The Fed has thrown another lifeline to markets and the economy by removing limits on its asset purchases of government bonds and mortgage-backed securities (MBS). The Fed is also introducing a number of new lending facilities aimed at supporting the US corporate sector and households, including the unprecedented step of buying corporate debt.

The Fed’s earlier interventions have so far failed to abate the severe stresses in both the Treasury and MBS markets, as coronavirus-related disruption continues to ripple through the economic and financial systems. The Fed’s decision to buy corporate debt is something other major central banks have done since the last crisis, but the Fed had so far managed to avoid. 

It is encouraging to see the Fed moving quickly, providing essential support to areas of the markets and the economy that are under stress. However, all these efforts have to be matched on much bigger scale by timely fiscal interventions to help the economy not only during this downturn, but also in recovery.

Additionally, given the uncertainty about the trajectory of the virus and its spill-over effects on the real economy, it seems unlikely that the US economy will see a V-shaped rebound in the second half of this year. For the US economy to be able to emerge from the current crisis and ongoing recession relatively unscathed, more radical policy interventions will be needed in the next few weeks. At this point, it is still unclear whether the US politicians will rise to the challenge.

Anna Stupnytska

Anna Stupnytska

Head of Global Macro and Investment Strategy