NY Fed kicks into 'emergency mode', analysts see 'QE4'

The Federal Reserve Bank of New York announced that it would expand its programme of daily securities purchases "across a range of maturities", alongside $1.5trn of emergency liquidity injections, in what traders said marked the start of the US central bank's fourth round of quantitative easing.

That is to say, over the 30 days starting from 13 March, the NY Fed would no longer limit its $60bn-worth of buying for reserve management purposes to just Treasury bills and would also purchase longer-term debt.

In order to address what it termed "highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak", the Fed also announced that it would offer a further $500bn in three-month repurchase operations and a similar amount in one-month operations on the following day.

That would come on top of another three-month repo for $500bn on Thursday.

One City-based analyst said the moves, coming as it did from the NY Fed, was not monetary policy, as the regional Fed bank's remit was only to adress technical factors in financial markets.

But with the Fed's next regularly-scheduled meeting just around the corner, on 17-18 March, the mini/quasi-[quantitative easing] announcement might feed expectations of QE actually being restarted when monetary policymakers next met.

"Regardless of what one wants to call it, it’s not negative, esp. when the SPX was trading down ~8%+ at one point earlier," the same analyst said.

As of 1725 GMT, the Dow Jones Industrials was trading lower by 6.15% to 22,104.79, alongside a 5.86% drop for the S&P 500 to 2,580.70 and a 5.67% fall for the Nasdaq Composite to 7,501.32.

But Wall Street's main stock market gauges later fell back, ending the session at their worst levels.

Ian Shepherdson at Pantheon Macroeconomics was in full agreement, telling clients: "This is a full-blown crisis response operation, intended to make it abundantly clear that the Fed will not allow liquidity to dry up.

"The statement does not promise that the Treasury purchases will continue beyond April 13, stating only that "Reserve management purchases into the second quarter will continue to be conducted with this maturity allocation," consistent with the FOMC's stated position that its bill purchases would continue "at least into the second quarter of 2020.

"But it's inconceivable to us that the Fed will not extend these operations; they can’t do anything which reduces policy accommodation, even at the margin."

Mickey Levy at Berenberg Capital Markets appeared to be of a broadly similar view, telling clients: "This aggressive asset-purchasing program in an array of maturities is the second emergency measure taken by the Fed in the last week.

"The Fed is very aware that the coronavirus and its negative economic fallout is a health crisis that cannot be addressed through monetary easing. However, in the last week, the dramatic deterioration in the corporate bond market and clear signs of illiquidity raised the Fed’s concerns that the negative health care shock was evolving into a potential financial crisis. For these reasons, the Fed acted aggressively."