Beyond these monetary policy actions, we have taken many additional measures to promote the stability of the financial system and to support the flow of credit. Today, I’m going to focus my remarks on these measures and detail their significance for supporting the economy. But before I continue, let me give the usual disclaimer that the views I express are mine alone and do not necessarily reflect those of the Federal Open Market Committee or anyone else in the Federal Reserve System. A Lesson from History Ensuring liquid and smoothly functioning financial markets are essential roles of central banks, like the Federal Reserve. Yet, it’s often poorly understood why these roles are so important for the health of the broader economy. It was the financial crisis that erupted in 1907 that led to the creation of the Federal Reserve System, and as we’ve planned and executed our response to the current crisis, it’s this history lesson I keep returning to. A number of shocks, beginning with the 1906 San Francisco earthquake, led to a run on the banks in 1907. The run on the banks was stemmed by emergency loans from a consortium of private banks, called the New York Clearing House. But a run on less regulated trusts, the “shadow banks” of that time, could not be similarly curtailed.1 J.P. Morgan brought together a group of young bankers, including Benjamin Strong, who would go on to become the first head of the New York Fed, to examine the books of the trusts.
Markets for Treasury securities and agency mortgage-backed securities, which are normally highly liquid and form the bedrock of our financial system, nearly buckled under the strain of massive flows of funds in response to the pandemic.3 It’s easy to think of financial markets as somewhat divorced from the real economy—most people will never need to worry about a spike in the repo rate or liquidity in the Treasury market. But the reality is that like the events of 1907—and more recently 2008—turmoil in financial markets can have a devastating impact on the wider economy. If credit isn’t flowing, people can’t finance the purchase of a home, businesses can’t invest, and nonprofit organizations and municipalities can’t keep essential services going. This is why safeguarding the functioning of financial markets is essential for the health of the broader economy. In response to the extraordinary volatility caused by the pandemic, the Fed greatly expanded its repo operations and began purchasing sizable quantities of U.S. Treasury securities and agency mortgage-backed securities. These actions to provide massive liquidity have proven successful. They restored market functioning and averted what could have been a much more severe pullback from markets and the flow of credit to households and businesses.4  Deploying Our Tools In addition to the repo operations and asset purchases, we have established a number of programs to support the flow of credit to households, businesses, and state and local governments.5 I won’t go into detail about all of the facilities, but I will emphasize two important points.