The Fed throws everything at financial markets

Dollar index

In recent weeks, the sheer size of the risk aversion and flight-to-cash exhibited by investors has overwhelmed financial markets and the securities dealers and banks that are charged with intermediating markets and distributing capital throughout the financial system.

The purchases would be made, it said, "in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy".

For the first time the Fed will back purchases of corporate bonds and make direct loans to companies, and will roll out "soon" a program to get credit to small and medium-sized business.

While the Fed's latest measures were seen to have effectively broken the spreading freeze in the dollar funding markets in the short-term, the shock to the real economy is expected to last for a far longer period with latest PMI data offering a glimpse of the pain.


The New York Fed said BlackRock was chosen for the role "after considering their expertise with purchasing large amounts of all relevant types of corporate debt issuance and corporate bonds in the secondary market, deep knowledge and substantial experience in the corporate debt markets, and robust operational and technological capabilities".

The Fed had previously committed to buying at least $500 billion of Treasury securities and at least $200 billion in mortgage-backed securities. 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.

Dow futures briefly hit their "limit down" overnight, but stocks ripped higher on Monday morning after the Federal Reserve lifted restrictions on its quantitative easing asset purchases and launched multiple new stimulus programs aimed at lending to small businesses and maintaining liquidity in the credit markets. 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.

"While great uncertainty remains, it has become clear that our economy will face severe disruptions". "The more damage that happens, the harder it is going to be to restart the economy".

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