The Federal Reserve’s balance sheet has expanded by a whopping $300 billion, largely due to the surge in bank bailouts and the record surge in discount window borrowing since March 15th. The discount window is the mechanism that allows banks and other eligible financial institutions to borrow money from the Fed at an interest rate slightly above the Fed’s benchmark rate. The unprecedented rise in these loans is a clear indicator of the strain the financial industry is experiencing in the wake of the COVID-19 outbreak.
The Fed has been actively taking measures to support the economy amidst widespread closures and uncertainty. The central bank has cut interest rates to zero and launched a $700 billion asset purchase program to stabilize the financial markets. It has also broadened the types of collateral it accepts in exchange for loans, allowing riskier assets like stocks to be used as collateral.
Despite these efforts, the economic disruption caused by the pandemic has left many financial institutions in need of support from the Fed. The surge in discount window borrowing is a sign that banks are having difficulty accessing funds from other sources and need the Fed’s assistance to remain solvent.
In addition to the increased demand for discount window loans, the Fed has been purchasing massive amounts of government bonds and mortgage-backed securities in an effort to inject liquidity into the markets. This has led to a substantial increase in the Fed’s balance sheet, which now stands at over $5 trillion.
The expansion in the Fed’s balance sheet has sparked concerns about inflation and currency devaluation. However, Fed officials have emphasized that these measures are necessary to support the economy in the short term and that they have the tools to control inflation in the long run.
Overall, the surge in discount window borrowing and the expansion of the Fed’s balance sheet demonstrate the severity of the economic crisis caused by the COVID-19 outbreak. While the situation remains uncertain, the Fed’s actions are aimed at providing stability and support to the financial industry and the broader economy.