Fed To Pump More Than $1 Trillion Into Financial System

Amid the economic fallout from the coronavirus outbreak, the Federal Reserve is taking significant steps to provide liquidity to the financial markets.

The New York Fed said that it will offer banks more than $1 trillion worth of additional short-term cash loans as part of an effort to smooth operations in the Treasury and money markets.

“These changes are being made to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak,” the New York Fed said in a statement.

In addition to pumping substantial amounts of money into the banking system, the Fed said it will extend its monthly purchases of $60 billion worth of Treasury securities across a range of maturities beyond just short-term T-bills.

The Fed has also scrapped plans to wind those purchases down in what some see as step toward a formal re-adoption of quantitative easing.

“The Fed originally opted to buy only T-bills in an attempt to distinguish its balance sheet management operations from full-blown QE,” said Paul Ashworth, Chief U.S. Economist at Capital Economics. “But the former has now morphed into the latter.”

He added, “The next step would be to expand the pace of monthly purchases, which we think the Fed will probably do at next week’s FOMC meeting.”

Ashworth said he only expects a 50 basis point interest rate cut at the Fed’s meeting next week, but he argued the fact that the central bank is already dabbling in quantitative easing makes it even clearer that it anticipates returning rates to near-zero levels soon.

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