Fed to buy as much government debt as needed to aid economy

In its boldest effort to protect the US economy from the coronavirus, the Federal Reserve says it will buy as much government debt as it deems necessary and will also begin lending to small and large businesses and local governments to help them weather the crisis.

The Fed's announcement Monday removes any dollar limits from its plans to support the flow of credit through an economy that has been ravaged by the viral outbreak.

The central bank's all-out effort has now gone beyond even the extraordinary drive it made to rescue the economy from the 2008 financial crisis.

"The coronavirus pandemic is causing tremendous hardship across the United States and around the world," the Fed said in a statement.

 

"Our nation's first priority is to care for those afflicted and to limit the further spread of the virus. 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.

Financial markets sharply reversed themselves after the announcement.

Dow Jones futures swung more than 1,000 points from about 500 down to a rise of roughly 500 before falling back again after the market opened.

The yield on the 10-year Treasury bond also fell, a sign that more investors are willing to purchase the securities.

In its announcement, the Fed said it will establish three new lending facilities that will provide up to USD 300 billion by purchasing corporate bonds, a wider range of municipal bonds and securities tied to such debt as auto and real estate loans.

It will also buy an unlimited amount of Treasury bonds and mortgage-backed securities to try to hold down borrowing rates and ensure those markets function smoothly.

The Fed's new go-for-broke approach is an acknowledgment that its previous plans to keep credit flowing smoothly, which included dollar limits, wouldn't be enough in the face of the viral outbreak, which has brought the US economy to a near-standstill as workers and consumers stay home.

Last week, it said it would buy USD 500 billion of Treasuries and USD 200 billion of mortgage-backed securities, then quickly ran through roughly half those amounts by week's end of the week.

And on Monday, the New York Federal Reserve said it would purchase USD 75 billion of Treasuries and USD 50 billion of mortgage-backed securities each day this week.

"They're really setting the economy up'' to start functioning again when the health crisis subsides, said Donald Kohn, a former Fed vice chair who is a senior fellow at the Brookings Institution.

"Part of this is about the other side of the valley: Make sure the credit is there."

Still, Kohn noted, These things will take some time to set up. These are complicated'' programs.

Referring to the financial crisis, he said of the Fed's policymakers, They have our experience to draw on.''

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said it is clear that the Fed is now doing whatever it takes."

This is an all-out effort to ensure that the business sector can continue to exist even as economic activity temporarily collapses, Shepherdson said.

In unleashing its aggressive new efforts, the Fed is trying both to stabilize the economic standstill and allay panic in financial markets.

Many corporations and city and state governments are in desperate need of loans to pay bills and maintain operations as their revenue from customers or taxpayers collapses.

That need has escalated demand for cash. In the meantime, large businesses have been drawing, as much as they can, on their existing borrowing relationships with banks.

The intensifying needs for cash means that banks and other investors are seeking to rapidly unload Treasuries, short-term corporate debt, municipal bonds and other securities.

The Fed's move to step in and act as a buyer of last resort is intended provide that needed cash.

The steps announced today, combined with the previous ones ... should substantially improve market functioning and should provide some important support for the economy, said Roberto Perli, a former Fed economist who is now head of global policy research at Cornerstone Macro.

But Perli cautioned that the benefits won't be felt immediately.