The US central bank announced on Thursday a massive increase to its cash injections into American financial markets to quell the growing uncertainty caused by the coronavirus pandemic.
The New York Fed, which has ramped up short-term funding to markets in recent days, said it will offer USD 500 billion in three-month funds called repurchase agreements or "repos" on Thursday and Friday, and $500 billion in one-month repos on Friday.
Over the coming month, it will provide $500 billion a week of one- and three-month repos.
That is on top of the at least USD 175 billion daily in overnight funding, and twice-weekly offers of at least USD 45 billion in two-week repos.
"These changes are being made to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak," the New York Fed said in a statement.
The bank said operations "will be adjusted as needed to foster smooth Treasury market functioning."
In was the third time this week the New York Fed has announced big increases in liquidity to help keep markets running.
"This is a full-blown crisis response operation, intended to make it abundantly clear that the Fed will not allow liquidity to dry up," Ian Shepherdson, chief economist of Pantheon Macroeconomics, said in a note.
The Fed uses the money market to keep the central bank's policy interest rate -- the federal funds rate -- in line with the desired range.
Financial institutions use money markets to borrow for very short periods, from one day to a year, a crucial function to keep the gears of the economy running.
The Fed last week made an emergency cut in the benchmark borrowing rate, lowering it by a half-point to 1.0-1.25 per cent to boost confidence in the face of increasing concerns the spread of COVID-19 could impact the US and global economies.
Economists say policymakers could deliver an even larger rate cut March 18 following the bank's regularly scheduled two-day meeting, with some saying the level could be slashed to zero, where it was during the global financial crisis.
In addition to the moves to ensure markets have sufficient liquidity to operate amid the virus fears, the New York Fed said starting Friday it will buy longer term US Treasury debt, rather than just 3- and 6-month bills.
It has been buying short term Treasuries at a rate of $60 billion a month since mid-October.
The Fed's actions "should limit the damage," Shepherdson said. "Now it's up to Congress to fire the fiscal bazooka, the bigger and quicker the better.
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