What Does the Fed Do?
As the central bank of the United States, the Federal Reserve’s (Fed’s)
mission is to promote the effective operation of the U.S. economy. It uses
monetary policy—actions to achieve maximum employment and stable
prices (also known as its “dual mandate”)—to support economic growth.
Effective monetary policy complements fiscal policy—the use of government
spending and tax policies to affect economic conditions. The Fed
also promotes the stability of the financial system; stable financial markets
are necessary for a well-functioning economy.2
The Fed plays a particularly important role in quelling financial and economic
crises. In fact, it was created in part to do just that: After decades of
destabilizing banking panics and other crises, the Fed was founded in 1913
to provide the nation with a safe, flexible, and stable monetary and financial
system. When crises arise, the Fed is authorized to act as the “lender
of last resort.” That is, in certain circumstances the Fed may provide funds
to the financial system when they are urgently needed and market sources
have been exhausted. Doing so keeps the financial system functioning
and prevents economic downturns from deepening. This authority came
into play with the onset of the COVID-19 pandemic. Here we look at the
substantial economic shock brought on by the pandemic and the steps
the Fed took in the initial weeks to aid the economy.
What Shape Was the U.S. Economy in Prior to the Pandemic?
In early 2020, before the pandemic took hold, the U.S. economy was in
very good shape. February marked the 128th month (and the ultimate
COVID-19’s Effects on the Economy
and the Fed’s Response
Jane Ihrig, Ph.D., Economist and Senior Adviser, Board of Governors of the
Federal Reserve System
Gretchen Weinbach, Ph.D., Economist and Senior Associate Director, Board of
Governors of the Federal Reserve System
Scott Wolla, Ph.D., Economic Education Coordinator
GLOSSARY
Discount window: Federal Reserve lending
to depository institutions to support the
liquidity and stability of the banking system
and the effective implementation of
monetary policy.
Economic expansion: A period when real GDP
increases; a period of economic growth.
Federal funds rate: The interest rate
depository institutions charge each other
to borrow or lend reserves in the federal
funds market; these funds are immediately
available.
Facility: A formal financial assistance program
offered by a lending institution to help a
targeted set of counterparties (those eligible
to borrow) with funding needs. The
Federal Reserve has permanent facilities
(like discount window credit) and temporary
facilities (like those implemented during
the Global Financial Crisis of 2007-09 and
the COVID-19 pandemic).
Liquid asset: An asset that is easily convertible
to cash with a consistently low cost of
conversion.
Policy rate: The interest rate that is used by a
central bank to set and communicate its
monetary policy stance (or position). In the
United States, the Federal Reserve’s Federal
Open Market Committee (FOMC) uses the
federal funds rate as the policy rate.
Real gross domestic product (GDP): The
total market value of all final goods and
services produced in an economy in a
given year calculated by using a base year’s
price for goods and services; nominal gross
domestic product (GDP) adjusted for
inflation.
U.S. Treasury securities: Bonds, notes, and
other debt instruments sold by the U.S.
Treasury to finance U.S. government
operations.
PAGE ONE Economics®
September 2020	 Federal Reserve Bank of St. Louis | research.stlouisfed.org
“The Federal Reserve’s response to this extraordinary period has been
guided by our mandate to promote maximum employment and stable
prices for the American people, along with our responsibilities to promote
stability of the financial system.”1
—Jerome H. Powell, Chair of the Board of Governors of the Federal Reserve System
Federal Reserve Bank of St. Louis | research.stlouisfed.org 2PAGE ONE Economics®
Table 1
COVID-19 Timeline in the United States, January to March 2020
January 21 First reported U.S. case
January 30 First reported case of person-to-person transmission in the U.S.
