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Monday, March 23, 2020 / 08:47PM
/ By The Guardian / Header Image Credit: Bryan R Smith/AFP via Getty Images
"Nothing is working as the US central bank tries to pull the markets out of a slump".
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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