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Don’t Fight the Fed

There is a saying among traders of all financial markets: “never fight the Fed” – it has never been more accurate than in 2020.

The coronavirus health crisis is just another example of why many consider the Fed to be the most important central bank in the world. The Fed supports not only the U.S. economy but financial markets across the globe.

As the overseer of the world’s reserve currency, the Fed’s main task is to make sure that its actions help to fulfill its mandate of price stability and job creation. But inflation worries can take a seat back in an emergency crisis, and the Fed knows it has the public support to go big. And it did go over the hill with its support – as it should have!

What the FED Did?

First, it cut the target for the federal funds rate to a range of 0 to 0.25%. This is the rate used by banks when they borrow from each other overnight, so the Fed made it possible to do that almost for free. For the general public, such a measure aims at stimulating borrowing or, more precisely, lowering the cost of, say, a mortgage, auto loan, and so on.

Second, it resumed its Asset Purchasing Program ( or QE), which worked so well in the aftermath of the 2008 financial crisis. On March 25th, the Fed announced that it will buy unlimited amounts of securities in an open-ended program.

Third, it expanded the repo (repurchase agreements) operations, offering unlimited money supply. Even before the coronavirus crisis, the repo market was subject to liquidity strains, and the New York Fed was already providing liquidity on a daily basis. With this recent move, the Fed just solved the problem, if it was a problem to start with.

Last but not least, its Main Street Lending Program offers four-year loans to small and mid-size businesses. The Fed just expanded the program – starting with the end of April the program benefits from $600bn in funding.

Is That All?

These are just a few steps the Fed did since the start of the coronavirus shock. Its measures dwarf in size and support anything any other central bank in the world did.

During this week’s press conference that followed the FOMC Statement, Fed’s Powell displayed a “tour de force,” highlighting the distance the Fed is willing to go. The measures were meant to bring support locally (in the United States) and internationally (weakening the USD).

It succeeded in doing both.

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