March 13 — The Federal Reserve moved to stem a market meltdown yesterday with offers of US$1.5 trillion (RM6.4 trillion) in short-term loans that some analysts say could point to more aggressive action from the central bank in coming days to stimulate the economy and stabilize the financial system.
With signs of financial stress emerging across different markets, the New York Federal Reserve said it would make the money available in three tranches of US$500 billion each and that it would start purchasing a broader range of US Treasury securities than it has been of late, a shift that signals the Fed could deploy some of its crisis-era tools sooner than planned.
The Fed meets next week and many analysts now expect the central bank to chop its own target policy rate, quite possibly to zero, and give markets new guidance about how it plans to combat the economic fallout from the coronavirus.
The unscheduled move — the latest in a series of actions aimed at providing liquidity and reassurance as the outbreak grows and brings areas of the country to a veritable halt — came as US stocks plunged nearly 10 per cent in their biggest one-day losses since the 1987 market crash. The outbreak, which originally was thought to pose a limited threat to the US economy, is now increasingly seen as the event that could bring a record-long economic expansion to an end, but with little clarity yet as to how severe the downturn might be.
The economy is already being hit with waves of event and travel cancellations. Broadway and Disneyland are going dark and the professional sports industry is for now on hold.
But it did show the Fed moving to head off a repeat of the events that locked down financial markets and froze credit a little over a decade ago at the start of what became a deep recession. Its offer of effectively unlimited cash to banks was an effort to plant a flag of sorts and remind that the core function of a central bank is as a lender of last resort — to ensure that whatever other ills the economy may face it won’t be a lack of cash.
“This is a massive increase in temporary liquidity provisions and likely much larger than what the market will demand,” said Cornerstone Macro analyst Roberto Perli, who described the actions as “for all practical purposes QE,” because the Fed would once again add to its stock of longer-term Treasury assets.
More to come
The central bank offered US$500 billion in a three-month repo operation yesterday and will offer an additional US$500 billion in one-month repo and US$500 billion in three-month repo loans today.
Notably, the Fed is also changing the maturities of the Treasury securities that it purchases monthly to increase reserves. Starting today, the central bank will buy across a full range of short— and longer-term assets to match the composition of Treasury securities outstanding, including coupons, bills, Treasury Inflation-Protected Securities and Floating Rate Notes.
“That’s basically QE,” said Tim Duy, a professor of economics at the University of Oregon. “If you are going the entire curve, you are definitely doing something different” from just buying bills.
The changes were made at the direction of Fed Chair Jerome Powell, in consultation with the Fed’s policymaking panel, to “address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak,” the New York Fed said.
Quantitative easing was a key piece of the Fed’s response to the 2007 to 2009 economic crisis, driving its balance sheet to more than US$4 trillion. Its asset holdings have been growing again, but only through the purchase of short-term Treasury bills, which the Fed has insisted was simply a technical action.
Analysts say the Fed is not finished.
“The Fed is likely to do more soon, including cutting rates to likely zero,” Ebrahim Rahbari, chief currency strategist for Citi, said in a note to clients yesterday.
That would represent a dramatic turn of events for the Fed, reversing in a matter of months a decade’s worth of effort to move interest rates back towards something like a normal level — only to see the twin shocks of a global trade war and now a global health emergency push them back down.
Along with a rate cut policymakers could also make sharper use of communication tools, including forward guidance to let markets know what it would take for them to raise interest rates again from rock bottom.
Fed officials could also potentially revive some of the emergency lending facilities launched during the financial crisis to keep cash flowing and prevent severe economic damage. — Reuters
