Due to the coronavirus crisis, the Federal Reserve launched a number of programs aimed at helping the economy and the markets. These programs were completed faster than during the financial crisis of 2008-2009, thus, analysts forecasted that by the time the crisis ends, the Fed can withdraw a balance of $10 trillion, which are bonds in quite a large percentage.
Last December 2008, the Fed increased its bonds by $ 3.7 trillion, which led to an increase of $ 4.5 trillion in the total balance of operations for over six years. There were attempts to get rid of some of these assets so the total amount fell below $ 3.8 trillion at one point. However, since the Federal Reserve started buying assets again, its total amount has now exceeded $ 4.7 trillion, which is the largest figure recorded in the history of the Central Bank.
Anyhow, the Fed's current efforts will only increase because last Monday, it announced that it will buy treasuries and mortgage-backed securities "in the necessary quantity" to support its goals of stabilizing markets. As for how fast the Fed is moving, it is set to acquire $ 625 billion this week, which is more than what it acquired during the recession last November 2010 to June 2011. Moreover, if we combine all the Fed's programs aimed at freeing frozen credit markets, it is more ambitious than anything it undertook during the great recession.
In any case, the Fed has once again expanded its programs, and is now buying corporate debt for the first time. It also added commercial mortgage-backed securities to its target purchases to help the credit markets, and expanded the types of securities it accepts as collateral for its liquidity offerings.
Nevertheless, the markets remain concerned about the lack of appropriate fiscal stimulus from the Congress, so stocks sold off aggressively on Monday. That doesn't mean though that the Fed hasn't done its part.
The Congress still needs to help. According to Krishna Guha, Vice Chairman of Evercore ISI and head of the Global Policy and Central Bank Washington, "if the Congress is held positively, which is still our baseline, joint political action should significantly reduce the risk of the viral shock being amplified by the credit shock across the economy."
To emphasize the importance of fiscal and monetary forces working together, the Fed announced a vague proposal aimed at lending to small businesses on the main street, which needs help from the Congress.
The ultimate horizon will be buying stocks and even high-yield corporate bonds through the exchange-traded funds that support major indexes such as the S&P 500 and Dow Jones Industrial Average. Although there are no signs that the Fed is moving in this direction, this could be the latest measure that could happen, if the markets still have too many problems. However, the Fed must first get permission from the Congress.
"There's a reason why the government didn't want this perception of a Central Bank owning risky assets in the past," economist Lauren Goodwin said. "But if the liquidity crisis is starting to turn into a solvency crisis, and we still don't have that fiscal activity to support the economy, then yes, I think you could continue to see the Fed as creative."
The material has been provided by InstaForex Company - www.instaforex.com