The Fed is
running out of options to stave off a coronavirus depression
Nothing is
working as the US central bank tries to pull the markets out of a slump
Larry
Elliott
Mon 23 Mar
2020 16.20 GMTLast modified on Mon 23 Mar 2020 20.20 GMT
These are
troubling times for the US Federal Reserve. The US central bank is trying
everything it knows to pull the financial markets out of their tailspin but
nothing seems to work.
Before Wall
Street opened the Fed announced that its new plan was to provide infinite
amounts of money through its quantitative easing programme. The response of
traders was to shrug and carry on selling.
In truth,
though, this was little more than a massive holding operation. The Fed was
buying time so that two things can happen: Donald Trump manages to get a fiscal
rescue package through Congress and there are definitive signs of a slowdown in
the incidence of new Covid-19 cases.
It didn’t
really help the prospects of a market rally on the back of the Fed’s
announcement that Wall Street and the rest of New York’s financial district
were locked down along with the rest of the city, but in the end the central
bank had little choice.
Here’s how
things looked from the Fed’s Washington DC HQ. Figures due out on Thursday
could show that 2 million Americans have been laid off in a week as a result of
the coronavirus pandemic. The financial markets looked to be about to have
another sharp fall. Congress had failed over the weekend to agree a $1.8tn
(£1.6tn) rescue package.
As the Fed
noted in a statement, the pandemic is causing “tremendous hardship” not just in
the US but around the globe. When it said the US economy would face “severe disruptions”
that was a classic piece of central bank understatement. These are the sort of
“severe disruptions” that John Steinbeck would have recognised.
Time then
for the Fed to act like the grownup in the room by pledging to provide
unlimited amounts of money to the financial system through its QE programme –
under which the central bank buys government bonds and other assets for cash.
The Fed
announced a $700bn package of asset purchases only eight days ago but was
working its through that sum extremely quickly to try to calm down markets
bordering on the dysfunctional.
As a
result, it has gone much further than it did during the financial crisis of
2008 by making QE open-ended. It also expanded the range of assets that it is
prepared to buy and announced a joint operation with the US Treasury to provide
direct support to businesses and consumers. The Fed will provide up to $300bn
of new financing to firms and households, with the Treasury providing $30bn to
cover any losses.
The Fed
will create a primary market corporate credit facility that will provide new
loans on generous terms to investment-grade companies. There will be no
interest payments for the first six months and analysts expect takeup to be
high.
In
addition, the Fed has got round an act that prevents it buying corporate bonds
through the establishment of a special purpose vehicle that will buy the debt
of companies rated BBB (just above junk status) or better.
The world’s
most powerful central bank is pushing at the boundaries of its mandate in ways
that carry both political and commercial risk. It doesn’t care about that. The
fear of a second Great Depression is to the US what fear of a return of
hyperinflation is to Germany: something to be avoided at all costs.
That said,
the Fed is running out of options. Short of getting approval from Capitol Hill
to start buying shares, it is not immediately obvious what more it can
meaningfully do. The onus is now on Congress to act and to act quickly.
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