Fed takes emergency action to stave off a depression

The Federal Reserve massively accelerated its coronavirus rescue plans Monday by announcing unlimited bond-buying, three new credit facilities and an upcoming Main Street lending program.

The Federal Reserve is signaling it will do whatever it takes to save the coronavirus-ravaged American economy from a depression.

The US central bank massively accelerated its rescue plans Monday by announcing unlimited bond-buying, three new credit facilities and an upcoming Main Street lending program.

Taken together, the Fed said the new programs will provide up to $300 billion in new financing to an economy getting crushed by the crippling health restrictions aimed at fighting the pandemic. The Fed is going all out to prevent the health crisis from turning into a full-blown financial crisis.

Crucially, the Fed pledged to buy bonds "in the amounts needed" to support markets, signaling there are no bounds to its rescue effort. The shackles have been removed.

That promise echoed Mario Draghi's vow last decade to do "whatever it takes" to prevent the collapse of the eurozone.

US stock futures spiked on the new emergency actions from the Fed, which has already slashed interest rates to zero. Recession fears and a liquidity crunch have crashed the stock market over the past month and caused parts of the bond market to malfunction.

The Fed said it will support American households and businesses, but it acknowledged "our economy will face severe disruptions."

"The coronavirus pandemic is causing tremendous hardship across the United States and around the world," the Fed said in a statement.

Major steps announced include:

  • Open-ended quantitative easing (QE). Just over a week ago, the Fed had set a limit of $700 billion on these bond-buying programs
  • Fed will start buying commercial mortgage backed securities (CMBS)
  • Two lending facilities to large companies: Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance, and the Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for existing corporate bonds
  • Bringing back crisis-era Term Asset-Backed Securities Loan Facility (TALF) to support the flow of credit to consumers and businesses
  • Expanding money market mutual fund liquidity facility to include wider range of municipal bonds
  • Expanding commercial paper credit facility

And the Fed said it expects soon to launch a Main Street Business Lending Program to support small- and medium-sized businesses.

"This is an all-out effort to ensure that the business sector can continue to exist even as economic activity temporarily collapses," Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a Monday note to clients. "The Fed is now effectively the direct lender of last resort to the real economy, not just the financial system."

In other words, the Fed is doing everything it takes to prevent a major credit crisis.

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