Fed vows unlimited bond buying to soothe market

The Eccles Federal Reserve Board Building in Washington

While governments around the globe are launching ever-larger fiscal stimulus packages, the latest U.S. effort remains stalled in the Senate as Democrats said it contained too little money for hospitals and not enough limits on funds for big business.

"While great uncertainty remains, it has become clear that our economy will face severe disruptions", the Fed said in a statement. "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", it added.

Financial markets sharply reversed themselves after the announcement, but then fell back again after the market opened. The yield on the 10-year Treasury bond fell, a sign that more investors are willing to purchase the securities.

Regulatory- and pandemic-related operational constraints for financial institutions with access to conventional Fed lending, (e.g., through the discount window and term repo operations) hindered their ability to use the Fed's short-term loans to stabilize markets. That need has escalated demand for cash.

"Getting to the corporate bond market was critical". The Fed's move to step in and act as a buyer of last resort is meant to provide that needed cash.

Trump administration appear closer to reaching bipartisan agreement on a stimulus bill that would inject almost $2 trillion into the economy.

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Weddings will still be allowed to be conducted but will be restricted to just the couple, the celebrant and witnesses. Further restrictions on indoor gatherings will also be introduced, including food courts and some markets.

"There's no doubting that the Fed is doing everything within its power to see the economy through this period of unbelievable turmoil", said Craig Erlam, senior market analyst at OANDA Europe.

The Fed also "expects to announce soon the establishment of a Main Street Business Lending Program to support lending to eligible small-and-medium sized businesses, complementing efforts" by the Small Business Administration.

The Federal Reserve on Monday announced a massive second wave of initiatives to support a shuttered USA economy, including buying an unlimited amount of bonds to keep borrowing costs low and setting up programs to ensure credit flows to corporations and state and local governments.

The Fed also said it will purchase agency commercial mortgage-backed securities as part of an expansion of its asset purchases, known as "quantitative easing".

All told, the size of the Federal Reserve's balance sheet has already surpassed the $4.5 trillion maximum level reached after the 2008 financial crisis, and we think it could well surpass $6 trillion before all is said and done.

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