A joke doing the rounds has it that on confronting an alien invasion, the first thing the US would do is cut interest rates. The gag is only moderately unfair: an absence of political leadership, and the White House’s undermining of American bureaucracy, have left the Federal Reserve as the first defence in the face of economic crisis. This may help in the short term. But socialising risk on the balance sheet of the central bank stores up problems for the future.
The scale of measures partly reflects lessons learned during the 2008 crisis. Moves to stabilise the financial system that took months to be instigated then were launched much more rapidly in response to the economic disruption caused by coronavirus. Swap lines with foreign central banks were introduced almost immediately, quantitative easing programmes were restarted and the Federal Reserve has intervened directly in money markets and corporate financing to take the burden off banks in a time of stress.
In total, these policies will extend the reach of the central bank much further into the US economy than ever before. Analysts at Bank of America forecast that the Fed’s balance sheet will reach $9tn by the end of the year, or about 40 per cent of US national income. Proportionally, that will bring the Fed roughly in line with the European Central Bank, though still far below the Bank of Japan, whose assets amount to more than 100 per cent of national income.