The Fed Makes Its Move To Help Markets Stay Afloat

by 4 months ago

Unsplash/Dmitry Demidko


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For the second time in two days, and the third time this week, the Fed is trying its hand at coming to the markets’ rescue. *’Hero’ by Chad Kroeger starts playing* It makes sense considering the stock market had its worst day since 1987.

How bad was it? All three major indices fell more than 9% on the day. It could have been even worse, but Jay Powell and the Fed gang said “not on my watch” agreeing to provide more than than $1.5T in sweet, sweet stimuli.

Of course, the markets rose briefly before falling back to their low point after taking some time to digest the news.

So what exactly did the Fed do?

For starters, the central bank is offering $1.5T, yes, trillion, in repo loans to help keep the US financial system liquid (read: keep banks operating). On Thursday, the Fed did its best to get markets hot and bothered with a $500B three-month offering, and it’s expected to dole out another $1T in repo loans split between one and three-month offerings today.

This is a change of pace for the HBIC (Head Bank In Charge). Before Thursday, repo offerings from the Fed saw short maturities. Like, two weeks or less, short.

And, apparently, Jerry Interest Rate’s generosity knows no bounds. The Fed plans to offer another $1T per week in liquidity going forward.

Everybody to safety!

The Fed will also be diversifying its $60B of short-term Treasury bill purchases to a more robust portfolio of Treasury Products, including bills, notes, and Treasury Inflation-Protected Securities, providing a broader range of maturities. Like a cougar fresh off a divorce. 

There are also rumblings on Wall Street that the Fed could cut rates all the way down to 0% during next week’s scheduled meeting. That is if we make it that long.

The bottom line…

What happens next? Well, no one’s really sure. The markets officially entered bear country, and there are no signs that the bloodbath will end anytime soon.

But if history is any indication, 2020 is going to go about as well as the XFL’s “inaugural” season. You see, the S&P 500 has fallen 20% or more (entered a bear market) 13 times, and only twice did the US economy not shrink during the following year (read: a recession).

If you want to look at it another way, there have been 14 recessions over that same time frame. Of those recessions, only three times were they “out of left field,” and not following a bear market diagnosis. Prognosis: not great, Bob.

Long story short, it’s probably time to settle in for what could be a long few months. Hopefully, you’ll still have a 401k to turn to when you hit 65. Otherwise, we’ll catch you at the Walmart greeter tryouts.

Water Cooler Talking Point(s)

💧 “It’s the times like these that make me glad I invest like a pirate, burying chests of coins on various Caribbean islands.” (AJ, The Water Coolest HQ)

 

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TAGSbankingEconomyFedFederal ReserveFinancejay powellunited states