The Federal Reserve said it will pump more than $1.5 trillion into Wall Street in order to calm the market and boost economic activity amid growing coronavirus fears, the regulator said in a statement on Thursday.
"These changes are being made to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak," the Federal Reserve Bank of New York said in a statement, adding it made the adjustments under the direction of Fed Chair Jerome Powell in consultation with the Federal Open Market Committee (FOMC).
- Despite the Fed’s announcement, financial markets plunged Thursday in the biggest one-day drop since 1987.
The Fed’s latest injection follows an earlier move this week where the agency boosted the volume of lending for overnight repurchase agreement operations.
On Wednesday, the Fed increased lending to more than $500 billion, from less than $200 billion, before announcing the additional expansion on Thursday.
The bank offered $500 billion in a three-month market repurchase operation, or repo, on Thursday.
Starting on Friday, the Fed said three-month and one-month repo operations for $500 billion each will be offered on a weekly basis through the calendar month.
Some analysts welcomed the move, but said a fiscal stimulus from Congress is also needed.
"Fed did its part today of helping with market functioning," Priya Misra, head of rates strategy at TD Securities, told Bloomberg. "We still need the fiscal help."
Mayra Rodriguez Valladares, a capital market consultant and trainer who works with banks on risk and management issues, expressed concern that there is an over-reliance on monetary policy during times of economic disruption.
"Legislators should be doing fiscal stimulus," she told Banking Dive. "They should be sending out money so that community colleges can be doing online training for all those people who are going to lose their jobs. They should be passing bills to increase money to the [Centers for Disease Control] to do more testing. The market is collapsing not because bankers and traders can’t cope with risk, these people deal with risk every day. The reason that there's such a freakout is because of the uncertainty. … The Fed can only do so much."
Ian Shepherdson, chief economist at Pantheon Macroeconomics, told Markets Insider the Fed’s move signals a "full-blown crisis response operation."
"Now it's up to Congress to fire the fiscal bazooka, the bigger and quicker the better," he said.
Congress is close to reaching a deal with the White House on an economic rescue package to respond to the coronavirus pandemic, according to The New York Times.
After negotiations with Treasury Secretary Steven Mnuchin, House Speaker Nancy Pelosi, D-CA, said on Thursday "we’ve resolved most of our differences” and the House would vote on Friday on the measure “one way or another."
The package will include enhanced unemployment benefits, free virus testing, aid for food assistance programs and funds for Medicaid, the paper reported. The measure also guarantees 14 days of paid sick leave and tax credits for small- and medium-size businesses.
As widespread school closures, sporting event cancellations and calls for social distancing disrupt daily life in the U.S. and around the globe, many industries, including financial services, have been forced to take stock of their vulnerabilities in the event of an economic downturn.
Earlier this week, the country’s top bank CEOs as well as trade group leaders were called to the White House to discuss the strength of the U.S. financial system during the crisis.
During a meeting with President Donald Trump on Wednesday, Bank of America CEO Brian Moynihan and Citigroup CEO Michael Corbat told the president the big banks are "very strong", "well-capitalized" and ready to help customers negatively impacted by the virus.
"The banks and the financial system are in sound shape and we are here to help," Corbat said.
Capital, however, is not the only factor that will help a bank weather an economic downturn, Valladares said.
"How much do these banks have in high quality liquid assets? How much do they have in cash, U.S. Treasuries, triple-A corporate bonds, money market funds, central bank reserves?" she said. "Lehman had a way higher minimum requirement of capital the day that it declared bankruptcy, because it's not so much about capital, it's about liquidity."