February 11 WHO (World Health Organization) announces a formal name for the coronavirus—COVID-19
March 3
FOMC holds unscheduled meeting: says coronavirus poses evolving risks to economic activity; lowers policy rate range ½
percentage point to 1 to 1¼ percent; says it’s closely monitoring developments and their implications for the economic outlook
and will use its tools and act as appropriate to support the economy
March 6 President signs first emergency coronavirus aid package
March 11 Confirmed U.S. cases reach 1,215
March 11 WHO declares COVID-19 outbreak a pandemic
March 11 NBA suspends all basketball games
March 12 MLB suspends spring training and delays start of regular baseball season
March 12 NHL suspends hockey season
March 12 NCAA cancels men’s and women’s college basketball tournaments
March 13 States across the U.S. announce plans to close schools
March 13 President declares national emergency
March 15
FOMC holds another unscheduled meeting: says coronavirus has harmed communities, disrupted economic activity, and
significantly affected global financial conditions; lowers policy rate range 1 percentage point to near zero (a 0 to ¼ percent
range); says will use its tools to support the economy, including flow of credit to businesses and households
March 15
Fed announces series of actions to support flow of credit to households and businesses; first of many announcements made
over coming weeks*
March 15 CDC (Centers for Disease Control and Prevention) recommends cancelling or postponing in-person events of 50 people or more
March 15 President issues guidelines to avoid gatherings of more than 10 people for next 15 days and limit discretionary travel
March 15 Confirmed cases rise to 3,487
March 16 NASCAR postpones all races until at least May
March 17 Kentucky Derby postponed until September
March 17 Confirmed U.S. cases reach 7,038
March 18 Trading on Wall Street halted for fourth time in two weeks; S&P 500 Index falls 5 percent
March 18 Confirmed U.S. cases top 10,440
March 18 President signs second emergency coronavirus aid package
March 27 President signs the Coronavirus, Aid, Relief, and Economic Security (CARES) Act, the largest single spending bill in U.S. history
NOTE: *All of the Fed’s COVID-19-related announcements, which began February 28, can be found at https://www.federalreserve.gov/covid-19.htm.
SOURCE: CDC (2020); Hauck et al. (2020); Muccari, Chow, and Murphy (2020); and Board of Governors of Federal Reserve System (various dates).
peak) of the longest economic expansion in U.S. history.
Employment was growing solidly, with February’s unemployment
rate of 3.5 percent the lowest in 50 years.
Employees’ wages were rising on the whole, although
gradually. Lower-income workers were also benefitting
from employment gains. Moreover, while inflation was a
bit low from the Fed’s perspective, it was stable. Taken
together, these indicators painted a rosy picture of a
strong and stable economy.
WhenthePandemicSetIn,WhatHappenedtotheU.S.Economy?
The COVID-19 pandemic and the steps taken to protect
public health hit the U.S. economy in early 2020 with considerable
speed and scope. The United States announced
its first reported case of the virus on January 21 and the
first death from it on February 29. To limit the spread of
the virus, health experts recommended widespread social
distancing (keeping a distance of at least six feet between
people). This policy resulted in the closing of all “non-­
essential” businesses and activities and the use of shelter-­
at-home strategies for all non-essential employees, steps
that many businesses and households implemented
swiftly (Table 1). As a result, by mid-March, entire parts
of the economy had been shut down, which had two
major effects.
First, economic activity was substantially disrupted, ending
the U.S. economic expansion. Spending on goods
and services plunged (Figure 1). With many businesses
closed, millions of workers were laid off. The unemployment
rate surged to an 80-year high—to 14.7 percent in
April and 13.3 percent in May (Figure 2). More jobs were
lost in the two months ending in April 2020 than had
been created over the preceding expansion, which had
lasted nine years (Figure 3). And the rise in joblessness
was especially severe for lower-wage workers, women,
African Americans, and Hispanics. Real gross domestic
product (GDP), which measures the value of the nation’s
total economic output, fell at a 5 percent annual rate in
the first quarter of 2020 followed by an eye-popping 33
percent fall in the second quarter. Although these data
provide a sense of the overall effects of the pandemic
on the economy, they do not capture the severe hardships
that set in for many, including the financial stresses
that can accompany sudden job loss.
