The dollar is our currency, but it's your problem.
— John Connally, U.S. Secretary to the Treasury, 1971
The Federal Reserve on Tuesday announced the establishment of a temporary repurchase agreement facility for foreign and international monetary authorities (FIMA Repo Facility) to help support the smooth functioning of financial markets, including the U.S. Treasury market, and thus maintain the supply of credit to U.S. households and businesses.
— Federal Reserve, March 31, 2020
One of the key features of this crisis is the speed at which the financial markets have reacted, the speed at which a recession has been declared, and the speed at which policymakers have responded to the crisis. In the past, we would normally have watched the macroeconomic data filter through, or possibly even disputed whether or not there had even been a recession well after the fact—e.g., following two quarters of negative GDP growth (a rule of thumb, not the official definition of recession) already behind us. Today, few would doubt we are now in the midst of a sharp economic downturn, with the duration and depth really the only key questions.
In this Economics Weekly, we discuss how the Fed, after helping to put out the fires springing up on its own turf, is being forced to broaden its reach to calm the next phase of the crisis—foreign economies and their dollar funding shortfall—and how it is reacting to the shifting demand between reserves or Treasurys by domestic banks.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.