The Fed Announces Unprecedented Support

The Fed Announces Unprecedented Support

almost 4 years ago2 mins

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The Federal Reserve (the Fed) announced on Monday there’d no limits to its bond-buying to support the US economy 💪

What does this mean?

The Fed announced $700 billion of new bond purchases this time last week, and by Friday, it’d already completed a batch of them. But maybe it didn’t see the immediate reaction it was hoping for – that is, more business loans. Or maybe it was concerned the US government hadn’t agreed on its own spending plans by the weekend. Either way, the Fed decided to unveil even more spending.

Source: The Wall Street Journal
Source: The Wall Street Journal

On top of unrestrained government bond-buying and ongoing support for super-short-term lending markets, the Fed announced several new programs: it’d buy up corporate bonds – as well as debts related to credit card, car, and student loans – in an effort to free up cash across the economy 🏦 It promised to roll out a plan for small, independent businesses outside the finance world too.

Why should I care?

After the government failed to agree on a spending package, the US stock market looked set to fall as far as it could without triggering an emergency 15-minute break. But it actually ended up having a positive start to the day following the Fed’s announcement, albeit temporarily. Hedge funds, for their part, might use that to encourage investors to give them even more money. Their pitch: “buy the dip” and profit from any eventual recovery in asset prices. They probably glossed over the bit about most hedge funds having lost money this month, mind you.

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According to Goldman Sachs, the speed of a stock market recovery depends on how quickly the virus is contained, whether companies have enough cash to survive the next three to six months (which the Fed’s trying to help with), and whether government spending can stabilize the economy ⛵️ A quickly contained virus accompanied by shuttered businesses and lost jobs, for example, will slow any recovery significantly.

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