Testimony before the House Financial Services Committee Subcommittee on National Security, International Development, and Monetary Policy

September 22, 2021

In response to the crisis in March of 2020, the Federal Reserve—using existing authority and in conjunction with powers and funding from the Coronavirus Aid, Relief, and Economic Security (CARES) Act—launched several emergency interventions in financial markets. I will discuss four of these interventions here. The first two involved direct lending to entities at a penalty rate—like section 13(3) emergency lending programs for financial firms, but for elements of the real economy. These included the Primary Market Corporate Credit Facility (PMCCF), which offered to purchase new corporate bonds, and the Municipal Liquidity Facility (MLF), which offered to purchase bonds from states and municipalities. The third intervention, called the Secondary Market Corporate Credit Facility (SMCCF), is a program to purchase a market index of already existing corporate bonds, and the fourth is the Main Street Lending Program (MSLP), which was designed to provide loans to small- and medium-sized businesses.

I will discuss three things about these programs today. First, the first three programs were more successful than people realize; we see dramatic effects if we look not just at their level of activity, but at their overall impact on interest rates. These efforts created lower borrowing costs at a time of severe budgetary stress, which helped ease pressure during the worst of the downturn. However, this is not a substitute for fiscal policy or direct support to states, municipalities, and people.

Second, these programs are an evolution of unconventional monetary policy at the zero lower bound and are likely to stay with us, just as they will likely stay with the other countries that used similar interventions throughout last year. There isn’t just one interest rate in our economy that is administered by the Federal Reserve; there are many, and tools that allow the Fed to directly target them are critical in guiding the economy back to full employment.

Because these programs work by influencing interest rates, Black and brown communities suffered from punitive rates as a result of the delay in expanding the eligibility of the MLF. To prevent this from happening again, the Fed must make understanding the multiple ways it can improve these facilities a priority going forward. Moreover, the experiences of these programs can provide guideposts for ways in which unconventional monetary policy can drive other policy objectives in the future.