Topline: As stocks headed for their worst day since 1987’s Black Monday Crash, the Federal Reserve announced further measures to prop up liquidity including a potential injection of more than $1.5 trillion into the market; stocks responded immediately, cutting losses in half on the announcement, before dropping back down 8%.
- The Fed said it will ramp up its overnight funding operations—buying “repos,” or repurchase agreements—by $1.5 trillion over the next two days.
- “These changes are being made to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak,” the New York Fed said in a statement on Thursday afternoon.
- The Fed also widened the range for its reserve management purchases—which had previously been restricted to short-term Treasury bills—to include other types of financial instruments.
- The moves are designed to preserve liquidity in the market; in other words, the Fed wants to prevent “freezes” and make sure buyers and sellers still have the ability to trade.
- It’s the third time in four days the New York Fed has announced that it will bulk up lending in the repo market: on Tuesday, it announced an injection of $50 billion, and it added another $25 billion on Wednesday.
- Stocks initially pared back nearly half their losses on the announcement, but within the hour had dropped back close to their previous daily lows; at 2:00 p.m. EST on Thursday, the Dow Jones Industrial Average was down 8%.
Key background: Stocks rallied on Tuesday this week after President Trump promised to introduce an economic stimulus package to address the crisis, then dropped again on Wednesday when details about that plan were slow to emerge. European stocks cratered on Thursday morning after President Trump announced that he would ban travel to the U.S. from Europe for 30 days. The Fed’s actions this week have been focused on the repo market, where it lends financial institutions short term money overnight so they have enough cash to cover their operations throughout the day. Repo is short for “repurchase agreement”; in these transactions, the Fed buys securities from a seller (a bank, or hedge fund, for example) who agrees to repurchase them later on with a bit of interest. This helps the Fed inject more cash into the banking system.
Crucial quote: Two weeks ago following an emergency rate cut, Fed Chairman Jerome Powell stressed that his agency’s actions should be just one part of a multifaceted response to the crisis that will involve health officials, fiscal authorities, and state and local governments: “We do recognize that a rate cut will not reduce the rate of infection; it won’t fix a broken supply chain. We get that.”
What to watch for: Bond traders are pricing in a 100% chance that the Fed will cut interest rates to zero when it meets next week—if it doesn’t do so sooner in another emergency meeting. Trump has repeatedly criticized the Fed for not lowering rates faster, most recently blaming the central bank for being too “slow moving” in addressing the economic impact from the coronavirus pandemic.
