US Fed aims 'bazooka' to backstop coronavirus-hit economy

Daniel Fowler
March 25, 2020

The US Federal Reserve has launched an aggressive plan to buy as much government-backed debt as it needs to keep financial markets functioning as plans for a $1.8tn plus bailout of business and consumers stalled in Congress.

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

The litany of new programs announced Monday followed a string of emergency measures last week that included the central bank slashing interest rates to near zero, expanding its balance sheet and redeploying crisis-era facilities to unfreeze various corners of the debt markets.

The New York Fed said in a statement on Tuesday it had retained BlackRock Financial Markets Advisory to purchase the assets on the Fed's behalf from primary dealers in the market.

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

The U.S. currency's earlier rise was also fuelled by a turnaround in dollar positions among hedge funds to a net short from an overall long bet, according to latest positioning data.

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Almost a third of the US population has been urged to stay indoors and authorities have mandated the shutdown of large parts of the service sector to keep people safe.

"The Fed is still working to maintain the flow of credit because they know what happened during the Depression (when) too many firms went under", Duy said.

The U.S. economy is now suffering from three material economic shocks, as global trade disruptions, mandated domestic business closures, and disruptions in lending from severe financial market stress will contribute to a large contraction in U.S. economic activity in 2Q.

Under the new programs, the Fed will lend against student loans, credit card loans, and USA government backed-loans to small businesses, and buy bonds of larger employers and make loans to them in what amounts to four years of bridge financing.

"While great uncertainty remains, it has become clear that our economy will face severe disruptions", the Federal Reserve said as it revealed the plans.

This year's capital plans will "be used to monitor how firms are managing their capital in the current environment, planning for contingencies, and positioning themselves to continue lending to creditworthy households and businesses", the Fed said.

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