Over the past nearly three weeks, the U.S. Federal Reserve Bank has put up a valiant effort to protect households, businesses and the economy from the effects of the coronavirus pandemic, or COVID-19. On March 23, it announced its latest stimulus package that included expanded windows for its purchase of securities and new credit facilities for businesses and municipalities. The Fed’s earlier actions have included sharp interest rate cuts, short-term loan facilities, asset purchase windows, and regulatory latitude for banks that may fall short of capital requirements as they participate in those programs.
How much further could the Fed go? Faculty at Wharton and Yale have expressed concerns over the trajectory of the Fed’s actions, arguing that it perhaps should stop short at taking on a fiscal policy-making role that is typically reserved for Congress.
“I’m extremely skeptical about the political utility of the Fed becoming a major fiscal policy maker,” says Peter Conti-Brown, Wharton professor of legal studies and business ethics. “That said, the Fed can still provide huge back-end market liquidity for what Congress and the Treasury should do for fiscal policy. It has legal authority—non-emergency legal authority—to diversify its holdings, with different kinds of government bonds to include revenue bonds or even perhaps general obligation bonds of states and municipalities.”
Read more at Knowledge@Wharton.
