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Comment: Reflecting on recent central bank decisions

In recapping the Federal Reserve’s actions since the start of March, it is impossible not to reflect in the present crisis on what might be Chair Jerome Powell’s legacy might be. Since the adoption of the dual mandate by Congress in November 1977, former Chairs all have had their distinguishing moments. The late Paul Volcker (served August 1979-August 1987) famously broke the back of inflation and ushered in the Great Moderation. Alan Greenspan (served August 1987-January 2006) was known for his ability to speak to markets and weather the various crises of his long tenure like the Asian currency crisis in 1997, the failure of Long Term Capital Management in 1998, or the terrorist attacks of September 11, 2001. Ben Bernanke (served February 2006-January 2014) proved to be the right man at the right time to address the Great Recession. Former Chair Janet Yellen (served February 2014-February 2018) led the Fed through the task of preserving the tenuous recovery, honing forward guidance, and planning how to taper the balance sheet.

Chair Powell’s careful stewardship of the long expansion has largely been overshadowed by the fractious presence and unhelpful criticism of President Trump. In the end, it may be that Powell’s legacy is his leadership in reviewing the framework of monetary policy in an era when neutral rates are lower than in the past and inflation remained stubbornly resistant to reaching central bank goals. It may prove prescient that policymakers were giving careful thought to how to address the next downturn when the COVID-19 pandemic arrived on their doorstep. The “early and aggressive” approach to deploying monetary policy tools in the event of a threat to the economy may be just what will enable the US to have a relatively short if steep decline in activity versus a more entrenched full-on recession.

Recap of recent central bank announcements:

March 3 – Federal Reserve – intermeeting rate cut to fed funds target range by 50 bp to 1.00%-1.25%; discount rate cut 50 bp to 1.75%; IOER cut 50 bp to 1.10%; ONRRP rate cut 45 bp to 1.00%.

March 4 – Bank of Canada – cut in overnight rate by 50 bp to 1.25%.

March 9 – Federal Reserve of New York – on directive from the FOMC, the New York Fed increased the size of overnight and term reop operations.

March 11 – Bank of England – bank rate cut 50 bp to 0.25%, no change in asset purchase program.

March 12 – European Central Bank – no change in rates; additional long-term loans for liquidity, more favorable terms on TLTRO targeted loans, additional €120 billion of private sector asset purchases, temporary supervisory measures to ease capital demands for banks.

March 13 – Bank of Japan – conducted unscheduled JGBs outright purchases, will conduct additional purchases as needed; starting in March 16 week, will provide ample liquidity using market operations with long maturities with repo agreements that mature over end of March; temporarily increased number of issues of JGSs, offers of sales of JGSs with repo.

March 15 – Federal Reserve – cut fed funds rate 75-100 bp to 0%-0.25%; discount rate 150 bp to 0.25%; IOER 100 bp to 0.10%; ON offer rate 110 bp to 0%; in coming months to purchase $500 billion Treasurys, $200 billion MBS, all Agency and MBS principal to reinvest in MBS. Coordinated with Bank of Canada, Bank of England, Bank of Japan, European Central Bank, and Swiss National Bank to enhance provision of liquidity via standing swap line arrangements.

March 15 – Bank of Canada – cut overnight rate 50 bp to 0.75%.

March 16 – Reserve Bank of New Zealand – cut official cash rate by 75 bp to 0.25%.

March 16 – Federal Reserve – Encourages banks to use the discount window to manage liquidity risks efficiently and avoid actions that have negative consequences for their customers.

March 17 – Federal Reserve – reestablishes Commercial Paper Funding Facility (CPFF) and Primary Dealer Credit Facility (PDCF) with minor changes from original programs established in 2007-2008.

March 18 – European Central Bank – announced Pandemic Emergency Purchase Program (PEPP) of €750 to be conducted until end of 2020 and include all eligible asset categories of APP; expanded range of eligible assets under CSPP to nonfinancial commercial paper; eased collateral standards by adjusting risk parameters of collateral framework.

March 18 – Federal Reserve – established Money Market Mutual Find Liquidity Facility (MMLF). A new facility but similar to crisis era AMLF. On March 20, expanded to make loans “secured by certain high-quality assets purchased from single state and other tax-exempt municipal money market mutual funds.”

March 19 – Bank of England – cut bank rate by 15 bp to historic low of 0.10% and increased holdings of government and corporate bonds by £200 bln.

March 19 – Bank of Canada – launched Standing Term Liquidity Facility (STLF) to enhance resilience of financial system.

March 19 – Bank of Japan – conducted emergency market operation, bought ¥1.3 tln of government bonds to curb rising long-term yields

March 19 – Reserve Bank of Australia – cut cash rate by 25 bp to 0.25%.

March 19 – Federal Reserve – opens temporary swap lines of $60 billion each with Reserve Bank of Australia, Banco Central do Brasil, Bank of Korea, Banco de Mexico, Monetary Authority of Singapore, and Sveriges Riksbank, and $30 billion each for Danmarks Nationalbank, Norges Bank, and Reserve Bank of New Zealand. To be in place for at least six months.

March 20 – Federal Reserve – in coordination with Bank of Canada, Bank of England, Bank of Japan, European Central Bank, and Swiss National Bank, the Federal Reserve increased frequency of 7-day maturity operations from weekly to daily starting on March 23 and running at least through the end of April.

March 20 – Bank of Canada – in addition to expansion of US$ swap lines, would hold term repo operations at least twice a week, reactivate its Contingent Term Repo Facility (CTRF) by April 3, and narrowed the operating band to 25 basis points from 50 basis points, “Effective Monday, March 23rd, the deposit rate will be set to the current target for the overnight rate.”

Note: like the actions taken by the Federal Reserve, most central banks primary focus seems to be on ensuring plenty of liquidity for stressed markets and signaling their willingness to support their respective economies. Actually addressing any economic downturn is at this stage secondary, although a lot of interest rate stimulus will be in place if and when it is needed.

For historical information on central bank rate actions, please see the Whetstone Analysis Reference Library.

 

 

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