With global markets in a rapid tailspin due to the mushrooming coronavirus crisis, the Federal Reserve will sharply increase its purchases of short-term U.S. Treasury bonds in an attempt to ease anxiety and disruptions in the financial markets, according to an Associated Press report.
According to the report, the Fed announced Thursday that it’s injecting up to $2 trillion into short-term lending markets as a way to ensure that the Treasury bond market can function smoothly. It’s also broadening its ongoing $60 billion-a-month purchases of Treasurys to include longer-term bonds.
Combined, the Fed’s actions are intended to help the stock market sharply pare its losses. But at first, the actions caused Treasury yields to fall before they rose back up again.
According to the report, the action, being led by the New York Fed, is intended to keep credit markets functioning and ensure that banks can continue to provide loans to businesses and other borrowers across the economy.
The actions are in response to wild stock market swings this past week. On Monday, coronavirus fears sent the stock market spiraling downward, only to be followed by a upsurge Tuesday. However, that momentum was pretty much gone Wednesday and Thursday as the market fell again.
According to the Associated Press report, the European Central Bank (ECB) earlier Thursday deployed targeted new stimulus measures to cushion the shock to the economy from the virus outbreak. ECB president Christine Lagarde reportedly said, though, that monetary policy couldn’t do it alone and called for a “decisive and determined” response from governments.
The already-troubled European economy took a major hit Wednesday night when U.S. President Donald Trump announced a month-long ban on all travel to the U.S. from Europe, excluding the United Kingdom. Trump’s move has been criticized by many industry observers, some arguing it was an arbitrary and unilateral move by the President.
The market for U.S. Treasury bonds is the basis of all other financial products on Wall Street. Because investors believe the U.S. government would never default on its debt, the bonds issued by the U.S. government are used to price every other asset. The market for U.S. government debt is enormous—roughly $17.5 trillion, the largest single pool of investment assets globally, according to the Associated Press report.