Federal Reserve plans $1.5 trillion loan injection to stave economic fallout
On Thursday, the Federal Reserve Bank of New York announced that it planned to inject at least $1.5 trillion into the financial system through purchases of Treasuries. The bond buying, known as quantitative easing, returns the Federal Reserve to a financial tool used primarily during the 2008 financial crisis.
The Fed said the financial injection will address "highly unusual disruptions" in the bond market linked to the coronavirus outbreak. Treasury yields have fallen to their lowest level on record in the wake of a collapsing stock market and an economy on hold due to fears from the virus.
U.S. stocks rose on Friday morning following the news.
“We continue to emphasize that this Fed will act aggressively and in particular that central banks are focused on safeguarding market functioning at this point, and will continue to provide liquidity in scale,” Ebrahim Rahbari, director of global economics at Citi Research. “However, despite the sharp initial risk rally, we think these measures will still not be sufficiently to durably stabilize market sentiment yet in light of credit concerns and escalating health concerns.”
Under the new quantitative easing program (or QE), the Fed will extend its purchases "across a range of maturities" to include bills, notes, Treasury Inflation-Protected Securities, and other instruments, even 30-year bonds. The U.S. central bank had yet to purchase coupon-bearing securities in a previous QE program.
The purchases start on Thursday and will continue through at least April 13.
Additionally, the Federal Reserve will offer $500 billion in short-term loans to keep struggling businesses afloat.
“The virus was the catalyst but it’s not the cause,” said Christopher Whalen, founder of Whalen Global Advisors. “Both bonds and equities were inflated rather dramatically by our friends at the Fed. You’re seeing the end game for monetary policy here, which is at a certain point you have to stop. Otherwise you get grotesque asset bubbles like we saw, and the engine just runs out of fuel.”