Sat | Mar 28, 2020

Federal reserve to buy unlimited government debt, lend to businesses

Published:Tuesday | March 24, 2020 | 12:09 AM
US Federal Reserve Chair Jerome Powell.
US Federal Reserve Chair Jerome Powell.

IN ITS boldest effort to protect the United States economy from the coronavirus, the US 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 on 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. “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.”

Financial markets sharply reversed themselves after the announcement, but then fell back again after the market opened. By mid-day, the Dow Jones Industrial Average was down about four per cent. 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, led by Chair Jerome Powell, is trying both to stabilise the economy 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 need 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 to provide that needed cash.

The central bank’s actions increase pressure on Congress to approve a nearly US$2-trillion stimulus package that stalled late Sunday. Joe Brusuelas, chief economist at RSM, a tax and advisory firm, said that if Congress can pass the legislation and have it signed into law by today, Tuesday, banks could start making loans to small and medium-sized businesses, with the Fed’s support, by Friday.

In its announcement Monday, the Fed said it will establish three new lending facilities that will provide up to US$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 central bank’s new go-for-broke approach is an acknowledgement 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 US economy to a near-standstill as workers and consumers stay home.

Last week, it said it would buy US$500 billion of Treasuries and US$200 billion of mortgage-backed securities, then quickly ran through roughly half those amounts by week’s end.

On Monday, the New York Federal Reserve said it would buy US$75 billion of Treasuries and US$50 billion of mortgage-backed securities each day this week.