Federal Reserve launches aggressive plan to buy government-backed debt
The US Federal Reserve has launched an aggressive plan to buy as much government-backed debt as it needs to keep financial markets functioning as plans for a $1.8tn-plus bailout of business and consumers stalled in Congress.
The central bank announced a series of programs on Monday aimed at supporting large and small businesses already reeling from the economic blow of coronavirus.
“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 central bank said in a statement, adding that “the Federal Reserve is using its full range of authorities to provide powerful support for the flow of credit to American families and businesses”.
As part of the effort the central bank will relaunch a massive bond-buying program, the Term Asset-Backed Securities Lending Facility, or Talf, last used in response to the 2008 financial crisis, to support the flow of credit to consumers and businesses.
The Fed has previously announced it would purchase at least $500bn of Treasury securities and at least $200bn of mortgage-backed securities but will now buy bonds in “the amounts needed to support smooth market functioning”.
The bank also said it would soon roll out a “Main Street business lending program” to support lending to eligible small and midsize businesses.
The move comes as plans for a government bailout have stalled in Washington. On Sunday Senate Democrats said the bailout of businesses, including airlines, did not adequately protect workers or include restrictions on bailed-out businesses.
“In the midst of an unprecedented national crisis, Republicans can’t seriously expect us to tell people in our communities who are suffering that we shortchanged hospitals, students, workers and small businesses, but gave big corporations hundreds of billions of dollars in a secretive slush fund,” said Senator Patty Murray, a Democrat of Washington state.
That news sent stock markets sharply lower on Monday morning and even news of the bailout failed to cheer investors. In London the FTSE 100 closed down 3.8% and all the US markets closed down with the Dow Jones losing 3%.
The treasury secretary, Steven Mnuchin, said Congress was “very close” toapproving a stimulus package and he hoped it could be passed on Monday.
Mnuchin said he was also working to speed direct cashdeposits to US taxpayers - estimated at $3,000 for a family of four -and to support payroll to small business for two months.“The president is fully determined we are using all our tools to pumpmassive amounts of liquidity, and working with the federal reserve, tosupport the US economy in an unprecedented situation when thegovernment has shut down major parts of the economy,” Mnuchin told CNBC.
The Fed’s intervention came as the managing director of the International Monetary Fund, Kristalina Georgieva, said the economic hit from the Coronavius pandemic would be worse than during the global financial crisis of 2008.
Speaking after a virtual meeting of finance ministers and central bank governors from the G20 group of major developed and developing nations, Georgieva said it was crucial to stop the virus spreading and to strengthen health systems everywhere.
“The economic impact is and will be severe, but the faster the virus stops, the quicker and stronger the recovery will be”, the IMF chief said.
The Fed has moved quickly to address the escalating economic fallout of the Covid-19 pandemic. Interest rates have been cut twice in the last month and are now close to zero.
But the moves have so far failed to dampen fears that the US is heading towards a deep recession. On Sunday the Federal Reserve Bank of St. Louis president, James Bullard, predicted the US unemployment rate, now just 3.6% and close to record lows, may hit 30% in the second quarter because of shutdowns to combat the coronavirus.
“It is a huge shock and we are trying to cope with it and keep it under control,” Bullard told Bloomberg.
States are already reporting massive spikes in people making unemployment claims. In parts of New York claims have shot up 1,000% as businesses including hotels, bars and restaurants have laid off staff.