WASHINGTON (AP) — In its boldest effort to protect the U.S. economy from the coronavirus, the Federal Reserve says it will buy as much government debt as it deems necessary and will also begin lending to small and large businesses and local governments to help them weather the crisis.
The Fed’s announcement Monday removes any dollar limits from its plans to support the flow of credit through an economy that has been ravaged by the viral outbreak. The central bank’s all-out effort has now gone beyond even the extraordinary drive it made to rescue the economy from the 2008 financial crisis.
“The coronavirus pandemic is causing tremendous hardship across the United States and around the world,” the Fed said in a statement. “Our nation’s first priority is to care for those afflicted and to limit the further spread of the virus. While great uncertainty remains, it has become clear that our 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.”
While great uncertainty remains, it has become clear that our economy will face severe disruptions.Jerome Powell, Federal Reserve chairman
Financial markets sharply reversed themselves after the announcement but then fell back again after the market opened. By mid-morning, the Dow Jones Industrial Average was down about 1.5%. The yield on the 10-year Treasury bond fell, a sign that more investors are willing to purchase the securities.
In unleashing its aggressive new efforts, the Fed is trying both to stabilize the economic standstill and allay panic in financial markets. Many corporations and city and state governments are in desperate need of loans to pay bills and maintain operations as their revenue from customers or taxpayers collapses. That need has escalated demand for cash. In the meantime, large businesses have been drawing, as much as they can, on their existing borrowing relationships with banks.
The intensifying needs for cash means that banks and other investors are seeking to rapidly unload Treasuries, short-term corporate debt, municipal bonds and other securities. The Fed’s move to step in and act as a buyer of last resort is intended provide that needed cash.
Many economists say that whatever financial support Congress eventually provides will likely be even more important than the Fed’s intervention. And they warn that such fiscal help needs to come soon.
The Fed’s intervention is not a substitute for fiscal stimulus,” said Joseph Gagnon, a former Fed economist who is now senior fellow at the Peterson Institute for International Economics. “Let’s hope Congress passes something quickly.’’
In its announcement Monday, the Fed said it will establish three new lending facilities that will provide up to $300 billion by purchasing corporate bonds, a wider range of municipal bonds and securities tied to such debt as auto and real estate loans. It will also buy an unlimited amount of Treasury bonds and mortgage-backed securities to try to hold down borrowing rates and ensure those markets function smoothly. The Fed’s intervention is not a substitute for fiscal stimulus. Let’s hope Congress passes something quickly.Joseph Gagnon, Fed economist
The central bank’s new go-for-broke approach is an acknowledgment that its previous plans to keep credit flowing smoothly, which included dollar limits, wouldn’t be enough in the face of the viral outbreak, which has brought the U.S. economy to a near-standstill as workers and consumers stay home. Last week, it said it would buy $500 billion of Treasuries and $200 billion of mortgage-backed securities, then quickly ran through roughly half those amounts by week’s end of the week.
And on Monday, the New York Federal Reserve said it would buy $75 billion of Treasuries and $50 billion of mortgage-backed securities each day this week.
“They’re really setting the economy up’’ to start functioning again when the health crisis subsides, said Donald Kohn, a former Fed vice chair who is a senior fellow at the Brookings Institution. “Part of this is about the other side of the valley: Make sure the credit is there.’’
Still, Kohn noted, “These things will take some time to set up. These are complicated’’ programs.
