Federal Reserve launches aggressive plan to buy government-backed debt

The central bank said its Federal Open Market Committee will buy Treasury securities and mortgage-backed securities in

The Fed's announcement on Monday removes any dollar limits from its plans to support the flow of credit through an economy that has been ravaged by the viral outbreak.

"The coronavirus pandemic is causing tremendous hardship across the United States and around the world".

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

Financial markets sharply reversed themselves after the announcement, but then fell back again after the market opened. The blue-chip index sank 7.4 per cent on Monday in its biggest one-day drop since a record 8.3 per cent plunge on Oct 24, 2008, during the global financial crisis. "It's their we'll do whatever it takes moment which should be a sign to financial markets and investors that the Fed will provide any and all liquidity necessary to support the economy through this period". In the meantime, large businesses have been drawing, as much as they can, on their existing borrowing relationships with banks. The Fed's move to step in and act as a buyer of last resort is meant to provide that needed cash. A new "Main Street Business Lending Program" that will extend credit to small- and-medium sized businesses will also be announced "soon", the Fed said.

The U.S. central bank proposed to buy a wide range of investments, including corporate bonds for the first time, to improve trading in markets that help home buyers finance the purchase of houses, state and local governments borrow and businesses get enough short-term cash to make payroll. The bill Congress is working on could provide between $1.5 -$2 trillion (7%-9% of GDP) to the economy, and allow the Fed to increase the size of its lending facilities, ultimately providing $4 trillion in additional lending capacity to the economy.

Unprecedented volatility in Treasury and mortgage-backed securities (MBS) markets - which are supposed to be the safest asset markets - exacerbated this flight to cash, and propagated large price dislocations in other sectors of the bond market, including credit and structured product markets.

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".

US stocks continued their slide after the announcement, as USA lawmakers struggled to reach agreement on a far-reaching coronavirus stimulus package on Monday after failing to reach a deal over the weekend.



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