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Comment: Minutes of March 15 FOMC meeting stress that the Fed was addressing an external health crisis

The minutes of the March 15 FOMC meeting – which superseded the scheduled March 17-18 deliberations – showed the Committee facing a number of uncertainties and “unpredictable” developments in regard to the COVID-19 pandemic. In retrospect, the FOMC made some shrewd assessments of conditions three weeks ago and the appropriate steps to take, but then they had the playbook from the financial crisis of 2007-2008 to get them started and buy some time. A notable mention was a possible “relaunch of the Term Auction Facility”. In the three weeks since the meeting, the FOMC has made a number of more carefully targeted decisions to assure credit gets where it is needed.

For a list of credit facilities (re)established and other decisions regarding asset purchases, please see the Whetstone Analysis Reference Library.

The key take-aways from the minutes seem to be:

  • The FOMC decided to frame their response as a public health crisis that occurred against the backdrop of a healthy economy and reasonably sound financial market conditions.
  • The FOMC expressed particular concern about how the pandemic would impact lower income workers, and how a protracted crisis might permanently displace many workers.
  • The initial steps to address the situation were about keeping credit markets functioning and ameliorating the sudden and severe impacts on businesses and labor from public health measures. It was also clear that price pressures would be downward at least for a time and therefore lowering interest rates would assist in maintaining price stability over the medium term.
  • Bringing short-term rates to the effective lower bound (ELB), providing forward guidance, and expanding asset purchases were primarily to support credit markets and ease disruptions in the near term. Stimulus was a secondary thought and not really an issue until the crisis is less acute and disaster recovery is the focus.
  • Out of necessity, much of the discussion about then current economic conditions relied on anecdotal evidence from contacts across the 12 District Banks. The minutes said, “Participants relayed reports on business sectors already badly hit by the response to the coronavirus outbreak.” Now that the data is catching up, it appears to have been a fairly accurate picture of the time.
  • The minutes noted the swift and downward direction of FOMC participants’ expectations for economic conditions and the impossibility of building a reasonable forecast for economic growth.

The discussion concluded, “Participants generally noted that other measures to support the flow of credit to households and businesses, including those that relied on section 13(3) of the Federal Reserve Act, might be needed in such an uncertain and rapidly evolving environment and that it would be prudent for the Federal Reserve to develop and remain prepared to implement such measures.”

In the weeks since, the Fed has offered a number of innovations to alleviate conditions in particular financial markets, as well as announcing some easing in regulation and supervision where that might be burdensome – particularly for smaller institutions – in order to ensure that banks can concentrate on their core services at a time of stress.

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