The Federal Reserve Ventures Into Unchartered Territory

Jay PowellFOMC Chair Powell answers reporters questions at the March 3, 2020 press conference

J.P.Marín Arrese | Jerome Powell raises the stakes  day by day by making bolder than ever decisions. He shatters the image of shyness, prudence and circumspection he offered when taking over the Fed chairmanship. His last daring move has left markets flabbergasted. No wonder. He has pledged 2.3 trillion to buy ungraded bonds and to set up a massive lending facility for Main Street companies, thus breaking the golden rule of including only high-rated paper in the Fed balance sheet. Such a bold step mirrors the deep anxiety raised by the vast increase in unemployment figures. As millions of workers join the dole queue and economic activity goes into prolonged hibernation, the US monetary authority is using all its firepower. As the skyrocketing crisis unfolds reaching unprecedented violence, putting on hold prudent considerations seems fully warranted. Even so, the Fed will cover potential losses with a Treasury guarantee up to 5% of eventual failures. 

Right now, ensuring the current freeze on demand and production doesn’t lead to extensive damage and closures stands as the paramount goal. The pandemic is wreaking havoc on the economy by depressing confidence and crushing both offer and demand. Preserving recovery from a spiralling downward slide requires determined and robust action. The US administration and the Fed are struggling to shore up the economy with lofty support measures. Trillions are being poured into firms and individuals to help them cope with this short-term quagmire.

Supporting junk bonds alleviates the backlash many fallen angels corporations face. Providing them with cash to overcome the current morass may save the need to inject substantial direct support over the coming months. Lending facilities do not solve the core problem stemming from a plunge in the profit and loss account. Yet, they offer a temporary umbrella until the weather clears up.

While Europe is struggling to draw up a joint plan to overcome the crisis, the US rides ahead tackling the problem. Money is all you need to avert this bad-spell from turning into a massive recession. The US has performed a timely move to prevent the worst from happening. Let’s hope we learn the lesson before it is too late.

About the Author

JP Marin Arrese
Juan Pedro Marín Arrese is a Madrid-based economic analyst and observer. He regularly publishes articles in the Spanish leading financial newspaper 'Expansión'.