1 1 (March 27, 2020)

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                  Resarh Service






The Federal Reserve's Legal Authorities for

Responding to the Economic Impacts of

COVID-19



Updated March 27, 2020
The COVID- 19 coronavirus has upended financial markets and the real economy. As the virus has spread,
businesses across the country have closed their doors, major stock indexes have lost over a quarter of their
value, and debt and commodity markets have experienced extreme volatility. While Congress is
considering the appropriate fiscal response to these developments, the Federal Reserve (the Fed) has
implemented several monetary policies and lending programs to stimulate demand and inject liquidity
into the financial system. This Sidebar discusses the Fed's responses to the coronavirus, the legal bases
for those actions, and the central bank's authority to take further steps to contain the economic fallout
from the virus. A CRS summary of the Fed's recent actions is also available here.


The Fed's Response to the Virus

The spread of the coronavirus has taken a significant toll on the global economy, causing layoffs, supply-
chain disruptions, and market turbulence. Many commentators contend that the virus is likely to produce
a recession as commercial activity grinds to a halt and liquidity disappears from key financial markets.
The Fed-which has a statutory mandate to promote full employment and can act as a lender of last
resort during crises-has responded to the virus with a series of policies designed to support the
economy and maintain financial stability.

Interest-Rate Cuts and Asset Purchases
The Fed's ability to set short-term inerest rates is generally considered its primary tool for managing the
economy. Since the outbreak of COVID- 19, the Fed has implemented two emergency rate cuts to
stimulate demand for goods and services. In early March, the central bank cut its target federal funds rate
by half a percentage point, bringing it to a range of between 1 and 1.25 percent. Less than two weeks
later, the Fed again cut rates an additional percentage point, lowering the benchmark rate close to zero.
The Fed can also influence long-term interest rates by purchasing assets with long-term maturities, like
Treasury and mortgage-backed securities. The spread of the coronavirus has coincided with sharp selloffs
                                                               Congressional Research Service
                                                               https://crsreports.congress.gov
                                                                                   LSB10435

CRS Leg Sidebar
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