navigate through these challenging times. The Federal Reserve expects to complete the review of its monetary policy strategy, tools, and communication practices later this year. The Federal Reserve remains focused on the attainment of its goals of maximum employment and price stability, including laying the foundation for the return to a strong labor market.

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Footnotes

21. See the FOMC statements issued after the March meetings, which are available (along with other postmeeting statements) on the Monetary Policy portion of the Board's website at https://www.federalreserve.gov/monetarypolicy.htm.

22. The report is available on the Board's website at https://www.federalreserve.gov/publications/files/fedlistens-report-20200612.pdf.

View charts and tables at https://www.federalreserve.gov/monetarypolicy/2020-06-mpr-part2.htm

Continues with Part 5 of 5