Second, and even more immediately, the economic
shutdown severely affected U.S. financial markets. Well
before the data discussed above became available, it
was increasingly clear that the pandemic would have
serious adverse effects on the economy. And any disruptions
to economic activity would also interrupt incoming
earnings and other cash flows for many households,
businesses, and state and local governments. In response
to this growing realization, many businesses and investors
sought to increase their holdings of cash and other very
“liquid” assets, and some did so by selling their holdings
of other assets. By early March, this rush to raise cash
caused severe strains across many financial markets. In
U.S. Treasury securities markets, for example, the difference
between the prices offered to sell and buy some
securities widened considerably, making it difficult for
trades to occur (Figure 4). Stress in the Treasury market,
normally among the most liquid markets in the world,
signaled financial stresses more broadly.3 Indeed, many
businesses and state and local governments that regularly
cover their near-term expenses by selling short-term
securities to raise cash started to have difficulty raising
enough money to operate, including for expenses such
as payroll, leases, and payments to suppliers. The resultant
“liquidity squeeze”—where access to cash dries up
even for those that had been operating smoothly just
days before—was particularly severe in mid-March and
threatened to greatly amplify the pandemic’s negative
effects on the economy.
How Did the Fed Respond?
In keeping with its mission, the Fed acted swiftly to
address the economic and financial effects of the pandemic.
It rapidly lowered the target range for its policy
rate, the federal funds rate, to near zero to bolster the
economy; took steps to stabilize the financial system;
and undertook programs to support the flow of credit in
the economy.4
Specifically, during two unscheduled meetings on March 3
and March 15, the Fed’s monetary policymaking body,
the Federal Open Market Committee (FOMC), voted to
reduce the target range for the federal funds rate by a
total of 1½ percentage points, dropping it to near zero
(Figure 5). Moreover, the FOMC made it clear that it
intended to keep that setting for a good while—until it
could be confident that the economy had weathered
recent events and was back on track for the Fed to achieve
its dual mandate. Taken together, these interest rate
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Federal Reserve Bank of St. Louis | research.stlouisfed.org 4PAGE ONE Economics®
Figure 1
Spending Plunged
Consumer spending decreased 6.6 percent ($1 trillion) in March 2020 and 12.6 percent ($1.8 trillion) in April.
NOTE: The data start in November 2007 to include the Great Recession.
SOURCE: FRED®, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/graph/?g=r60z and https://fred.stlouisfed.org/graph/?g=r60v, accessed July 8, 2020.
Figure 2
Unemployment Surged
The unemployment rate bounced from a low of 3.5 percent in February 2020 to a peak of 14.7 percent in April and 13.3 in May.
NOTE: The data start in November 2007 to include the Great Recession.
SOURCE: FRED®, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/graph/?g=r5AM, accessed July 8, 2020.
Federal Reserve Bank of St. Louis | research.stlouisfed.org 5PAGE ONE Economics®
actions helped keep borrowing costs low for households
and businesses at a critical time. These actions will also
help spur spending and investment when the economy
emerges from the depths of the shock.
The Fed also took a number of steps to “unfreeze” key
financial markets. Such steps not only help these markets
run smoothly, they also encourage economic activity by
enabling the Fed’s low policy rate to pass to other interest
rates and to affect financial conditions more broadly in
the economy. First, the Fed announced an enormous
expansion of its purchases of securities, one that increased
its holdings by more than $2 trillion in the first two months
of this policy (Figure 6). Such purchases keep markets
working when assets are otherwise difficult to sell, inject
cash into the economy, and also convey that the Fed
stands ready to “backstop” (reinforce) important parts
of the financial system. These purchases helped restore
more normal functioning of crucial markets, including
the market for Treasury securities, which, as Figure 4 highlights,
was under significant stress.5 Second, the Fed
lowered the cost banks face when borrowing directly
from the Fed’s discount window and encouraged them
to lean on this option, if needed, to help meet their
Figure 3
Employment Plummeted
Total nonfarm payroll is a measure of employment. The measure peaked at 152,463,000 people employed in February 2020. By April,
employment had dropped to 130,303,000.
