WASHINGTON, D.C. — The Federal Reserve on Monday made another batch of extraordinary moves to ease the growing credit crunch in America, but it had limited effects in calming financial markets as some economists offered grimmer predictions of the severity of the coronavirus-induced economic crisis.
The Fed committed to buying an unlimited amount of government bonds to help keep credit markets from freezing up. Strains to the financial system have emerged in recent days because businesses are scrambling to get as much cash in their hands to pay expenses and stay afloat in an economy largely shut down by the virus.
“This is almost the last salvo they have. They’ve reached their limit,” said Chris Rupkey, chief financial economist at MUFG Bank in New York. “If this doesn’t work to support financial conditions and the free flow of credit, I don’t know what will.”
The central bank’s announcement came as somewhat of a surprise, and it initially helped to soften the blow expected to stock markets after Senate negotiations on a fiscal stimulus packaged faltered Sunday. But by late Monday morning, the Dow had dropped more than 800 points.
“The Fed’s showing they’re going to throw everything they have at the problem. Right now, we need fiscal policy,” said Ryan Sweet, an economist at Moody’s Analytics.
Lawmakers and Trump administration officials were trying to reach a compromise on a nearly $2 trillion package of measures to prevent the economy from falling deeper into recession.
Morgan Stanley, in a sobering analysis Monday, said it now sees the jobless rate, 3.5% in February, surging to a record-high average of 12.8% in the second quarter.
The investment banking firm predicted that U.S. gross domestic product would contract in that quarter at an annualized rate of 30%, which would be a 74-year low.
Morgan Stanley economists are not forecasting a Great Depression as in the 1930s, in large part because of stronger policy responses. But they warned that the downturn would be far worse than the Great Recession in 2007-09 if the virus peaks later than April or May.
The Fed, which previously dropped its main interest rate to near zero, said Monday that it would buy as much U.S. Treasury and mortgage-backed securities as needed to ensure that credit, the lifeblood of the economy, keeps flowing to businesses and consumers. Previously, the central bank had committed to purchasing $700 billion worth of the government-backed debt.
The Fed also moved to make it easier for banks to lend money, including establishing a lending facility similar to the one used during the 2008 financial crisis that will allow the central bank to buy securities backed by student, auto and credit card loans, as well as business loans made through the Small Business Administration. The Fed also expanded its facilities to include certain kinds of corporate and municipal debt.
“The coronavirus pandemic is causing tremendous hardship across the United States and around the world,” the Fed said in announcing its actions.
“While great uncertainty remains, it has become clear that our economy will face severe disruptions. 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.”
Analysts said the Fed’s new steps will go a long way in warding off a financial crisis, but they aren’t likely to be enough to calm investors or deal with the underlying problem inflicting markets and the real economy.
“The announcement is good,” said Rupkey, but “the only thing that’s going to stop this is letting people come out of their homes again.”