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Fed commits to unlimited bond purchases in bid to counter pandemic fallout

by Joseph Lawler

March 23, 2020 08:23 AM

 

The Federal Reserve announced Monday morning that it was committing to buying unlimited amounts of bonds to counter the effects of the coronavirus pandemic.

It also said that it had established a range of new programs to ensure the provision of credit in markets that have frozen up as sectors of the economy have been shut down.

Together, Monday's actions rival or go beyond the Fed's emergency measures taken during the 2008 financial crisis. The announcement was also the third such surprise move by the central bank in the past month, as it had already lowered its target interest rate to zero.

"The Federal Reserve is committed to use its full range of tools to support the U.S. economy in this challenging time," Fed officials said in a previously unscheduled monetary policy announcement. The decision was unanimous among the central bank's monetary policy committee members.

 

The central bank noted that the first priority must be to address the spread of the coronavirus, but said that “aggressive efforts” were justified to limit job losses and support a strong recovery once the virus abates.

The Fed will create three new lending facilities: Two to help create and then buy bonds issued by large corporations and help generate securities backed by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration.

The idea behind the facilities is that, by buying assets in markets for various kinds of bonds, they can provide liquidity in those markets and prevent other participants from having to engage in fire sales of bonds to get cash.

Together, the facilities are meant to provide up to $300 billion in financing.

In addition to supporting large businesses, the Fed said that it expects to set up a “Main Street Business Lending Program” to benefit small businesses.

Congress is also seeking to improve credit conditions for businesses through a major relief package that stalled Sunday night. The fast-evolving bill would greatly expand SBA loans and provide emergency loans to industries hit particularly hard by the pandemic.

Monday's actions mirror ones the Fed took in 2008 as market credit markets experienced the equivalent of bank runs. To backstop those markets, the central bank rapidly bought enough securities to expand its balance sheet from under $1 trillion to above $2 trillion.

Then, as the economy failed to recover in the subsequent years, the Fed engaged in large-scale bond purchases meant not just to prevent panic in specific credit markets, but also to spur spending economy-wide by lowering interest rates. Those bond purchases, known as quantitative easing, eventually ballooned the Fed's balance sheet to $4.5 trillion. The central bank had begun shrinking its balance sheet in 2018 as unemployment neared record lows but now has abruptly reversed course.

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