The Federal Reserve, via a coordinated operation with five other central banks, will make dollars available, while investors around the world are panicking. The markets are nevertheless announced in sharp decline Monday.
Federal Reserve
The Federal Reserve has decided to use all the weapons at its disposal to avoid the syncope of the American and world economy. At the same time, the populations are confined to Europe and will follow the same fate in the United States. The central bank has announced that it will drop its critical rates by one point, which will now be between 0% and 0.25%. Then, it will massively buy up bank, corporate, and real estate debt for an amount of up to $ 700 billion. Finally, via a coordinated operation with five other central banks (European Union, Canada, Japan, United Kingdom, Switzerland), it will make dollars available. At the same time, investors in the world, panicked, take refuge in the green ticket. All-round measures, which recalled the terrible hours that followed the bankruptcy of the American investment bank Lehman Brothers in September 2008.
It is not confident that they calm the financial markets, while the Western economies will be paralyzed entirely as of this Monday. Off-market transactions on the Dow Jones and Standard & Poor’s 500 indicated a sinking of around 4% on Sunday evening, in the wake of a historical 10% rebound recorded on Friday. On the interest rate side, there was an improvement: ten-year rates soared 0.72% and exceeded 1%. This is much better than the historic low of 0.38% reached on March 9.
The Fed Now Offers Free Money
In this crisis, the orders of magnitude are considerable: The Fed now offers free money, as it did in the wake of 2008. The drop of one point is added to that of half a point, decided Tuesday, March 3, without any international coordination and which did not affect the financial markets. The fall is considerable, compared to the 2.5% -2.25% reached in December 2018. The American central bank has not, however, entered the adventure of negative interest rates, whose consistency and disputed and which lead bankruptcy of banks, a scenario to be avoided at all costs to prevent aggravating the financial downturn. This situation explains in particular that the ECB, which has negative rates, is not capable of having a purely monetary response to the crisis.
Then, the Fed resumes its securities buying operations, known under the barbaric name of “quantitative easing,” which it had launched in 2008 and sought to reduce from 2013. These operations, intended to ensure the liquidity of the market and controlling medium and long-term interest rates, had led to an increase in the bank’s balance sheet. It had grown from $ 900 billion to over 4,500 billion. The Fed had reduced it slightly, and today it stands at $ 4.3 trillion.