WASHINGTON — The Federal Reserve announced new measures on Monday, March 23, to backstop all credit markets in the U.S. economy, without limits, a sign central bankers consider this economic crisis worse than the Great Recession, as millions of American households and businesses are getting crushed by the shutdown of daily life to slow the spread of the coronavirus.
The Fed said Monday it would purchase Treasurys and mortgage-backed securities "in the amounts needed to support smooth market functioning," effectively putting no limits on how many assets the Fed is willing to buy. This extraordinary move goes much further than the 2008-09 financial crisis playbook, the last time the Fed injected hundreds of billions of dollars into the financial system through asset purchases and Wall Street bailouts.
"It has become clear that our economy will face severe disruption," Fed leaders wrote in a statement. "The Federal Reserve is committed to using its full range of tools to support households, businesses, and the U.S. economy overall in this challenging time."
The Fed is trying to prevent the recession from turning into a depression. With so many sectors, from tourism and restaurants to technology and auto manufacturing, all in a standstill, companies, governments and newly unemployed Americans are all looking for short-term loans to bridge the shocking loss of income - all at the same time. This unprecedented clamor for credit has frozen those markets, despite the Fed's nine different moves last week to keep credit markets flowing.
The financial crunch is playing out all over the country. Rhode Island's state treasurer warned the state is likely to run out of money in "weeks." Airlines and hotels are asking for massive billion-dollar loans. Meanwhile, the layoffs continue to mount, which could push unemployment to reach as high as 30 percent in the second quarter, worse than during the Great Depression, warned James Bullard, president of the St. Louis Fed.
"Basically, the Fed is throwing the kitchen sink out there now," said Peter Boockvar, chief investment officer at Bleakley Advisory Group.
U.S. markets initially jumped on the news with futures turning positive and corporate bonds rallying, but the stock market gains did not hold. The Dow Jones industrial average fell about 300 points when trading began on Wall Street.
The Fed also announced Monday it will buy certain corporate bonds for the first time in its history and said it will "soon" announce a Main Street Business Lending Program. These programs are meant to provide ample availability of loans to small and large businesses on top of any moves by Congress.
"The corporate bond market almost broke on Thursday and Friday. This Fed move was absolutely needed," said Aaron Brachman, a managing director at Washington Wealth Group.
The central bank's actions come as Congress has stalled on a major $1.8 trillion relief package for the nation, causing markets around the world to tank. On Monday, Morgan Stanley became the latest big bank warning that growth in the second quarter could be down 30 percent, a record-breaking slide.
"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," the Fed said.
Investors are looking to the Fed to provide even more money and support for the economy than Congress can.
"It's very likely the real stimulus is all going to come form the Fed and it will be with minimal oversight," said Brachman of Washington Wealth Group.
Last week, the central bank slashed interest rates to zero and gave banks access to loans at a record-low 0.25 percent rate. The Fed also said it would do at least $700 billion in new bond purchases, but it is now indicating a willingness to do a lot more than that.
This week alone, the Fed plans to purchase $375 billion worth of Treasury securities ($75 billion a day) and $250 billon worth of mortgage-backed securities ($50 billion a day).
"This is Jay Powell's 'whatever it takes' moment," said David Wessel, head of the Hutchins Center on Fiscal and Monetary Policy at Brookings, referring to Fed Chair Jerome H. Powell.
In addition to buying more bonds, a policy known as "quantitative easing," or QE, the Fed is relaunching programs to support corporate and household debt. One such is the Term Asset-Backed Securities Loan Facility, which helps the market for student loans, auto loans, credit card loans and loans backed by the Small Business Administration.
The Fed also said Monday that it will support the commercial lending market by purchasing commercial mortgage-backed securities in addition to mortgage-backed securities made up of home loans.
All of these efforts are meant to provide ample "bridge financing," Fed officials said.
"The Great Depression was about the Fed moving too slowly. We are seeing many things today, but a slow moving Fed has not really been one of them. That's encouraging," wrote Neil Dutta, head of economics at Renaissance Macro Research in a note to clients.
Treasury Secretary Steven Mnuchin said he is working closely with the Fed and Congress to ensure small businesses get the money they need quickly to survive. The bill in Congress would enable small businesses with 500 or fewer employees to get a Small Business Administration loan of about two months of payroll and some overhead expenses.
"Any small business can go into a bank very quickly and get the loan underwritten and get the money fast," Mnuchin said Monday on Fox Business. "This is a team effort to kill this virus and provide economic relief."
This article was written by Heather Long, a reporter for The Washington Post.
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