Why did the Federal Reserve inject half a trillion dollars into the financial system?

“The declines in the stock market are big enough and deep enough that people are going to start pulling back on spending," said one economist.
Image: Jerome Powell
Federal Reserve Chairman Jerome Powell gives a press briefing after the surprise announcement the Fed will cut interest rates, on March 3, 2020.Eric Baradat / AFP - Getty Images

Breaking News Emails

Get breaking news alerts and special reports. The news and stories that matter, delivered weekday mornings.
SUBSCRIBE
By Martha C. White

Wall Street briefly pared its losses on Thursday as investors reacted to the Federal Reserve’s announcement that it would dramatically increase liquidity by injecting as much as $1.5 trillion into the economy with an unprecedented series of asset purchases.

Previously, the White House’s Europe travel ban and a cascade of headlines about the spread of the coronavirus in the United States had led to the unprecedented second weekly triggering of the market’s “circuit breaker” to halt trading for 15 minutes a few minutes into the trading day.

While the travel, hospitality and energy sectors have so far been on the front lines of the coronavirus pandemic, analysts said the flight out of stocks reflecting a growing concern that a much wider swath of the American economy will be hurt, even with aggressive monetary policy moves.

The New York Fed said in a statement it was expanding its purchases of Treasuries to include longer-term notes, bills and other instruments as a result of the “highly unusual disruptions in Treasury financing markets” as a result of the virus. This pivot marks a departure from the more limited liquidity measures in which the central bank had previously engaged, such as backstopping the overnight lending repo market.

Still, the Fed’s interventions can only do so much to hedge against the uncertainty sweeping the market, said Scott Wren, senior global market strategist at the Wells Fargo Investment Institute. “There aren’t too many good answers. It’s all really revolving around the virus,” he said. “I think the market’s pricing in a lot of getting-worse kind of news.”

Mark Zandi, chief economist at Moody’s Analytics, said investor anxiety is driven by market fears combined with unprecedented headlines such as the NBA canceling the rest of its season and actor Tom Hanks announcing that he and his wife had tested positive for the virus.

“A couple more days like yesterday in the stock market could do it. It looks pretty ugly. I’m sure that’s really starting to spook people. It‘ll be hard to discern what eventually causes people to run for the bunker,” he said. “It’s not just one of those things, but it’s a flood of those things.”

Zandi said the beleaguered retail sector could be the next shoe to drop, and the next casualties could be the media and entertainment industries, pointing out the mounting announcements of canceled or postponed sporting events, concerts and festivals. “Retail will start getting hit. The declines in the stock market are big enough and deep enough that people are going to start pulling back on spending, particularly Baby Boomers,” he said.

“We’re trying to watch consumer spending. I think that’s where it’s going to show up first,” Wren said.

To date, analysts characterized the response from lawmakers as inadequate — another factor injecting uncertainty into the market, even as the major indices moderated their earlier losses falling the New York Fed’s announcement.

Some criticized what they saw as a slapdash response from the Executive Branch. “A payroll tax idea was floated by President Donald Trump, and I think he caught a lot of people, even in his own administration, off guard because there was no plan in place. I think investors have taken his comments as a sign that he’s shooting from the hip,” said Mitchell Goldberg, president of ClientFirst Strategy.

“Last night’s speech was an opportunity the president failed to take,” Zandi said, noting Trump's lack of specificity. “It didn’t give a sense that they were thought through at all.”

Investing experts expressed dim hope for getting fiscal stimulus and support for workers and small businesses through a divided Congress in short order. “There’s somewhat of a lack of support on both sides of the aisle for some kind of fiscal stimulus. By the time we actually get it… it’ll come in later than when it really needed to,” Wren said. “The uncertainty over the virus, the uncertainty over the fiscal stimulus, oil down to around $30 — those are three key things that are driving things and right now there’s not a lot of positive news.”

In the U.S., “The lack of testing in the early stages of the outbreak means that cases will continue to rise sharply,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a client note. Shepherdson predicted that existing European containment measures would be deemed inadequate and that more drastic restrictions on the movement of people within and between countries would be undertaken.

Some are starting to suspect that the U.S. will be unable to avoid implementing similar measures, in spite of the economic pain they will cause.

“It’s going to be very difficult for businesses to maintain productivity under these circumstances. You can't have these measures without impacting the economy and I think people are going to have to accept that we’re taking an economic hit,” Goldberg said.