The US Federal Reserve has announced limitless asset purchases until the economy is back in line with its mandates. The action, however, is probably too late to prevent a deep and long-lasting recession.
Quantitative easing measures have been coming thick and fast from the US central bank, with around $2 trillion in QE since the March 11 balance sheet and more on the way. QE is when a central bank purchases bank assets to increase liquidity in the financial markets.
A recent report from market insights provider RANsquawk suggests that the FED has pivoted to an ‘unlimited’ QE program until things start to improve economically.
“The federal funds rate target and the interest on excess reserves were left unchanged at 0.00-0.25% and 0.10%, respectively.”
Further reports confirmed that the Fed will anchor its benchmark interest rate near zero for a year, possibly much longer. [Investor’s Business Daily] Central bankers are waiting for the economy to weather the storm and return to previously set goals; however, this could be longer than expected given the current state of things and the ongoing lockdown.
The announcement from this week’s meeting did not specify which types of assets will be purchased without limits. The bank did previously indicate that it would buy $500 billion of Treasuries and at least $200 billion of mortgage-backed securities.
The lack of clarity going forward leaves the door open for the Fed to carry on without any limits on its purchases. The result of this is likely to be the production of more currency to cover the cost of this extended and unprecedented QE measure.
Shock to the System
The report added that traders were disappointed with the lack of explicit forward guidance, and it has become clear the Fed is ill-equipped to handle such a violent shock to the system.
The COVID-19 shutdown has now cost the US economy over 24 million jobs and tremendous human and economic hardship. Policymakers have agreed that the coronavirus crisis will weigh heavily in the near term and it “poses considerable risks to the economic outlook over the medium term.”
Fed chief Jerome Powell added to the gloomy outlook, telling reporters,
“It will take some time [to reach] anything that resembles maximum employment.”
The unprecedented fiscal stimulus packages could see the central bank providing $4 trillion in funding to businesses, states, and municipalities hurt by the coronavirus outbreak. A further $2 trillion in asset purchases brings that total to $6 trillion, and more is likely to follow as the recession deepens.