NOTE: The data start in November 2007 to include the Great Recession.
SOURCE: FRED®, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/graph/?g=r5AO, accessed July 8, 2020.
Figure 4
Stresses Emerged Even in Some Treasury Markets
NOTE: UST, U.S. Treasury securities. A bid-ask spread is the difference in the
price offered to sell versus buy a security; a widening spread indicates
increased difficulty in finding a seller-buyer pair to agree on a trade. The red
line shows that the most recently issued Treasury securities (referred to as
“on the run”) traded smoothly during the initial weeks of the pandemic. In
contrast, the green and blue lines show that investors had trouble finding
buyers of older Treasury securities (relative to the on-the-run security, the
first off-the-run security is the next youngest); the increase in these lines signaled
a deterioration in market functioning. Then the green and blue lines
declined—conditions in Treasury markets improved—as the Fed’s securities
purchases, the black line, ramped up.
SOURCE: Board of Governors of the Federal Reserve System (2020).
Federal Reserve Bank of St. Louis | research.stlouisfed.org 6PAGE ONE Economics®
Figure 5
The Fed Reduced Its Policy Rate to Near Zero
The federal funds rate is the Fed’s policy rate; the effective federal funds rate is the volume-weighted median of the rates at which these
funds transact in markets. The Fed uses its monetary policy tools to ensure the effective rate typically stays within the FOMC’s target policy
range.
NOTE: The data start in November 2007 to include the Great Recession.
SOURCE: FRED®, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/graph/?g=rbkO, accessed July 8, 2020.
Figure 6
The Fed’s Holdings of Securities Jumped Up
SOURCE: FRED®, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/graph/?g=r5Bn, accessed July 8, 2020.
customers’ demands for credit. The Fed also enlarged
its offerings of “swap lines” with foreign central banks to
improve access to dollar liquidity around the globe.6 In
addition, the Fed boosted its offerings of repurchase
agreements (repos) with eligible financial counterparties;
in this transaction, the Fed temporarily lends cash,
taking as collateral a Treasury or other safe security. The
use of the Fed’s discount window, swap lines, and repo
operations climbed in the early weeks of the shock and
then retraced as financial markets stabilized.
To help provide credit to businesses, households, and
communities where it was not otherwise available, the Fed
also introduced several liquidity and lending facilities.
The Fed is authorized to take these steps only in special
circumstances and with specific approval.7 Overall, the
Fed introduced 11 facilities to support various types of
funding and credit markets—including markets for financial
instruments such as commercial paper, corporate
bonds, municipal bonds, and asset-backed securities—
and businesses of all sizes.8 With these facilities, the Fed
aimed to keep key financial markets and the flow of credit
running in the economy. Some of these facilities began
operating quite quickly, while others took more time to
establish. By mid-June, a point before all of the facilities
had become operational, these programs in total provided
about $150 billion in funds. In many cases, however,
just knowing the Fed was providing a backstop source
of liquidity or credit helped restore confidence and
activity in these markets.
Conclusion
Though the COVID-19 pandemic is primarily a health
crisis, it has caused substantial disruptions to U.S. financial
markets and the economy. As a result, the Fed has
responded forcefully. In the initial several weeks of the
crisis, the Fed used interest rate policies to support the
economy and took steps to stabilize financial markets
and restore the flow of credit to many sectors of the
economy. Together with the fiscal actions of Congress
and the administration, these steps have helped financial
markets resume more normal functioning and created
conditions that will support an economic recovery
when the public health crisis has sufficiently subsided.
Of course, the path and timing of the recovery are
subject to great uncertainty, and so, as noted by Chair
Powell, “At the Fed, we will continue to use our tools to
their fullest until the crisis has passed and the economic
recovery is well under way.”9 n
Federal Reserve Bank of St. Louis | research.stlouisfed.org 7PAGE ONE Economics®
Notes
1 Powell (2020b).
2 The Fed’s three other key functions—supervising and regulating financial institutions,
fostering payment and settlement system safety and efficiency, and promoting
consumer protection and community development—also serve to promote
a smoothly functioning financial system. For more information, see The Federal
Reserve System Purposes & Functions at https://www.federalreserve.gov/aboutthefed/pf.htm
for a detailed discussion of the structure, responsibilities, and aims
of the U.S. central banking system.
