The U.S. Federal Reserve on Monday announced a plan to purchase U.S. treasuries and agency mortgage-backed securities with no limit to support markets, an aggressive move to prop up the economy amid coronavirus uncertainty.
While investors fear the central bank is running out of ammunition, experts believe that strong and targeted fiscal policies must be rolled out as soon as possible to prevent a looming recession from turning into a depression.
The Fed said in a statement before the stock market opened Monday that it will continue to purchase Treasury securities and agency mortgage-backed securities "in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions," putting no numerical cap on its asset purchase program.
Earlier this month, the central bank pledged to buy at least 500 billion U.S. dollars in U.S. treasuries and at least 200 billion dollars in agency mortgage-backed securities over the coming months.
The Fed's latest move signaled that the central bank is prepared to act as much as necessary to help the U.S. economy weather the coronavirus outbreak.
"The coronavirus pandemic is causing tremendous hardship across the United States and around the world," the Fed said in the statement, adding that the U.S. economy will face "severe disruptions."
"Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate," said the central bank.
Chris Rupkey, chief financial economist at MUFG Union Bank, was quoted by CNBC as saying "Fed policy is shifting into a higher gear to try to help support the economy which looks like it is in freefall at the moment."
"The central bank is shifting from being not just the lender of last resort, but now it is the buyer of last resort," Rupkey said. "Don't ask how much they will buy, this is truly QE (quantitative easing) infinity."
In a separate statement, the Fed on Monday also announced new measures to provide support for the flow of credit to American families and businesses, such as including purchase of agency commercial mortgage-backed securities in its agency mortgage-backed security purchases.
In addition to buying more bonds, a policy known as "quantitative easing," the Fed will also provide up to 300 billion dollars in new financing to flow of credit to employers, consumers, and businesses by establishing new programs.
It will establish two facilities, the Primary Market Corporate Credit Facility (PMCCF) and the Secondary Market Corporate Credit Facility (SMCCF), to support credit to large employers, and set up another facility, the Term Asset-Backed Securities Loan Facility (TALF), to support the flow of credit to consumers and businesses.
Krista Schwarz, an assistant professor of finance at the Wharton School of the University of Pennsylvania, told Xinhua that the Fed has been "extremely creative and quick" in responding with monetary policy "in all possible ways."
"The Fed's emergency facilities are short-circuiting the breakdown in market intermediation by directly participating in and lending to specific market segments (those most challenged in obtaining liquidity in today's environment), and broadening the reach of funding to different types of market participants," Schwarz said.
OUT OF AMMUNITION?
The Fed's action was the latest in a series of bold moves to support the economy amid mounting fears over the COVID-19 outbreak. In a second emergency cut within a month, the central bank recently trimmed its benchmark interest rate by a full percentage point to near zero.
The central bank also said that it will establish a Commercial Paper Funding Facility to support the flow of credit to households and businesses.
It announced the establishment of temporary U.S. dollar liquidity arrangements and the enhancement of U.S. dollar liquidity swap line arrangements with several central banks to ease access to dollars.
The Fed said on Friday that it expanded its program backing money market mutual funds to "enhance the liquidity and functioning of crucial state and municipal money markets."
Tim Duy, a professor with the University of Oregon and long-time Fed watcher, wrote in a blog post on Sunday night that "Chair Jerome Powell and his colleagues brought out tools over a two-week span that took years to develop during the last crisis."
"This week the data will start to catch up to reality and it's going to be ugly," Duy said. "I have yet to see reason to expect financial markets will stabilize anytime soon."
As investors fear that the central bank is running out of options to stimulate the economy, Schwarz told Xinhua the Fed has used a lot of its ammunition, "but I would not yet say it is out of ammunition."
"The Fed could always create more facilities to target additional market segments or reach specific types of market participants, and they could act more aggressively with forward guidance," she said.
Despite that, the Fed cannot do this job alone and needs the support of fiscal policy, Duy said.
Schwarz said it will always be the case that the Fed can act more quickly than Congress, but "it is important for Congress to provide the kinds of targeted fiscal stimulus that only legislation can offer."
DEADLOCK ON STIMULUS BILL
A 1.6-trillion-dollar funding package in response to the coronavirus outbreak did not get enough votes in a key Senate procedural vote Sunday evening, and it failed to proceed again on Monday afternoon, as Democratic lawmakers expressed discontent with measures to bail out corporates, among other things.
Senate Majority Leader Mitch McConnell, a Kentucky Republican, criticized Democrats for blocking the package with "cynical partisanship" and making a number of "unrelated demands."
U.S. Secretary Steven Mnuchin said that the economic relief package will include measures to support small businesses and working Americans. He told CNBC on Monday morning that "we have enormous bipartisan support on most of this bill."
Duy, the veteran Fed watcher, said he fears that "while we may be temporarily appeased by the initial round of fiscal efforts, Congress and the administration have yet to come to grips with the evolving economic situation."
"The sudden stop of the U.S. economy is sending unemployment soaring," he said. According to the U.S. Bureau of Labor Statistics, the number of initial jobless claims in the country spiked by 70,000 to 281,000 in the week ending March 14, the highest level in two and a half years.
Initial claims may exceed 2 million this week after state and local governments around the nation began ordering shutdowns of everything except essential services, Duy said.
Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University, was quoted by the Wall Street Journal as saying that the job losses will be heavily concentrated in restaurants, hotels, airlines and real estate industries.
Dhawan estimated that the U.S. economy could lose 6 million jobs in the coming months and 8 million by the end of the year.
The coronavirus continues to spread rapidly across the nation, with more than 43,000 confirmed cases and over 530 deaths reported as of 7 p.m. U.S. Eastern Time on Monday, according to data tracking tool developed by the Center for Systems Science and Engineering at Johns Hopkins University.
The fiscal package recommended by the Senate is "both too small and too reliant on existing tools to alleviate the damage to household finances and stave off a wave of business closures that would threaten the ability of the economy to bounce back later this year," Duy said of his concerns.
"This is not just another recession; we need bigger and newer tools to mitigate the damage," he said.