Published: Mon, March 23, 2020
Markets | By Otis Pena

Federal Reserve starts unlimited bond purchases

Federal Reserve starts unlimited bond purchases

"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".

Details: The Fed said its previously announced plan to purchase treasury and mortgage-backed securities - a program called quantitative easing - would be unlimited.

"While great uncertainty remains, it has become clear that our economy will face severe disruptions", it underlined in a statement.

The bank also said it would soon roll out a "Main Street business lending program" to support lending to eligible small and midsize businesses. The TALF will enable the issuance of securities backed by student loans, auto loans, credit card loans and loans guaranteed by the Small Business Administration.

The Federal Open Market Committee also announced a wide range of radical new interventions and expanded many other emergency programmes.

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The Fed will 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 Federal Reserve announced a number of steps on Monday meant to shore up the United States economy during the coronavirus crisis.

For the first time, the Fed will dip its toes into the corporate bond market by contributing to a lending facility that will be used to buy corporate bonds issued by highly rated companies.

USA shares continued their slide after the announcement, as US lawmakers struggled to attain settlement on a far-reaching coronavirus stimulus package deal on Monday after failing to attain a deal over the weekend. The Department of the Treasury, using the Exchange Stabilization Fund (ESF), will provide $30 billion in equity to these facilities. After cutting interest rates to near zero and offering to purchase more Treasury bonds and mortgage-backed securities last week, the central bank now chose to lend against student loans and credit card loans as well as buy bonds of larger employers. Goldman Sachs expects an outright contraction in global real GDP in 2020 on the back of a 24% plunge in USA real GDP in the second quarter: two-and-a-half times as large as the previous post-war record. USA equity futures also reversed a decline, Treasuries extended an advance, oil jumped after the Fed pledged asset purchases with no limit to support markets.

"That is the Fed's all-out effort to make sure that the enterprise sector and households can proceed on", mentioned Sam Bullard, senior economist for Wells Fargo Securities.

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