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4 Mins Read

The United States Stimulus Package – Monetary Policies

Across the globe, COVID-19 continues to grow and terrorize economies. Governments have taken action to reduce the damage through stimulus packages. There was some positive growth over the past 2 weeks but with high volatility. In our last post, we compared COVID-19 to other pandemics. In this post, find out how the United States stimulus package is combating COVID-19.

The United States Stimulus Package

In the US, the pandemic has caused the most terror over the last 2 weeks. There are more than 380,000 cases in the US. The US faces the sharpest rise in unemployment in its history. Around 10 million people filed for unemployment over the last 2 weeks. The US Federal Reserve is taking several steps to reduce the impact of the virus. The United States has an extensive stimulus package. Fiscal and Monetary policies are two segments of the package. Today we will cover the monetary policies of the package.

Stimulus Package – Monetary Policies

Monetary policies relate to the money supply in the country. They target the interest rates, inflation and price stability. The US Federal Reserve is in charge of the monetary policies. Here is a short brief on the monetary policies in the package:

  1. 3 March 2020: They made an unscheduled cut to the fed fund rate of 0.5%, the largest cut since the 2008 financial crisis.
  2. 12 March, 2020: The Feds expanded the reverse repo operations, adding $1.5 trillion liquidity to the banking system. This will help keep money markets stable and provide banks with liquidity.
  3. 15 March 2020: The Fed made several additions to the stimulus:
    • Cut interest rates down to 0.00 to 0.25%
    • Purchased $500b in treasury and $200b in mortgage-backed securities
    • Lowered the interest rate on the discount window to 0.25% from 1.5%. This is another way to lend to the banks.
    • Lowered bank reserves requirements to 0. This will help loosen the credit markets.
    • Encouraged banks to use their capital and liquidity buffers to lend
  4. 16 March 2020: The Fed increased the reverse repo operations by another $500b
  5. 17 March 2020: The Fed introduced 2 new programs to help with the market liquidity:
    • The Commercial Paper Funding Facility (CPFF): This allows the Fed to create a corporation and buy commercial paper and unsecured loans. These are loans made by businesses for their everyday expenses. The Treasury allocated up to $10b from the Exchange Stabilization Fund (ESF) to the CPFF. This is to finance the loan losses from the CPFF.
    • The Primary Dealer Credit Facility (PDCF): This provides banks with short term loans. The loans have collateral like municipal bonds or investment-grade corporate debt. The PDCF will run for 6 months starting on 20th March.
  6. 18 March 2020: A new program – Money Market Mutual Fund Liquidity Facility (MMLF) – launched by the Fed. Under MMLF, banks can borrow money to buy assets from money market funds. The Treasury is offering up to $10b to cover the losses from this program. The MMLF will run for 6 months. It is like the AMLF program launched in 2008.
  7. 23 March 2020: The Fed released another set of policies:
    • The Fed increased the purchase of both treasuries and mortgage-backed securities by an extra $620b. They committed to buying as many assets required to “support the smooth functioning of markets”.
    • They expanded the scope of purchase of mortgage-backed securities. This means they will also buy agency commercial securities. It includes mortgages for commercial properties backed by government agencies like Fannie Mae.
    • They also established a program – Primary Market Corporate Credit Facility (PMCCF). Under the PMCCF, they will buy loans and bonds issued by banks to large businesses.
    • Moreover, they established another program – Secondary Market Corporate Facility (SMCCF). Under the SMCCF, they will buy bonds and bond ETFs. Thus, increasing the liquidity in the corporate bond market.
    • The Fed also formed the Term Asset-Backed Securities Loan Facility (TALF). Under the TALF, they will buy asset-backed securities such as auto loans, student loans or small business loans.
    • They expanded the MMLF program to include more diverse money market funds.
    • They also expanded the CPFF to include a wider spectrum of commercial paper assets.
    • Further, they announced the launch of the Main Street Business Lending Program to support small and medium businesses.
    • Each of these special-purpose programs will run for 6 months until the end of September 2020. The Treasury Department will finance up to $10b to cover losses i.e. a total of up to $300b.
  8. 31 March 2020: The Fed lowered the capital requirements for banks along with other technical changes.
  9. 6 April 2020: The Fed announced another lending facility. This is to help expand the Small Business Administration’s loan program.
Summing Up

These are the monetary policies implemented by the Federal Reserve. The hope is to create more liquidity for the banks and credit markets and stabilize the markets. In the first half of March, the markets did not respond well to these packages. Instead, they might have caused more panic in the market. Yet, in the second half of the month, there was some positive growth.
Stay tuned for our next update on the fiscal policies. For any further support, feel free to reach us at advisors@kristal.ai.

Disclaimer

This blog article has not been reviewed by the MAS. It is prepared solely for information purposes and does not constitute an offer or solicitation for the purchase or sale of units in the funds. This does not constitute any form of investment advice and Kristal Advisors (SG) Pte Ltd does not take into account your personal investment objectives, specific investment goals, specific needs, or financial situation and makes no representation and assumes no liability to the accuracy or completeness of the information provided here. The information and publications are not intended to be and do not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort offered or endorsed by Kristal Advisors (SG) Pte Ltd.

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