Fed to pump trillions of dollars into financial markets

Move is dramatic response to effects of coronavirus pandemic

 US Federal Reserve chairman Jerome Powell  Photograph: AFP via Getty

US Federal Reserve chairman Jerome Powell Photograph: AFP via Getty

 

The Federal Reserve said it would pump trillions of dollars into the financial system in a dramatic response to signs of stress in short-term funding and US Treasury markets.

The US central bank is also making changes to its programme of Treasury purchases to “foster smooth Treasury market functioning”.

For the third time in four days, the Fed’s New York arm announced on Thursday that it will increase the size of its lending in the repo market, where investors borrow cash in exchange for high-quality collateral like Treasuries – this time by multiples of the amounts previously on offer.

The Fed will now offer up at least $500 billion (€447 billion) in three-month loans, beginning immediately, with another $500 billion of three-month loans on Friday. It said it would also provide a $500 billion one-month loan on Friday that settles on the same day.

Three-month loans

Beginning next week, the Fed said it would offer both three-month loans for $500 billion and one-month loans for $500 billion on a weekly basis until April 13th.

It said it will alter the composition of its ongoing $60 billion Treasury purchases for the month of March, to “roughly match the maturity composition of Treasury securities outstanding”, answering calls from traders concerned about deteriorating liquidity conditions.

The changes to composition “are being made to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak,” according to the statement. “Reserve management purchases into the second quarter will continue to be conducted with this maturity allocation. The terms of operations will be adjusted as needed to foster smooth Treasury market functioning and efficient and effective policy implementation.” – Copyright The Financial Times Limited 2020