MNI REVIEW: FOMC: Whatever It Takes to Restore Market Normalcy

--Zero Rate and USD700B Offered Sunday Night Before Asia Opens, G7 Call

By Jean Yung 

     WASHINGTON (MNI) - The Federal Reserve unleashed an unprecedented package

of rate cuts, asset purchases and easier lending rules Sunday, showing policy

makers would do whatever it takes to shore up strains from COVID-19 threatening

everything from small household and business lending to the Treasury market

itself. 

     A 100bp cut in the benchmark policy rate returned the fed funds target

range to 0% to 0.25% for the first time since the financial crisis, and an even

stronger 150 bps decrease in the discount rate, to 0.25%, sent a powerful

message to banks to make credit flow. 

     The FOMC also said it would buy at least USD500 billion in Treasuries and

USD200 billion in agency mortgage backed securities over the "coming months,"

with Chair Jay Powell telling reporters that the Fed will not be bound by any

monthly caps. 

     "Economic policymakers must do what we can to ease hardship caused by the

disruptions to the economy and to support a swift return to normal once they

have passed," he said, adding it's in lieu of the meeting scheduled for Tuesday

and Wednesday. 

     It was the Fed's third emergency action following an unscheduled 50bps rate

cut just a week earlier and the promise of almost unlimited short-term lending

to primary dealers Thursday. The moves came before a Monday call of G7 leaders

at 10am EST to discuss the coronavirus outbreak that over the weekend led

nations like France, Spain and Canada to crack down on public gatherings. 

     Powell said fiscal policy has a strong role to play and most policy makers

have told MNI that government cash is the best way to sustain household and

businesses who will lose income. President Donald Trump called a national

emergency Friday unlocking $50 billion and praised the Fed for making his

long-called for move to take rates to zero, though health officials say the U.S.

may face a severe health crisis because of failure to test early and warn people

from large gatherings.

     Other central banks are trying to stay ahead of plunging bond yields that

signal a lack of confidence in the size of the policy response from governments

and central banks. The BOC made a surprise 50bps cut Friday to 0.75%, the RBNZ

cut 75bps to a record low 0.25% and the RBA said a package is coming Thursday.

     --RATES TO STAY LOW

     The Fed didn't generate a new quarterly economic forecast as was expected

at this meeting, but Powell said the economy may shrink in the second quarter

without saying if the U.S. is entering a recession.

     The economic outlook depends on the spread of the virus and whether the

measures taken to combat it are effective, "and that's just now knowable,"

Powell said, citing a range of opinions among FOMC members. He emphasized that

the economy had been performing well through January. 

     Until the committee is "confident that the economy has weathered recent

events" and is on track to achieve the Fed's mandated goals of maximum

employment and price stability, rates will stay low, he said. 

     Powell said he isn't seeking legal authority to expand the range of assets

the Fed can purchase, and repeated a longstanding view that negative interest

rates were likely not appropriate for the U.S. economy. 

     "We'll maintain at this level until we're confident that we've achieved our

goals," Powell said. "It suggests that we're going to be watching and willing to

be patient." 

     --QE4

     Dysfunction in bond markets played a large role in prompting the Fed to act

with urgency, Powell said. When primary dealer banks took up little of the

promised $1.5 trillion in short-term loans Thursday, the Fed pivoted immediately

to buying USD37 billion in Treasuries on Friday. 

     "What we learned was we needed to go direct here instead of trying to

intermediate through the dealers," Powell said. Markets had "reached levels of

very high illiquidity," he said. "If they're not functioning well, then that

will spread to other markets. We know dysfunctional financial system can have

effects on the economy." 

     The New York Fed said Sunday it will buy USD40 billion of Treasuries on

Monday and roughly USD80 billion of agency MBS over the next four weeks. That is

"all but certain to exceed the peak pace of USD85 billion (a month) during QE3

by a large margin," Goldman Sachs analysts noted.

     But Powell dismissed a reporter's question asking whether the asset

purchases constituted QE4. "It really is to support the availability of credit,"

he said, while also acknowledging that the purchases will also foster more

accommodative financial conditions. "In terms of what it's labeled, that's of

less interest to me."

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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