US Fed expands bond purchases to unlimited amount amid virus shock

Daniel Fowler
March 24, 2020

"The Federal Reserve is committed to using its full range of tools to support households, businesses, and the USA economy overall in this challenging time", the central bank said in a statement.

The Fed last week restarted financial crisis-era programs to help the commercial paper and money markets, after cutting interest rates to near zero and pledging to boost its holdings of Treasuries by at least $500 billion and of mortgage securities by at least $200 billion.

This means that the U.S. central bank's asset buying program will go beyond the amounts it pledged to purchase on March 15.

"It's their bazooka moment", said Russell Price, chief economist at Ameriprise Financial Services in Troy, Michigan.

Concerns are growing that the USA economy may fall into a recession as shops and businesses are closing across the country and many people are urged to stay at home in an effort to slow the spread of the pneumonia-causing virus.

"In the midst of an unprecedented national crisis, Republicans can't seriously expect us to tell people in our communities who are suffering that we shortchanged hospitals, students, workers and small businesses, but gave big corporations hundreds of billions of dollars in a secretive slush fund", said Senator Patty Murray, a Democrat of Washington state.

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Stock futures rose, reversing earlier losses, and U.S. Treasury yields also ticked higher.

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

This will involve the creation of a Primary Market Corporate Credit Facility for new bond and loan issuance with a Secondary Market Corporate Credit Facility to "provide liquidity for outstanding corporate bonds".

"There is more that we can do if necessary", he said.

Under the Fed's authority granted by Section 13 (3) of the Federal Reserve Act, the central bank then lends to the SPV to support the vehicle's purchases. The program will reduce risks for banks and make it easier for them to keep issuing new loans to consumers and businesses that need them, said Steve Friedman, senior economist for MacKay Shields.

"The Fed is doing everything they can" to keep markets functioning smoothly after economic activity was disrupted, he said "We take this as a huge easing". "Now, the spotlight is on elected leaders to do their jobs as well".

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