A new way for the Fed to combat a market crisis

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When the Treasury market collapsed in March 2020, the Federal Reserve intervened in an extraordinary way. That month alone, it purchased over a trillion dollars worth of Treasury bonds. On the surface, this looked a lot like the quantitative easing we saw during the global financial crisis. But the purpose was different. It wasn't about lowering the yield curve or providing any form of strong forward guidance. Instead, the Fed took on the role of “market maker of last resort,” so to speak. And yet, despite the different goals, the two operations look the same and are conducted by the same officials (the members of the FOMC). This creates confusion and costs and can create a situation where it looks like the Fed is working against itself. In this episode of the podcast, recorded in Jackson Hole at the Kansas City Fed's annual economic symposium, we speak with Anil Kashyap, professor at the University of Chicago Booth. He presented a paper at the conference proposing a separate instrument within the Fed that can handle balance sheet operations for financial stability. We discussed his proposal along with broader questions about the transmission of monetary policy.