3 One can see examples of the stresses across numerous financial markets in
Singh (2020), including markets for commercial paper, investment grade debt,
high-yield debt, municipal bonds, and asset-backed securities.
4 Not summarized here, the Fed also took steps on the regulatory front to encourage
banks to provide credit. See Powell (2020b) for a discussion.
5 See Logan (2020) for a detailed discussion of how the Federal Reserve’s asset
purchases supported smooth market functioning.
6 Under a dollar liquidity swap arrangement (a swap line), the Fed provides U.S.
dollars to a foreign central bank in exchange for the equivalent amount of the
foreign central bank’s currency, based on the market exchange rate at the time
of the transaction, and the parties agree to unwind the transaction at a specified
date in the future.
7 As a pre-condition to implementing emergency credit programs, Section 13(3)
of the Federal Reserve Act requires the Board of Governors of the Federal Reserve
System to find that “unusual and exigent circumstances” exist. And, since the passage
of the Dodd-Frank Act in 2010, the Board’s authority to engage in emergency
lending has been limited to programs and facilities with “broad-based eligibility”
that have been established with the approval of the Secretary of the Treasury.
8 For information about each of these facilities and the other policy tools used by
the Fed, see https://www.federalreserve.gov/monetarypolicy/policytools.htm.
9 Powell (2020a).
Please visit our website and archives at http://research.stlouisfed.org/publications/page1-econ/ for more information and resources.
© 2020, Federal Reserve Bank of St. Louis. The views expressed are those of the author(s) and do not necessarily reflect official positions of the Federal Reserve Bank
of St. Louis or the Federal Reserve System.
References
Board of Governors of Federal Reserve System. “Meeting Calendars, Statements,
and Minutes (2015-2020).” Various dates;
https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm.
Board of Governors of the Federal Reserve System. “Monetary Policy Report –
June 2020.” June 12, 2020;
https://www.federalreserve.gov/monetarypolicy/2020-06-mpr-summary.htm.
CDC. “Previous U.S. COVID-19 Case Data.” May 20, 2020, update;
https://www.cdc.gov/coronavirus/2019-ncov/cases-updates/previouscases.html.
Hauck, Grace; Gelles, Karl; Bravo, Veronica and Thorson, Mitchell. “Four Months In:
A Timeline of How COVID-19 Has Unfolding in the US.” USA TODAY;
https://www.usatoday.com/in-depth/news/nation/2020/04/21/coronavirus-updates-how-covid-19-unfolded-u-s-timeline/2990956001/,
accessed May 20, 2020.
Logan, Lorie K. “The Federal Reserve’s Market Functioning Purchases: From
Supporting to Sustaining.” Remarks at SIFMA webinar (as prepared for delivery),
July 15, 2020; https://www.newyorkfed.org/newsevents/speeches/2020/log200715.
Mucarri, Robin; Chow, Denise and Murphy, Joe. “Coronavirus Timeline: Tracking
the Critical Moments of COVID-19.” NBC News, March 10, 2020;
https://www.nbcnews.com/health/health-news/coronavirus-timeline-track-
ing-critical-moments-covid-19-n1154341.
Powell, Jerome H. “Current Economic Issues.” Speech at the Peterson Institute for
International Economics (via webcast), May 13, 2020a;
https://www.federalreserve.gov/newsevents/speech/powell20200513a.htm.
Powell, Jerome H. “Coronavirus and the CARES Act.” Testimony before the
Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C.,
May 19, 2020b;
https://www.federalreserve.gov/newsevents/testimony/powell20200519a.htm.
Singh, Daleep. “The Fed’s Emergency Facilities: Usage, Impact, and Early Lessons.”
