Fed Ramps Up Bond Buying, Indicating Much Larger Purchases Are Likely
Friday, March 20, 2020
The Federal Reserve is likely to significantly boost its government-bond purchases beyond the $500 billion minimum it committed Sunday to buy amid market strains that sent interest rates higher in recent days.
The Fed took a significant step in that direction Thursday, announcing it would purchase $150 billion in securities on Thursday and Friday—on top of $125 billion in purchases earlier this week.
This means the Fed will have bought more than half of the $500 billion in Treasury securities in one week with little sign of restored market functioning, pointing to a growing likelihood for a much more aggressive round of purchases than appeared likely just a few days ago.
The central bank on Sunday also approved purchases of at least $200 billion in mortgage bonds.
Notably, the Fed didn’t limit itself from additional purchases. Instead, the quantities announced Sunday, which it said would be executed over coming months, are minimum amounts the New York Fed has been directed to buy.
The recent, rapid pace of bond buying suggests Fed officials will need to consider in the coming days how to communicate their intentions about even-larger quantities of purchases amid a full-throated effort to prevent strains in financial markets from undermining national efforts to fight the coronavirus pandemic.
Mortgage bond markets have also shown severe strains in recent days, and the New York Fed said Thursday it would purchase $20 billion in those assets later in the day and $32 billion more on Friday.
The Fed purchased more than $3 trillion in Treasury and mortgage securities in three separate rounds of bond buying, dubbed quantitative easing or QE, between 2008 and 2014.
To get a sense of the scale of recent purchases, the current round is on pace to exceed in just weeks the $600 billion in the second round of bond buying, called QE2, that the Fed conducted between November 2010 and June 2011.
Those programs were deeply controversial, drawing attacks from Republican lawmakers, conservative economists and some Fed officials. They warned it would lead to runaway inflation, which it didn’t, or that it represented an improper incursion by the central bank into fiscal policy.
Thus far, the purchases have met with few, if any, objections from lawmakers on Capitol Hill.
While an initial round of purchases was focused on improving market functioning during the height of the 2008 financial crisis, most of the purchases were aimed at helping stimulate economic growth by pushing down long-term yields and encouraging investors to buy riskier assets like corporate bonds and stocks.
The current purchases are focused squarely on reducing turmoil in financial markets, rather than on stimulating economic activity.
“There’s no monthly cap here. There’s no weekly cap,” Fed Chairman Jerome Powell said Sunday. The central bank will buy assets “at a strong rate that we think will restore market function, restore liquidity as quickly as it can be restored,” he said.
Rising interest rates, now, when inflation is likely to decline means monetary policy is growing tighter at a time when the central bank is trying to ease financial conditions. Long-term bond yields have risen in recent days. Yields on 10-year Treasury notes have risen to more than 1.2% Wednesday from 0.6% on March 9.
“Higher real rates are a huge problem for the Fed and the global economy if they continue. In economic terms, they raise the cost of the recovery,” said Jim Vogel, an interest-rate strategist at FHN Financial.
For the Fed and the Trump administration, the purchases could prove to be one of the most powerful tools deployed by the U.S. government. Not only do the purchases pump money into the financial system and avert higher borrowing costs, but they could facilitate the massive federal budget deficits that will be needed to fight the virus and the economic toll it takes on the nation.
The Fed has been moving at the central bank’s equivalent of light-speed to re-engineer a range of facilities to prevent credit markets from deteriorating further. In addition to bond purchases, the Fed cut its benchmark rate to near zero on Sunday.
It announced a lending facility on Tuesday to help unclog the $1.1 trillion market for short-term corporate IOUs called commercial paper, and it unveiled another program late Wednesday to help money-market mutual funds raise cash in order to meet redemptions they are facing.
The Fed’s move to bolster the money-fund industry came after the funds were unable to easily sell their holdings of corporate commercial paper to meet large volumes of shareholder redemption requests, according to industry lawyers. Illiquidity in the commercial-paper market also made it difficult for the funds to comply with postcrisis rules requiring them to hold set quantities of liquid assets, fueling the funds’ operational difficulties.
Over the past week, the money-fund industry saw outflows of totaling more than $80 billion from “prime” funds that purchase short-term corporate debt, as both institutional and mom-and-pop retail investors sought to sell their shares, according to data from Crane Data LLC.
Some of those outflows were fueled by investors seeking to redeem their money before funds could temporarily block investors from withdrawing their funds, according to some analysts.
On Thursday, the Fed said it would establish a temporary program to help lend billions of dollars at near-zero interest rates to central banks in Australia, South Korea, and seven other countries, following an earlier round of such “swap” lines announced Sunday for central banks in Europe and Japan.
“With its recent actions, the Fed has put a stake in the ground as the lead central bank in the world, while simultaneously it has shown itself to be a partner with the rest of the world,” said Rick Rieder, chief investment officer of global fixed income at BlackRock. “If required, the Fed can go bigger, or longer, in the execution of its programs.”
Other central banks have been pulling out the stops with similar urgency to arrest market strains and prepare for a burst of fiscal spending to address lost revenues that firms and households could suffer from the global pandemic.
On Wednesday, the European Central Bank unveiled an unexpected €750 billion ($818.7 billion) program of public- and private-sector asset purchases that will run at least through the end of the year and possibly beyond. With it, the ECB will be able to buy almost €120 billion a month of eurozone debt for the rest of the year—the largest amount ever.
On Thursday, the Bank of England cut its benchmark interest rate to a record low and said it would buy £200 billion ($232 billion) of U.K. government bonds. “We are in an absolutely unprecedented situation,” Bank of England Gov. Andrew Bailey told reporters.
Earlier Thursday, the Reserve Bank of Australia cut interest rates to a record low and said it would target prices in the bond market to fix the yield on the three-year Australian government bond at around 0.25%. When yields jumped on longer-term Australian bonds, RBA Gov. Philip Lowe said the central bank was prepared to buy longer-dated maturities, which pulled rates back down.