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WHAT DID THE FED DO? DID IT WORK?
The Federal Reserve launched a series of actions to stabilize Treasury markets. The stated aim was “to support the smooth functioning of markets” for those securities.
Repurchase agreements (repos): The Fed vastly expanded their repo operations, essentially providing unlimited amounts of cash in short-term loans to dealers, collateralized by Treasuries and other government securities. The Fed had already stepped in last year to address instability in short-term markets, but this injection of cash was potentially many times larger.
Security purchases The Fed resumed purchasing massive amounts of securities, a key tool employed during the Great Recession, when the Fed bought trillions of long-term securities. Unlike after the Great Recession, the purchases were explicitly tied to improving market functioning. The scale of these purchases has been unparalleled: since the start of the COVID-19 outbreak (March 9th), the Fed has purchased $1.45 trillion in Treasury securities and $575 billion in agency mortgage-backed securities. By serving as the other side of the trade—the buyer to these sellers—dealers could more confidently make markets and intermediate transfers.
Easing regulations: The Fed temporarily eased its supplemental leverage ratio rule. Among other things, it allowed the largest banks to exclude cash and Treasury securities from calculating their total assets, effectively reducing the amount of capital they are required to hold. This approach could help banks fill the gap when the Fed eventually leaves by temporarily alleviating the balance sheet constraints that arguably created this problem in the first place.
The Fed’s actions seem to have worked. Treasury futures are once again pricing in line with their cash deliverables, market depth has started to recover, and repo rates have fallen in line with the federal funds rate, the Fed’s key short-term rate target. The Fed’s aid to Treasury markets, in combination with a broad range of new emergency lending facilities, has helped key credit markets heal as well.