Remarks at Hudson Valley Pattern for Progress (delivered via videoconference),
July 8, 2020;
https://www.newyorkfed.org/newsevents/speeches/2020/sin200708#photo3.
Federal Reserve Bank of St. Louis | research.stlouisfed.org 8PAGE ONE Economics®
Name___________________________________ Period_______
Federal Reserve Bank of St. Louis Page One Economics®:
“COVID-19’s Effects on the Economy and the Fed’s Response”
After reading the article, complete the following:
1.	 What was one of the original purposes the Fed was created for?
	 a.	 The Fed was created to ensure solid and steady stock market returns for investors.
	 b.	 The Fed was created to provide economic data to investors and businesses.
	 c.	 The Fed was created to support small businesses in struggling communities.
	 d.	 The Fed was created to provide loans and act as a backstop during a financial crisis.
2.	 How did the COVID-19 pandemic affect the unemployment rate?
	 a.	 The unemployment rate steadily increased over several months, rising from 3.5 percent to 13.3 percent.
	 b.	 The unemployment rate increased from a 50-year low rate of 3.5 percent to 14.7 percent in two months.
	 c.	 The unemployment rate fell as people dropped out of the labor force to shelter at home.
	 d.	 The unemployment rate fell as “non-essential” businesses continued to hire but asked their employees to 	
		 work from home.
3.	 As the data started to reveal the severity of the slowdown, how did businesses and investors seek to reduce 	
	 financial risk?
	 a.	 Reduce holdings of risky financial assets and increase holdings of cash
	 b.	 Reduce holdings of cash and increase holdings of risky financial assets
	 c.	 Borrow from the Federal Reserve’s discount window
	 d.	 Borrow money from the Federal Reserve at the federal funds rate
4.	 Why is the U.S. Treasury market an important indicator for the rest of the economy?
	 a.	 Stress in this very large market most likely signals financial market stress more broadly.
	 b.	 The U.S. Department of the Treasury produces U.S. currency.
	 c.	 Large investors make investment decisions based on returns on U.S. Treasury securities.
	 d.	 The U.S. Treasury market accounts for most of U.S. GDP.
5.	 How did the onset of the pandemic affect businesses and state and local governments?
	 a.	 They found it difficult to access funds to continue operations.
	 b.	 They enjoyed the lower cost of borrowing and became more profitable.
	 c.	 They had opportunities to hire displaced workers and boost productivity.
	 d.	 They lowered workers’ wages and tackled additional projects.
Federal Reserve Bank of St. Louis | research.stlouisfed.org 9PAGE ONE Economics®
6.	 How did the Fed bolster economic activity?
	 a.	 The FOMC lowered its target range for the federal funds rate to near zero percent.
	 b.	 The FOMC lowered its target for the unemployment rate.
	 c.	 The Fed increased its holdings of assets by buying gold on the open market.
	 d.	 The Fed sent stimulus checks to millions of Americans.
7.	 How did the Fed lower the cost of borrowing from the Fed?
	 a.	 The Fed provided access to loans from the Fed at local bank branches.
	 b.	 The Fed lowered the cost of borrowing from its discount window.
	 c.	 The Fed capped interest rates out to two years at zero.
	 d.	 The Fed lowered inflation.
8.	 How did the Fed’s purchases of U.S Treasury securities and other financial assets help stabilize the financial system?
	 a.	 They signaled that the Fed would buy all financial assets in the economy.
	 b.	 They helped the markets for these assets to close down smoothly during social distancing.
	 c.	 They kept markets working when the financial assets were otherwise difficult to sell.
	 d.	 They helped the Fed raise cash for its own holdings.
9.	 How did the Fed’s liquidity and credit facilities support the flow of credit in the economy?
	 a.	 They showed how the Fed could start its own bank.
	 b.	 They kept markets working when the financial assets traded in those markets were difficult to sell.
	 c.	 They led to the hiring of many workers who took on more credit.
	 d.	 They signaled that the Fed would provide all of the credit to the economy.
Federal Reserve Bank of St. Louis | research.stlouisfed.org 10PAGE ONE Economics®