Federal Reserve Takes Aggressive Action to Bolster Financial Markets

By Tom Burnett, CFA

In order to help consumers, investors and workers deal with the Coronavirus outbreak’s economic slowdown, the Federal Reserve has instituted a series of dramatic actions intended to stabilize the markets and the global economies. On March 15, 2020, the Federal Open Market Committee cut short term interest rates to a range of 0-0.25%. On March 17th, the Fed launched a support program for corporate commercial paper that will add liquidity to the market for short-term corporate borrowing. The next day, the Fed added liquidity measures to support money market mutual funds to ensure that fund prices do not fall below one dollar per share. On March 19th, the Fed announced a central bank policy that will make available billions of dollars to countries facing an unusual demand for the U.S. currency.
The Fed is responding to a severe threat to the global economic system caused by the virus outbreak and the measures put in place to overcome it. The U.S. stock markets have fallen by some 30% from their February high levels and March is looking like it will be the worst month for stocks since the ‘Crash’ of 1987.
Congress and the White House are working to bring fiscal policies to bear also, but the bond market has noticed the material increases in financing that will be necessary to support the global economic system. Yields on Treasury bonds have risen sharply in the past month. For example, the yield on the Ten-Year bond bottomed at 0.39% earlier this year, and it is now yielding 1.13%. Similarly, the 30-year bond yield has risen from a low of 0.83% in February to 1.77% today. In each of its announcements, the Federal Reserve reiterated its intention to support the markets and the underlying economic/employment conditions.

Tom Burnett, CFA
Director of Research