Fed takes major action to support markets as coronavirus weighs on economy

The Federal Reserve headquarters in Washington September 16 2015. — Reuters pic

The Federal Reserve headquarters in Washington September 16 2015. — Reuters pic

The Federal Reserve announced a number of steps on Monday meant to shore up the USA economy during the coronavirus crisis.

The Fed will support "the flow of credit to employers, consumers and businesses by establishing new programmes that, taken together, will provide up to US$300 billion in new financing".

While much of the planet goes into lockdown, traders gave a massive thumbs up to the U.S. central bank´s pledge to essentially print money in a move not seen since the global financial crisis.

In addition, the Fed said it will soon unveil a programme to lend directly to small- and medium-sized companies - those that have been hardest hit by the near complete shutdown of the USA economy as authorities fight to contain the spread of the virus.

"While great uncertainty remains, it has become clear that our economy will face severe disruptions".

Financial markets sharply reversed themselves after the announcement.

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The move by the central banking system lifted Dow Jones Industrial Average futures, but the index still stumbled by roughly 3 percent in early trading, sinking below the 19,000 mark within the first 10 minutes.

The bank also said it would soon roll out a "Main Street business lending program" to support lending to eligible small and midsize businesses.

The Fed will buy Treasuries and agency mortgage-backed securities "in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy", and will also buy agency commercial mortgage-backed securities (MBS), according to a statement.

The central bank'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 U.S. economy to a near-standstill as workers and consumers stay home.

The Fed last week pledged to buy at least $500 billion in Treasury securities and $200 billion in mortgage-backed securities over the coming months, signaling a return to quantitative easing to boost liquidity in the economy.

Just knowing that the Fed is on the case should reassure businesses as the programs ramp up, Kohn said. "Part of this is about the other side of the valley: Make sure the credit is there".

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