The Federal Reserve stepped into financial markets Thursday for the second day in a row and the third time this week, this time dramatically ramping up asset purchases amid the turmoil created by the coronavirus.
"These changes are being made to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak," the New York Fed said in an early afternoon announcement amid a washout on Wall Street that was heading toward the worst day since 1987.
Stocks were off their lows following the announcement though some of the gains were pared as the market digested the moves. Some in the market were skeptical that the move was enough, and even whether the the Fed itself had the proper tools to reverse the current market downtrend.
"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."
One part of the announcement saw the Fed widen the scale for its $60 billion worth of money the Treasury purchases, which to now had been confined to short-term T-bills.
Under the new regime, the Fed will extend its purchases "across a range of maturities" to include bills, notes, Treasury Inflation-Protected Securities and other instruments. The central bank will begin purchasing coupon-bearing securities, something market participants have been clamoring for since late 2019.
The purchases start Thursday and will continue through April 13.
The second part of the new operations will see the New York Fed desk offer $500 billion in a three-month repo operation and a one-month operation. The offerings will happen on a weekly basis through the remainder of the program.
In addition, the Fed will continue to offer at least $175 billion in overnight repos and $45 billion in two-week operations. Repos are short-term operations in which financial institutions provide high-quality collateral in exchange for cash reserves they use to operate.
The extraordinary moves came amid extreme market turmoil created by uncertainty over the coronavirus pandemic. Government bond yields earlier this week cascaded to record lows amid reports of liquidity issues in the market and fears of a global recession.
However, questions remain whether the Fed can arrest the market's issues on its own. Wall Street has been looking for an aggressive fiscal response and has yet to get it from Washington lawmakers.
"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."
Markets have been looking for action by the Fed, which instituted an inter-meeting interest rate cut last week that did nothing to quell concerns. The Fed on Monday increased the limits for its ongoing repo operations, then Wednesday expanded the limits an announced a $50 billion term offering that attracted heavy interest earlier in the day Thursday.
Along with the announcement, the Fed pledged that "the terms of operations will be adjusted as needed to foster smooth Treasury market functioning and efficient and effective policy implementation."
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