The Federal Reserve (Fed) has responded to the human and economic damage inflicted by the coronavirus outbreak with extraordinary new measures on monetary accommodation. In addition to cutting its benchmark interest rate by 100 basis points (bps) back to the zero level, the Fed will greatly expand its balance sheet with at least $500 billion of new Treasury bond and $200 billion of agency mortgage-backed security purchases.
Yesterday’s record-sized emergency Fed rate cut less than two weeks after a 50 bps emergency cut indicates the Fed is prepared to do whatever is necessary to maintain financial stability and liquidity in the system. These extraordinary measures were necessary to help restore the proper functioning of financial markets after a week when even off-the-run Treasury bond trading was challenging.
While Fed accommodation is unlikely to mitigate the near-term economic fallout from the coronavirus, Chair Jerome Powell understands the Fed’s critical role in supporting the availability of credit to households and businesses. New fiscal stimulus measures are likely to come quickly as the depth of the challenge should push partisan politics to the side.
In closing, while we firmly believe that markets will rebound and we will get through this challenging time together, please stay safe and be well.
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