fbpx

Blog

The Federal Reserve and the Treasury Department

David LynchApril 24, 2020

COVID-19 Related Information

As each day brings news of the coronavirus and the United States’ relief efforts, articles and news outlets continue to speak of material that may not be common knowledge to everyone. While the whole country has focused its attention on this horrific pandemic and the impact it has had, it is valuable to be as informed as possible so we can follow our government’s economic response, step by step. It is especially important to navigate the complex relationship between The Federal Reserve and the Treasury Department and how their efforts hope to help our economy.

The Federal Reserve Bank of the United States, otherwise known as “The Fed,” is essentially just that: the central bank for the United States government. Politically independent, The Fed has flexibility to influence the free marketplace to ensure price stability and unemployment. The Treasury Department, on the other hand, is an Executive Department that issues debt, prints money, and manages the country’s finances. The two entities work together to ensure the nation’s economy is stable with the Treasury focused on issuing stimulus checks and The Fed is assisting the banks that service American borrowers.

When a business, or individual, needs money immediately they turn to a bank to issue them credit, usually a loan. However, the Covid-19 pandemic has caused serious concerns regarding the issuance of such credit to individuals and businesses. Banks that previously felt confident their loans would be repaid now have reason to question. According to the St. Louis Fed, commercial and industrial loans grew 1.49% during the entire 2019 year. March 2020 loans increased 1.86% from the previous month. Borrowers are demanding access to credit, and thus the Treasury Department has supported funding for The Fed to create liquidity facilities to combat the increased demand. These facilities assure funding for banks to issue loans through programs set by the government. It is how these programs are funded.

Since The Fed cannot issue loans directly to individuals, it uses their “primary dealers”, i.e. banks, to administer the loans. In other words, The Fed creates the loan through their liquidity facility, which banks administer to individuals & businesses. Some of The Fed’s liquidity facilities are new, some have been reintroduced from the economic collapse of 2008-2009. Each facility has the purpose of supporting their corresponding program. For example, the Paycheck Protection Program Liquidity Facility (PPPLF) is the program that provides the money to support the loans of the Paycheck Protection Program (PPP). The Municipal Liquidity Facility supports the issuance of loans to state and local governments, etc. It is important to note that all facilities The Fed has instituted must be approved by the Treasury Secretary.

The pace at which our news and updates have been coming has been staggering. It is important to find some time to educate ourselves on these dynamic economic and health issues, in order to learn more about how they affect you personally. Hopefully, next time we hear about The Fed and what its liquidity programs are doing, it will make a little bit more sense as to what they are, where they come from, and how they are designed to help. As always, please don’t hesitate to reach out to your advisor to discuss some more implications of the economic response.

 

Sources: 
Cornell Definitions
Federal Reserve Press Release
Additional website disclosures