Federal Reserve Chair Jerome Powell is boldly going where no central banker has gone before: quantitative easing infinity. The U.S. central bank is taking one small step for stocks and one giant leap for the global economy with the mother of all monetary bombs. It is pumping trillions of dollars into the system to prevent a complete market meltdown as the COVID-19 pandemic paralyzes the planet, drains bank accounts, and leaves everyone on the New York Stock Exchange scratching their heads.
To Infinity and Beyond!
Before the March 23 opening bell, the Eccles Building announced a barrage of “aggressive” monetary actions aimed at stabilizing financial markets and ensuring the coronacrisis does not cause further economic hemorrhaging. The Fed confirmed that it would acquire assets “in the amounts needed” to support the system, abandoning its previous $700 billion QE limit. Put simply, it is QE unlimited.
The Fed further unveiled several new lending initiatives with a price tag of $300 billion for every aspect of the banking system. This includes an unspecified lending program for small- and medium-sized businesses and a Term Asset-Backed Loan Facility that was implemented during the last economic collapse. These measures will “support the flow of credit” to employers, consumers, and companies.
Powell and Co. ostensibly heeded the advice of former Fed Chair Ben Bernanke because the central bank will now move into corporate bonds. Until the market turmoil subsides, the Fed will buy corporate bonds in secondary markets and through exchange-traded funds (ETFs). To no one’s surprise, the iShares iBoxx $ Investment Grade Corporate Bond ETF spiked more than 6%.
In a separate announcement, the New York Fed Bank revealed that it would buy $75 billion of Treasury securities and an additional $50 billion of agency mortgage-backed securities every business day this week. The institution said it would also purchase agency commercial mortgage-backed securities.
This is in addition to the plethora of other stimulus tools it has thrown at the coronapocalypse. So far in March, it has expanded reverse repo operations by $2 trillion, erected $90 billion swap lines with nine central banks, bought tens of billions of dollars in U.S. bonds, and established the Money Market Mutual Fund Liquidity Facility (MMLF).
The Fed has unleashed the mother of all bombs, and the only thing it has left is a nuclear weapon: subzero interest rates.
A Shrug and a Whimper
Soon after the announcement was made, the leading indexes reversed their pre-market losses. Within moments, the stock market plunged again and has left investors shrugging their shoulders.
The Dow Jones fell 2% to under 18,800, the S&P 500 tumbled 2% to around 2,250, and the Nasdaq dipped 1% to about 6,800. West Texas Intermediate (WTI) crude oil looked to be headed for a positive session, but prices slumped more than 1% before traders could even sip on their first cup of Texas Tea. Gold and silver continued their ascent. The benchmark 10-year Treasury note declined to 0.764%. European markets experienced another day of red ink, while Asian indexes sank (the Nikkei surprisingly settled up more than 300 points).
What else could be done at this point? The federal government’s much-awaited $2 trillion stimulus bill might be the only life raft remaining on the Titanic. There will be nothing left once that boat is gone. The only solution is a COVID-19 vaccine or a drop in infections. Which comes first remains to be seen.
Cure Worse Than the Problem?
Who knew that a virus originating from a wet market in Wuhan could trigger such multi-trillion-dollar devastation across the globe? Whatever happens, the consequences of containing the economic fallout will be severe, ranging from skyrocketing price inflation to astronomical government debt levels. President Donald Trump recently sent out a cryptic tweet, writing: “WE CANNOT LET THE CURE BE WORSE THAN THE PROBLEM ITSELF.” He is right. With Chinese imports going to be inevitably curbed and the Swamp paving Main Street and Wall Street with freshly printed dollar bills, inflation is going to be a massive problem for the country – and the world – to endure.
Read more from Andrew Moran.