By Howard Schneider
WASHINGTON (Reuters) – The U.S. Federal Reserve’s balance sheet reached a record $4.7 trillion this week and banks grabbed cut rate loans from the central bank as efforts to blunt the economic damage of a global health crisis took hold.
Data released Thursday showed bank borrowing from the Federal Reserve’s “discount window” spiked to more than $28 billion this week, compared to $11 million the week before, after the central bank slashed the cost of loans and encouraged firms to tap the Fed to help funnel credit into the economy.
The discount window is the main tool through which the Fed acts as the economy’s “lender of last resort,” and has often been avoided by banks who feel that using it is a sign of distress.
But as in the 2007 to 2009 crisis the Fed has been trying to break that stigma and encourage banks to use the discount window freely, on Sunday slashing the interest rate to 0.25% and allowing banks to borrow for up to 90 days at a time.
“The Federal Reserve Board is encouraged by the notable increase in discount window borrowing this week with banks demonstrating a willingness to use the discount window as a source of funding to support the flow of credit to households and businesses,” the Fed said in a statement released alongside data on bank borrowing for the week.
(GRAPHIC – Banks rush to borrow from the Fed: https://fingfx.thomsonreuters.com/gfx/mkt/13/3681/3642/Pasted%20Image.jpg)
It was the largest amount taken from the discount window since October 2009, when the United States was still climbing out of the 2007 to 2009 recession.
It was also a tangible sign of the Fed’s actions this week starting to take hold. The Fed slashed its target interest rate to near zero and has rolled out in quick succession a series of other measures to ensure bank, corporate funding and overseas markets continue to function even as large parts of the economy shut down to try to squelch the coronavirus epidemic.
Between the discount window loans, expanded short-term loan repurchase operations, and a resumption in bond buying, the Fed’s balance sheet hit a new high of $4.7 trillion — a record setting one week jump of around $350 billion that topped the pace of balance sheet expansion reached during the previous crisis.
That is a marked change from a year ago when the Fed was trying to shrink the size of its holdings as it closed down the last of its crisis-fighting efforts of a decade ago.
The coronavirus epidemic has now thrown all of that into reverse, with the Fed’s balance sheet and ability to buy large amounts of securities again being used to manage an unforeseen round of turmoil.
(GRAPHIC – U.S. Fed’s balance sheet swells to record: https://fingfx.thomsonreuters.com/gfx/mkt/13/3679/3640/Pasted%20Image.jpg)
(Reporting by Howard Schneider; Editing by Chris Reese, Daniel Wallis and Diane Craft)