The Fed has seen enough.
With US equities in free fall, and European stocks having suffered their largest one-day loss in history, the New York Fed announced on Thursday it’s expanding asset purchases beyond T-Bills and will step in to provide a veritable tsunami of liquidity.
“As a part of its $60 billion reserve management purchases for the monthly period beginning March 13, 2020 and continuing through April 13, 2020, the Desk will conduct purchases across a range of maturities to roughly match the maturity composition of Treasury securities outstanding”, the statement reads.
In short: That $60 billion per month in bill purchases for “reserve management” just became QE “proper” – they’re buying coupons. Period. The new schedule is below.
That will presumably help with market functioning, which has been severely impaired. Indeed, the Treasury market is showing signs of being completely “broken“, a state of affairs that, by many accounts, became wholly untenable on Wednesday. The realized 10-day volatility on Bloomberg Barclays US Treasury Total Return Index jumped to a record this week.
Earlier Thursday, both the Fed’s 14- and 25-day term repos were oversubscribed. The 14-day ops have been oversubscribed since the beginning of last month.
In short, there’s a cash crunch in the offing, and so, the Fed will try to address that in “once and for all” fashion. Here’s the Fed bringing out the liquidity bazooka:
Today, March 12, 2020, the Desk will offer $500 billion in a three-month repo operation at 1:30 pm ET that will settle on March 13, 2020. Tomorrow, the Desk will further offer $500 billion in a three-month repo operation and $500 billion in a one-month repo operation for same day settlement. Three-month and one-month repo operations for $500 billion will be offered on a weekly basis for the remainder of the monthly schedule.
Now that’s more like it. Stocks aggressively trimmed losses as soon as the statement hit the wires, but began to fade again in short order, suggesting any relief for equities may prove fleeting.
This was the scene on Thursday morning, prior to the Fed’s actions:
The Fed will continue to conduct daily O/N and 14-day term repos as before, on top of the newly announced actions.
“These changes are being made to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak”, the desk remarked, adding that “reserve management purchases into the second quarter will continue to be conducted with this maturity allocation”.
It’s hard to imagine this will be enough to completely arrest the slide. This doesn’t change the fact that entire sections of the economy are set to be shuttered as part of the COVID-19 containment effort, nor does it do anything to guarantee that corporate entities facing existential crises will ultimately make it out of this year intact.
Still, this shows the kind of backbone and resolve that’s so far been missing from the Powell Fed’s crisis response.
It also demonstrates that the Fed is taking this seriously – unlike anyone at 1600 Penn. or on Capitol Hill, apparently.
Market participants spent much of 2019 begging for weak economic numbers to ensure continued Fed rate cuts. The read-through was that “insurance cuts” are fantastic ways to juice the numbers. Free money.
Careful what you wish for.
Looks like it took around an hour for the market to realize that “emergency cuts” aren’t quite as fun.
Sounds to me like a reason to sell… I mean yeah a hit of liquidity couldn’t hurt but it doesn’t actually make anything materially more likely that the year will be one of growth. Sleep a little easier that the whole thing hasn’t come apart maybe.