Did the Fed just merge with the Treasury?

Is The FED Merging with The Treasury Department Amidst COVID-19 Pandemic

The COVID-19 pandemic has rattled the global financial sector in ways that even the brightest minds in economics could ever imagine. The global economy is under immense pressure as macroeconomic uncertainties continue to fuel concerns of an imminent recession. The U.S economy, which was growing at an impressive rate prior to the crisis, has already started feeling the pressure considering developments in the past few weeks.

Stock Market Plunge

One of the longest Bull Run in the stock market has come to an abrupt end. Major stock market indices led by the S&P 500 and the Dow Jones Industrial Average have already plunged into the bearish territory, tanking by more than 20%. The implosion has come at the backdrop of the spread of the coronavirus that has taken a toll on various sectors of the U.S economy.

Concerned with the risk of an imminent recession, policymakers in the U.S have swung into action in a bid to avert the events of the 2008-2009 financial crises. Stringent measures, as well as drastic economic policies, have come into play as policymakers seek to curtail the COVID-19 fallout.

There is no doubt that the U.S central bank the Federal Reserve and the Treasury have on their hands an arsenal of tools they can use to avert the U.S economy plunging into recession as it did in 2009. The FED has so far shown the lengths it is willing to go to ensure the U.S economy sails through, unscathed, amidst the Coronavirus pandemic.

U.S Monetary Policies For COVID-19 Pandemic

Over the past month, the central bank has cut interest rate by 150 basis points. With interest rates near the zero territory, the FED might as well have run through its 2008 crisis book. In a bid to calm the stock markets, which has experienced extreme levels of volatility in recent months, the central bank has initiated a $1 trillion a day in repurchase agreements. In addition, it has confirmed unlimited quantitative easing programs.

Fed Chair Jerome Powell

The Coronavirus Aid Relief and Economic Security CARES is one of the program designed to caution taxpayers in the U.S amidst the coronavirus pandemic. The congress approved program includes a $2.2 trillion package that will be distributed to people as well as businesses greatly affected by the pandemic.

The $2 trillion packages will offer six months’ worth of relief, targeting among other people student borrowers. American taxpayers are poised to receive $1200 in paychecks to cover various expenditures as the country remains under lockdown.

The bailout package will increase funding to unemployment benefits as well as offering small businesses finances to pay employees, among other benefits. The package also provides at least $100 billion to help hospitals in the U.S battle the Coronavirus pandemic.

While the response has provided some form of reprieve, it’s the manner in which they’ve been carried out that has continued to raise serious questions. One of the questions that are increasingly sending shockwaves in the capital markets is whether the U.S central bank, the Federal Reserve is slowly merging with the Treasury department.

Is The FED Merging With Treasury?

However, it is the confirmation of a $625 billion worth of bond-buying program that might as well have got the FED at crossroads with economists. The purchase program will see the FED purchasing both governments guaranteed securities as well as corporate bonds. Once the dust settles, the FED will end up owning two-thirds of the treasury market, given the rate at which it is buying securities in the market.

The FED might as well have assumed a role that is not under its mandate on embarking on the aggressive buying spree. Under the law, the Federal Reserve is only allowed to purchase and lend against securities that have a government guarantee. Some of the products that the central bank can buy include treasury securities, as well as agency mortgage, backed securities. It can also spend its balance sheet on debt issued by Fannie Mae and Freddie Mac.

However, that has not been the case with the recent wave of purchase. The central bank has ended up buying more corporate bonds that don’t have federal government security. By spending on corporate bonds as well as other securities, the Central bank has essentially assumed a role initially reserved to the Treasury department. Similarly, it is becoming increasingly clear that the FED might as well have merged with the treasury department.

The FED and the Treasury department are supposed to operate independently. However, that has not been the case, especially on President Donald Trump's constant bashing that the FED is not doing enough to protect the U.S economy. Similarly, the two have had to work together to the extent of their operations appearing intertwined.

In a bid to shrug off any merger concerns, the FED has resorted to the creation of special purpose vehicle (SPV) for each of its operations that go beyond its mandate. The Treasury Department on its part has started using its Exchange Stabilization Fund by making equity investments in each of the SPV created by the FED

While it is the Treasury Department that is buying all these securities as part of the bailout package, it is the FED that has ended up financing everything. Conversely, the FED is acting as the banker providing all the finances that the Treasury Department needs to purchase all the securities in the financial markets.

What is simply happening is that the FED has given the Treasury department access to its printing press. Whatever the Treasury department needs to purchase in the financial markets, the FED is sure to provide the money. In essence, the Treasury Department appears to be in control of the central bank.

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