Fed pulls out all stops to prime faltering economy and lifts global markets

• The Fed has committed to using its full range of tools to support households, businesses, and the United States economy amid the challenging time precipitated by the COVID-19 pandemic
• It has started an open-market and open-ended bond buying programme to ease liquidity in the financial markets and introduced a wide range of credit and funding facilities to support large employers, municipalities and small businesses
• Despite the initial lacklustre response from the Dow, the Fed’s comprehensive package buoyed major global markets

The Federal Reserve has stepped on the gas in a race against time to shore up the United States economy reeling from the COVID-19 pandemic. In a press release issued on 23 March, the Fed has committed its maximum capabilities and laid down aggressive, unprecedented measures to limit the losses of incomes and jobs as well as ensure the economy’s speedy recovery when the situation stabilises.

Trying times call for strong measures

The US central bank’s latest set of actions outline significant actions, such as open-ended quantitative easing (QE). The recent announcement removes the previously established limit of $700 billion to QE. Instead, the Fed has promised to continue buying Treasury securities and agency mortgage-backed securities “in the amounts needed to support smooth market functioning.”

In addition, the measures include the establishment of credit facilities, two of which are geared toward large companies. The Primary Market Corporate Credit Facility (PMCCF) will handle new bond and loan issuance, while the Secondary Market Corporate Credit Facility (SMCCF) aims to provide liquidity for outstanding corporate bonds. The Fed has also decided to bring back the crisis-era Term Asset-Backed Securities Loan Facility (TALF), which has the objective of supporting the flow of credit to both businesses and consumers.

The Federal Reserve will also begin purchasing commercial mortgage backed securities as well as corporate bonds and bond ETFs. Its move also includes the expansion of commercial paper credit facility and money market mutual fund liquidity facility to include a wider range of municipal bonds.

Another part of the Fed’s plan is the establishment of the Main Street Business Lending Programme, which is meant to support lending to small and medium enterprises (SMEs). Details are scarce about this particular programme, but the Fed has said that this would complement the efforts of the Small Business Administration (SBA).

Has the Fed done enough?

At the time of the announcement, the Fed’s move to go all in was not enough to calm investors’ worries. A brief rally in stocks and corporate bonds ensued after the Fed released the information, but that upturn did not gain much steam owing to the US Senate’s failure to pass a highly anticipated $2 trillion stimulus package for the outbreak. Fortunately, the next day proved better. On Tuesday, 24 March, the Dow gained 2,113 points or 11.4%, recording its best day since 1933.

Global markets have also reacted in a more positive tone to the Fed’s actions. The FTSE 100 index rose by nearly 4% at the start of trading, while Germany’s DAX went up almost 6% and France’s CAC shot up nearly 5%. Early trade in the pan-European Stoxx 600 also increased 4.4%, with all sectors entering positive territory.

In Asia Pacific, the response has also been warm and welcoming. Japan and South Korea saw impressive gains, with Nikkei rising 7.1% and Kospi growing 8.6%. Hong Kong’s Hang Seng was 4.46% higher upon close and the Shanghai stock exchange saw 2.34% growth. Australia also recorded a 4.17% increase, while the New Zealand market rose 7.18%.

Time for Congress to move

Analysts and economists view the Fed’s measures positively too. Jean-Louis Nakamura, the chief investment officer for Asia Pacific of Swiss bank Lombard Odier, has called the new measures “a defining moment” not just for staving off the pandemic’s impact but also in terms of policy innovation.

“The Fed’s programmes constitute an answer to the growing concern that fiscal transfers might not reach beneficiaries fast enough to avoid a dramatic wave of bankruptcies, threatening the capacity of the US economy to rebound after the health crisis,” said Nakamura.

“The Fed’s latest round of measures are sweeping and puts the central bank as the dealer and lender of first resort… These strong measures address many of the shortfalls from previous policy actions,” noted rates strategist Eugene Leow and economist Radhika Rao, both of whom are from Singapore’s DBS Bank.

While the full impact of COVID-19 cannot be gauged yet and the efficacy of the Fed’s steps remains to be seen, what is clear is that economic policy can only do so much. There is a need for Congress to act and support the central bank’s actions, something that Nakamura has emphasised. To fully address the situation, he said that “an articulated fiscal package is still required.”

Leow and Rao have echoed this same sentiment, saying that the spending bill is what needs to come next. “Wrangling in the Senate over the spending bill is the last piece of the puzzle to fall in place.”

Today, 25 March, Congress has made its move. The White House and Senate leaders have announced that a deal has been struck regarding a sweeping $2 trillion package to aid the health care system, businesses, and employees. The deal, however, has yet to be finalised in detailed legislative language.