Fed unveils aggressive measures to shore up economy

Federal Reserve Chair Jerome Powell pauses during a news conference in Washington. The Federal Reserve says it will buy short-term loans from banks and companies to support the flow of credit as the economy grinds

Federal Reserve Chair Jerome Powell pauses during a news conference in Washington. The Federal Reserve says it will buy short-term loans from banks and companies to support the flow of credit as the economy grinds

The Fed's immediate goal is to keep credit flowing to the real economy.

The new programs mean the Fed will lend against student loans, credit card loans, and US 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.

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's measures are unprecedented and they have been extremely proactive in preventing this external shock from morphing into a wider funding crisis", said Vasileious Gkionakis, head of FX strategy at Lombard Odier.

As the Federal Reserve beefs up its liquidity backstop and efforts to counter financial market distress, which stems from market panic in response to the coronavirus pandemic, the Fed balance sheet has started to explode. Unlike the 2008 financial crisis, which hit banks and financial institutions, the non-financial corporate sector is the epicenter of this crisis.

These measures add to other programs introduced last week that will further support short-term corporate lending through commercial paper issuance and ensure that prime money market funds, which traditionally invest in short-term corporate debt, have ample direct access to liquidity in the event of redemptions.

The Fed had previously committed to buying at least $500 billion of Treasury securities and at least $200 billion in mortgage-backed securities.

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

"The Federal Reserve will continue to use it full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals", the bank said.

Trump administration appear closer to reaching bipartisan agreement on a stimulus bill that would inject almost $2 trillion into the economy.

Still, it's important to keep in mind that these programs aren't a panacea and won't prevent a US recession (indeed, high frequency data suggest that the USA may already be in recession).

"While great uncertainty remains, it has become clear that our economy will face severe disruptions". However, the policies can help the economy avoid a depression.

Ulrich Leuchtmann, head of FX and commodity research at Commerzbank said in a note that as more economies enact draconian measures to lock down their economies, the global economy would be massively constrained in the near future and markets could quickly turn back into risk-off mode.

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