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Fed Extends Bond Buying to Infinity and Beyond

Don Curren March 23, 2020

The US Federal Reserve took its biggest step yet to shore up the US economy and financial markets being swamped by the COVID-19 pandemic Monday morning, extending the “whatever-it-takes” ethos to quantitative easing even farther by embracing essentially unlimited buying of US Treasury bonds and mortgage-backed securities.

The US dollar took a substantial hit immediately after the measures were announced, dropping by 1.1%, but then recovering somewhat, according to the trade-weighted DXY index, and losing 0.3% against the Canadian dollar, against which it has recorded massive gains since the coronavirus became an acute global threat.

The policy-making Federal Open Market Committee “will purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy,” the Fed said.

The new measures will in all probability result in a substantial expansion of the US central bank’s already bloated balance sheet, and may prove controversial in some quarters over time, although most are likely to be pleased with the Fed’s robust measures in the short term.

The Fed said it would buy $375 billion in Treasury securities and $250 billion in mortgage securities this week.

It also launched a number of other programs aimed at supporting an economy facing an unprecedented challenge as the US struggles with rapid spread of the virus. It had 35,225 cases of COVID-19 and 471 deaths from the respiratory disease as of Monday morning, according to the website reporting on cases of the disease maintained by the Center for Systems Science and Engineering at Johns Hopkins University.

Fed Chair Jerome Powell Federal Reserve did not hold a news conference after the announcement, but the Fed’s news release reaffirmed its commitment to doing whatever it can to counteract the economic effects of the coronavirus and the strict measures being embraced to slow its spread.

“The Federal Reserve is committed to using its full range of tools to support households, businesses, and the U.S. economy overall in this challenging time,” the release said.

“While great uncertainty remains, it has become clear that our economy will face severe disruptions. Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate,” it said.

In addition to the purchases of US government bonds and mortgage securities, the Fed announced a number of other programs aimed at supporting a broad range of sectors in the US economy, including purchasing commercial mortgage-backed securities issued by government-supported entities.

It also said it would “support the flow of credit to employers, consumers, and businesses by establishing new programs that, taken together, will provide up to $300 billion in new financing. The Department of the Treasury, using the Exchange Stabilization Fund (ESF), will provide $30 billion in equity to these facilities.”

The Fed said it would 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, and would create a third facility, the Term Asset-Backed Securities Loan Facility (TALF), to support the flow of credit to consumers and businesses.

Underlying those and the other measures the Fed adopted was a clear signal that the US central bank will be relentless in its efforts to support the economy and the financial system from the devastating impact of the coronavirus.

Don Curren
Market Strategist and Content Editor

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