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Federal Reserve announces unlimited quantitative easing

By Lawrence Gash

Fed aims to restore stability to the US stock market in the face of Covid-19

The US Federal Reserve has announced a series of further measures which it hopes will restore some stability to the American stock market amid the Covid-19 crisis.

The American economy has suffered significantly in the past month, with the S&P 500 recording its third-worst trading day on record. The VIX, the volatility gauge, has reached record highs and millions of Americans find themselves unemployed.

Having failed to stabilise markets by cutting interest rates to zero and injecting trillions of dollars into the faltering US financial system, the Federal Reserve will resume the policy of unlimited quantitative easing.

The American central bank stated that it will continue its current asset purchasing programme “in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy”.

The Fed will also move for the first time into corporate bonds. The American central bank will purchase the investment-grade securities in primary and secondary markets as well as through exchange traded funds.

Other measures include an unspecified lending programme for "Main Street" businesses, a $300bn (£261bn, €278.7bn) initiative to support the flow of credit to employers, consumers and businesses – and the "Term Asset-Backed Loan Facility (TALF)", last implemented during the global financial crisis.

The Fed will hope such measures blunt the worst of the economic impact of Covid-19 on the world’s largest economy. Already Goldman Sachs has predicted US GDP to fall 24 per cent in the second quarter, while Morgan Stanley has forecast a 30 per cent contraction.

While some have welcomed the Fed’s intervention, others see the resumption of QE Infinity as dangerous money printing which will all but guarantee hyperinflation in the long run.

Such fears were not allayed by the president of the Federal Reserve Bank of Minneapolis, Neel Kashkari, who recently stated: “There's an infinite amount of cash at the Federal Reserve." He also said: “We create it electronically and we can also print it, with the Treasury Department, so you can get money out of your ATMs.”

FURTHER READING: Morgan Stanley: US GDP to fall 30%

FURTHER READING: S&P 500 technical analysis March 23 to 27: Can the index bounce back after the worst week since 2008?

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