Jerome Powell and the FOMC have finally had their “whatever it takes moment” and promised open ended asset purchases aimed at beating the US yield curve and financial conditions into submission. The move makes sense based on what we know about QE, which is that the purchases need to be huge, timely, and unconditional for optimal effect. With financial conditions still in a tailspin despite last week’s global monetary bazooka volley, the Fed has decided to once again go big and go early.
The measures are expansive and aggressive in every sense. The pace of the “QE classic” element will be a scorching $75 billion of treasuries and $50 billion of mortgage backed securities a day this week. In addition to expanded QE, the Fed has taken a host of additional measures. These include steps to allow it to purchase corporate debt and asset backed student loan, auto, and credit card debt, including reviving the crisis-era Term Asset-Backed Securities Loan Facility.
The Fed certainly had plenty of justification for stepping its support up another notch. Despite last week’s wave of easing measures from global central banks and governments, US and global financial conditions continued to tighten, and demand for US dollars remained very high. What the FOMC is seeking to do here is maximise the psychological impact of QE, which will hopefully flatten the US yield curve and eventually improve risk appetite, preventing a credit crunch and financial crisis.
With the US legislature looking in danger of dragging its feet on much-needed fiscal stimulus, it’s possible the Fed’s measures will prove insufficient in preventing further deterioration in financial conditions. The Fed’s options are limited from here, although they could commit to an even bigger regular balance sheet increase target, or buy troubled assets with legislative approval. If this happens and the crisis worsens further, global markets will truly be through the looking glass, and direct monetary financing of the government budget – or helicopter money – will begin to come into focus.
USD is trading on the back foot after the news, with NOK in particular extending its gains from earlier in the session. For a meaningful reduciton in the dollar strength seen recently, financial conditions would need to improve, allowing risk appetite to begin to return.
Bloomberg US financial conditions index plunges to crisis levels, prompting Fed action
Dollar pressure subsides slightly
Author: Ranko Berich, Head of Market Analysis