it would do practically anything to help

the American economy fend off a recession.

- So the Fed has two main roles.

The one we most think about is of monetary policy,

which basically means raising interest rates

and lowering interest rates to try

and keep the economy on an even keel.

The other role it has is what we would call

it's a lender of last resort role.

In fact, that is a role for which most central banks,

including the Fed, were originally created.

- [Narrator] The Fed says it will use its full range

of tools to support the U.S. economy

during the coronavirus pandemic.

Here are the tools.

Tool number one, interest rates.

On March 15th, the central bank dropped

its interest rate target.

- [Jerome] Today, we reduced the target range

for our policy interest rate by one percentage point,

bringing it close to zero, and said that we expect

to maintain the rate at this level until we're confident

that the economy has weathered recent events.

- [Narrator] Historically, the Fed has cut interest rates

in an effort to stimulate growth,

but that's only one of its tools.

- In most recessions in the past,

the Fed has to lower interest rate by an average

of five percentage points to turn things around

and get the economy growing again.

It came into this crisis

with interest rates already very low

at only around one and a half percentage points

and it's already cut them to zero.

So it is effectively out of ammunition.

- [Narrator] Having lost the use of its main tool,

here's some of the other tools the Fed can use.

Tool number two, government bonds.

On Monday, March 23rd, the Fed said

it would buy $375 billion in Treasury securities

and $250 billion in mortgage-backed securities

in just one week.

The Fed has done this before, in 2008.

Between then and 2014, the central bank's asset sheet grew.

Then spending plateaued and the Fed started

to wind down its balance sheet.

But the Fed's buying in March leaves the bank

with more than four and a half trillion dollars in assets.

The central bank has said, that moving forward,

the purchases of government securities

are essentially unlimited.

- As that tends to lower long term interest rates,

that brings down things like mortgage rates directly,

so it has been buying bonds.

The only problem is that bond rates are down below 1%

and so there isn't a lot of juice it can put

into the economy by pushing those down further.

So right now, the Fed's monetary policy role

is largely out of ammunition.

However, the Fed can do a lot through the lender

of last resort role.

In fact, we have seen it do a lot.

- [Narrator] As lender of last resort,

the Fed can make more money available

to the financial system to make sure

that it has cash to operate smoothly.

In mid-March, the Fed made $1.5 trillion available in a bid

to prevent unusual disruptions in the repo market.

In these transactions, the Fed lends cash

and accepts government bonds

or mortgage-backed securities as collateral.

Financial institutions can use the money for a variety

of short-term operations, all of which are necessary

for bond markets to operate normally.

You can think of this cash injection as grease for the gears

that keep the financial system humming.

- Now typically, bond dealers do not need a lot of help

from the Federal Reserve, but in stressful times they,

like a lot of other big companies, find it's difficult

to find someone to lend them money.

So the Fed steps in and lends them the money.

It's important that it do so, because if it didn't,

you would see long term interest rates,

including on your mortgages, going up a lot.

- [Narrator] Tool number four, discount window lending.

In March, the Fed eased the rules for accessing its channel

to lend cash directly to commercial banks.

Commercial banks typically finance loans with cash

they get from deposits and private lenders,

but if those sources aren't available, they can,

in a pinch, borrow from the Fed.

- The way the Fed lends to banks, it basically asks them

to come to its so-called discount window.

- [Narrator] This interest rate is typically higher

than the federal funds target.

That encourages banks to borrow from each other

and to not rely on the Fed.

- [Narrator] But on March 16th,

the Fed lowered the discount rate to .25 percent,

which is near the upper range of the federal funds target.

- If banks are worried about people thinking they're weak,

they're not gonna go to the discount window,

even if they need the money

because there's a stigma attached to it.

So what the Fed wants to do now is,

hey, we're really worried about the economy,

come to our discount window and borrow.

Please don't worry about stigma.

And just to make sure you don't have to worry about stigma,

we're actually gonna lower the rate on discount window loans

to roughly the same rate you'd have to pay out

on the regular markets.

And that's what they've done.

- [Narrator] Tool number five, commercial paper.

On March 17th, the Fed relaunched

its commercial paper funding facility.

This facility will help the Fed lend cash

directly to businesses.

That money is then used for day-to-day business operations,

like payroll.

- So the Fed never saw itself as being the main source

of funding for private enterprise.

It always wanted the economy to primarily be

a market-based economy where private companies

would borrow from private lenders.

The only reason that it's stepping in to play this role

is because we're going through an economic crisis.

If these private firms cannot get funding

from their usual place, there outta be a way

to get it from the Fed.

- [Narrator] Tool number six, swap lines.

- [Narrator] The Fed can also send money abroad

to backstop foreign central banks.

- So the dollar is a very special currency.

Companies and banks and investors who don't do business

in the United States, all agree to do business in dollars

because it's kind of like the lingua franca of currencies.

However, when you have a crisis,

this causes a bit of a vulnerability.

At times like this, the Fed sees that part of its role

as lender of last resort is to lend

to the rest of the world.

- [Narrator] In March 2020, the Fed ramped up a program

that can make more U.S. dollars available overseas

at near zero interest rates.

- And these loans that the Fed makes to other central banks

are called swap lines.

- [Narrator] In March, the Fed extended swap lines

to several banks across the globe.

- If the world needs dollars,

the Fed will print those dollars

and it will lend them those dollars.

It's not in the interest of the United States

that companies in all our trading partners

go out of business because that will ultimately

not just hurt their economies, it will hurt our economy

because we rely on them as customers

and we rely on them as suppliers.

- [Narrator] Though the Fed has exhausted

its monetary tools, it continues to work

to backstop financial markets.

- [Greg] They're trying to ensure that,

on top of this health crisis and economic crisis,

we do not also have a financial crisis.

(calm music)