Monday 23 March 2020 3:56 pm

US Federal Reserve announces unlimited bond-buying to tackle coronavirus slowdown

The US Federal Reserve has pledged to buy a potentially unlimited amount of government debt and ramp up lending support to businesses in its latest massive intervention in an economy ravaged by coronavirus.

“Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate,” the Fed said in a statement today.

Read more: US stocks drop despite massive coronavirus stimulus from Federal Reserve

“The Federal Reserve is committed to using its full range of tools to support households, businesses, and the US economy.”

The Fed said it will buy bonds “in the amounts needed to support smooth market functioning and effective transmission of monetary policy”. 

It had previously committed to buying at least $500bn (£434bn) of government bonds and $200bn of mortgage-backed securities. The Fed’s latest statement paves the way for potentially a big expansion of its quantitative easing (QE) programme, under which it creates digital money to buy bonds.

The central bank’s intervention came as the US Senate remained gridlocked over a stimulus package that could be worth almost $2 trillion. Senate Democrats blocked the Republican-designed package, saying it did not do enough for workers or hospitals.

The Fed said it would directly support US firms, unveiling two new facilities that let it directly purchase corporate bonds.

It also launched a facility to buy securities backed by student, car and credit card loans, helping support markets that have come under pressure during the coronavirus slowdown.

The Fed said its new facilities will support the flow of $300bn worth of credit for employers, consumers and businesses.

Markets unimpressed by major steps

It was just the latest major move by a Federal Reserve that has in recent weeks slashed interest rates to zero, pumped trillions of dollars into short-term money markets and expanded its asset purchases to support the real economy.

Yet once again the move failed to quell investors’ fears, with Wall Street stocks falling in morning trading. The S&P 500 was last down 4.3 per cent, the Dow Jones was 4.5 per cent lower, and the Nasdaq was down 2.8 per cent.

The policies had the desired effect on the US bond market, however, where 10-year Treasury yields fell by 0.13 percentage points to 0.725 per cent. Yields move inversely to price.

Read more: Former BoE governor Mervyn King: Coronavirus crash worse than financial crisis

Kathy Bostjancic, chief US financial economist at consultancy Oxford Economics, said: “The Fed is doing ‘whatever it takes’ to improve the smooth functioning markets and support the economy.”

Yet she said that central bank action will not be enough to help the economy on its own. “Congress urgently needs to deliver a large-scale fiscal stimulus program.”