The Fed is Doing “Whatever it Takes” to Prop Up the Economy. That’s a Very Bad Thing.

by Samuele Murtinu and Peter G. Klein

No sooner had the COVID-19 recession hit the US economy—with its mandatory business and school closures, travel bans, shelter-in-place orders, and a massive drop in commercial activity—than politicians, academics, journalists, and business leaders began calling for the Fed to save it.

The Fed’s response didn’t take long: a) $2.3 trillion in new loans to households, businesses, markets, and state and local governments; b) a cut in the federal funds rate to 0–0.25 percent and a promise to keep it low indefinitely; c) open-ended purchases of Treasurys and government-guaranteed and commercial mortgage-backed securities; d) short-term loans to “primary-dealer” financial institutions in exchange for collateral, including investment-grade debt; e) support for money market mutual funds; f) direct lending to banks, households, consumers, small firms, and corporations, also by purchasing investment-grade corporate bonds and commercial paper; and g) lowering banks’ loss-absorbing capital and reserve requirements. No one would accuse the Powell Fed of standing idly by!

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