US Fed, Market Turmoil Persists Despite 'Big Bazooka' Ready

Stock Market Fails to Turn Upward
Dollar ↓ Gold & Bond Prices ↑

[Asia Economy New York=Correspondent Baek Jong-min] The U.S. central bank, the Federal Reserve (Fed), decided on 'unlimited quantitative easing' (QE) in response to the novel coronavirus (COVID-19) crisis, but turmoil in the financial markets has not subsided.

New York Stock Exchange
Photo by Reuters Yonhap News

On the 23rd (local time), the Fed stated in a press release that it would purchase Treasury bonds and mortgage-backed securities (MBS) "in the amounts needed." The Fed also expressed its position that it "will use the full range of tools to support the U.S. economy during this challenging time."

This statement means that the Fed will proceed without limiting the scale of QE, which was initially announced as $700 billion worth of Treasury bonds and MBS purchases a week earlier.

As concerns over credit tightening due to instability in the corporate bond market grew, the Fed decided to purchase corporate bonds, which it had not bought even during the global financial crisis.

The 'Primary Market Corporate Credit Facility' (PMCCF) and the 'Secondary Market Corporate Credit Facility' (SMCCF) have been established to provide bridge loans with a four-year term in the issuance market and support investment-grade ('BBB-' or higher) corporate bonds and exchange-traded fund (ETF) markets in the secondary market.

The 'Term Asset-Backed Securities Loan Facility' (TALF) has also been created. This facility supports highly creditworthy individual consumers. Eligible loans include student loans, auto loans, credit card loans, and Small Business Administration (SBA) guaranteed loans.

The scale of support for corporations and households through these three emergency facilities amounts to $300 billion.

The Fed also decided to expand the scope of municipal bond purchases. Previously, the Fed announced that it would purchase bonds issued by state and local governments through the 'Money Market Mutual Fund Liquidity Facility' (MMLF).

The fact that the central bank, the Fed, has prepared measures for corporations and households indicates its recognition that liquidity tightening caused by the COVID-19 crisis is spreading widely and that it is taking preemptive action. With large-scale unemployment anticipated due to the suspension of operations and production activities of companies, stores, and restaurants, a consensus has formed among Fed members that no further delay in measures is possible.

The Fed also clearly demonstrated its intention to stabilize the market by abruptly announcing the unlimited QE policy just before the market opened on the same day.

However, even such a sudden move by the Fed shows limitations in reversing the turmoil in the financial markets. On that day, the Dow Jones Industrial Average closed at 18,591.93, down 3.04% from the previous day; the S&P 500 index closed at 2,237.40, down 2.93%; and the Nasdaq index closed at 6,860.67, down 0.27%.

CNBC reported that despite the Fed's aggressive measures, the failure of the U.S. Senate to reach an agreement on a stimulus package bill once again was the main driver of the stock market decline that day.

Unlike the stock market, the foreign exchange and bond markets moved as the Fed intended. The dollar index, which shows the value of the dollar against major currencies, weakened after losing its strength, while gold prices showed a strong gain of over 5%. The 10-year U.S. Treasury yield also fell by 0.083 percentage points to 0.771%, returning to a stable trend.

This content was produced with the assistance of AI translation services.