The Federal Reserve is under all kinds of pressure to keep the economy moving amid the COVID-19 crisis. In the last few weeks, it has done much to keep the epidemic from leading to a broad economic slowdown, while resisting calls to take the most extreme measures, such as making “helicopter money drops.”

Still, there’s an aura of déjà vu surrounding much of what the Fed has done, harking back to the 2008 financial crisis.

For instance, the Fed changed its target rate between scheduled meetings—for the first time since 2008. And, it has implemented several changes by invoking its emergency lending authority under Section 13(3) of the Federal Reserve Act—as it did during the earlier crisis.

Still, until this week, most of the Fed’s actions were nothing unusual in the big scheme of federal crisis management. Before getting into the latest—and most troubling—moves, here is a timeline of the Fed’s major announcements up to March 23.

• March 3—an emergency 0.5 percentage point (50 basis point) cut in the main interest rate target, bringing the federal-funds rate target to a range of 1 percent to 1.25 percent.
• March 12—an injection of an additional $1.5 trillion into short-term credit markets through the Fed’s repurchase agreement (repo) operations. (Per Bill Nelson, former deputy director of the Fed’s Division of Monetary Affairs, the total injected could end up being as large as $4.5 trillion.)
• March 12—the decision to buy Treasury securities of all different maturities, as opposed to only short-term notes.
• March 15—a surprise cut of the federal funds target rate, bringing it to a range of 0 percent to 0.25 percent.
• March 15—a new round of quantitative easing (QE), resulting in purchases of up to $500 billion in Treasuries and $200 billion in mortgage-backed securities.
• March 15—a cut in the main lending rate at the Fed’s discount window, through which the Fed provides loans directly to banks. (The Fed cut the main discount window rate, the primary credit rate, by 150 basis points, to 0.25 percent.)
• March 15—an extension of the term on discount window loans, allowing banks to borrow from the discount window for as long as 90 days, renewable by the borrower on a daily basis.
• March 15—the announcement of explicit support for financial firms that use their own liquidity and capital buffers during the crisis (without this announcement, use of these buffers would trigger regulatory scrutiny or be prohibited).
• March 15—the complete elimination of reserve requirements, enabling banks to get even more liquidity into the economy.
• March 17—the establishment of a primary dealer credit facility (PDCF) to provide short term loans to the Fed’s primary dealers. The dealers can post a broad range of financial instruments as collateral, including investment grade bonds, commercial paper, municipal bonds, and even equity securities.
• March 17—the formation of the Commercial Paper Funding Facility (CPFF) to “provide a liquidity backstop to U.S. issuers of commercial paper.”
• March 18—the creation of a Money Market Mutual Fund Liquidity Facility (MMLF). The Federal Reserve Bank of Boston will use the MMLF to help money market funds meet redemption demands as “households and other investors” redeem their funds for cash. This assistance will take the form of loans “secured by high-quality assets” such as “unsecured and secured commercial paper, agency securities, and Treasury securities.”
• March 20—the extension of the MMLF to provide loans to municipal money market mutual funds.

The Fed deserves credit for going to such lengths.

Buying Treasuries (and other securities) puts more cash in the system and adds to the amount of reserves that banks can use to make loans and provide liquidity. The repo operations are essentially the same thing, so the Fed has been providing more liquidity across a broad swath of financial markets – exactly what it should be doing in a liquidity crisis.

One quibble, though, is that the Fed is still paying interest on excess reserves (IOER), a policy initiated in 2008 to keep excess reserves (created by Fed purchases) in check. Even the Fed’s economists acknowledge the contractionary effects of IOER, and it makes no sense to continue these payments, because it works against increasing liquidity. Paying IOER makes even less sense now because the Fed just lowered reserve requirements to zero—all reserves are now excess reserves.

There is no time like the present to ditch the IOER framework. Doing so would free up another $1.5 trillion in reserves that banks can use to provide (much needed) liquidity to other businesses. (Yes, the rate is only 0.10 percent, but it is the risk-adjusted relative rate that matters, not the absolute rate.)

Another problem with the Fed’s recent actions, alluded to above, is that the Fed rolled them out in what looked like a series of fire drills. Sometimes the Fed introduced changes on consecutive days, and several were announced just days before the scheduled policy meeting. The approach looked chaotic when steadiness was direly needed.

To be fair, the Fed deserves some slack because it was reacting as events unfolded. However, the Fed would not have had to rely on piecemeal efforts, at least not to the same extent, if it had strengthened the weaknesses that appeared throughout the 2008 crisis.

For instance, it could have, created some type of standing facility to use during both normal and crisis periods. Several monetary economists floated proposals, such as the one that George Selgin suggested shortly after the crisis. Selgin’s proposal for flexible open market operations is similar to one used by the Bank of England.

The Fed could have set up a pilot program, or at least engaged the public in a serious discussion of the costs and benefits of such a system, but it did neither. The failure to do so over the last decade is even stranger considering how quickly—and with no public engagement—the Fed ditched its traditional operating framework for a new floor system that depended on IOER.

When the dust settles from the current crisis, the Fed should openly explore revamping its operations to avoid future fire drills to the extent possible. It might, for example, be a good time to create a standing repo facility, such as the one suggested by Fed economist David Andolfatto. Perhaps targeting nominal spending, through monetary base targets, would leave the Fed better prepared to handle a crisis.

Still, none of these suggestions will provide a panacea, and everyone should recognize that there are limits to what any central bank can do to prevent an economic collapse. If governments force everyone to shelter in place for the next six months, for example, monetary policy will not help because we will not be in a liquidity crisis. Monetary policy can help with a liquidity crisis because that type of credit crunch consists of solvent firms (with illiquid assets) having trouble keeping enough cash on hand to serve their customers and suppliers.

Instead, we will be in a situation much closer to a traditional solvency crisis, where businesses no longer have cash because they don’t have customers. Those businesses don’t need loans, they need customers. Without customers, they can’t pay back the loans.

Normally, this is not the Fed’s main concern because they do not make loans to private commercial firms. They provide loans to banks and financial firms, so that they can stay liquid and provide financing to solvent businesses in a liquidity crunch. That’s what the above list of new policies represents—liquidity support for financial markets that can, in turn, support commercial activity.

Today’s announcement, however, reveals a very troubling departure from this norm. Just as government shutdowns are bringing commercial activity to a crawl, with the potential of creating a solvency crisis, the Fed is going to start lending directly to commercial businesses.

According to the press release, the Fed will establish “two facilities to support credit to large employers—the Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance and the Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds.”

The biggest problem here is the first facility, the PMCCF.

As the details make clear, the establishment of the PMCCF means that the Federal Reserve will now directly lend money to large commercial businesses. The loans will come with interest payments deferred for six months and terms of four years.

The press release also notes that “In addition to the steps above, the Federal Reserve expects to announce soon the establishment of a Main Street Business Lending Program to support lending to eligible small-and-medium sized businesses, complementing efforts by the SBA.” The devil will be in the details, but it certainly appears that the Fed is about to “support” the future forgiveness of new SBA “loans.”

This sort of lending by the Fed undermines the central bank’s credibility on monetary policy and embroils it deeper than ever in the politics that come with lending government funds to commercial businesses. It will now be nearly impossible for the Fed to resist expanding programs like the PMCCF, and it will make it much harder to head off calls for providing helicopter money drops (giving money to everyone).

If Congress wants to send money to everyone and make loans (or provide grants) to businesses, they should stand up and do it rather than pass the buck off to the unelected officials who work at the Federal Reserve.