Fed’s Anti-Virus Lending Firepower Could Reach $4.5 Trillion

The Federal Reserve could now have as much as $4.5 trillion to keep credit flowing and make direct loans to U.S. businesses through the massive coronavirus stimulus bill being considered by U.S. lawmakers.

Balance Sheet

The bipartisan agreement, which still needs to be passed by the Senate and House and signed into law by President Donald Trump, will include $454 billion in funds for the Treasury to backstop emergency actions by the Fed to support the U.S. economy, Senator Patrick Toomey said on Wednesday.

The central bank will work with the U.S. Treasury to use that money as a backstop against credit risk as it supports markets for corporate and short-term state and local debt, while also loaning directly to large and medium-sized businesses.

Its lending facilities have typically required a loss-absorbing cushion of around 10% from the Treasury to protect it from loans that don’t get paid back, a feature that Toomey indicated he wanted preserved. On that basis, every dollar from the Treasury can stand behind $10 dollars lent by the Fed.

“It is a very, very big thing; it is unprecedented,” the Pennsylvania Republican told reporters Wednesday on a conference call, adding it was an opportunity to lever up “the unlimited balance sheet of the Fed.”

Toomey’s comments suggest Fed facilities could be expanded with the new funds, in effect doubling the Fed’s current $4.7 trillion balance sheet if necessary. On Sunday, Treasury Secretary Steven Mnuchin said the bill would provide up to $4 trillion in liquidity through broad-based lending programs operated by the Fed.

A Fed spokesperson declined to comment.

The central bank has launched a dramatic range of emergency measures to shelter the blow from the virus, which has brought important parts of the economy to a grinding halt as governors in several states ordered a stop to all but the most essential activity. It has slashed interest rates to almost zero and is pumping hundreds of billions of dollars into financial markets to keep credit flowing.

Those actions were ramped up on Monday, when the Fed also announced it was also working hard on a Main Street Business Lending Program to support medium-sized businesses.

Corporate Debt

It also launched two other facilities — one to support the secondary market for corporate debt, and a second to lend or buy bonds directly from large corporations, an unprecedented bypass of the banking system that has redefined the Fed’s role in economic emergencies. With these moves, the Fed has surpassed actions it took during the 2008 financial crisis and has become the nation’s bridge lender of last resort.

Constance Hunter, chief economist at KPMG in New York, said the Fed’s credit facilities are in effect short-term bridge loans critical to keeping both small and large businesses afloat so they can hire back furloughed or laid-off workers when the pandemic subsides.

Chain Reaction

“There is a transmission channel from large corporations, to small- and medium-sized enterprises and to households” as each tries to extend temporary credit or keep paying staff, Hunter said, adding that the Fed programs will be vital.

“What I am hearing business leaders say is, ‘We don’t want to shut out our customers. If they have a temporary decline in ability to pay, we want to extend credit to bridge them to the other side of the crisis as much as possible,” she said.

The U.S. banking system has already been tapped for hundreds of millions of dollars via credit lines as companies try and shore up short-term cash positions.

To keep credit flowing in the financial markets, the Fed has also launched facilities to support the issuance of commercial paper and asset-backed securities, as well as programs to lend to bond dealers and backstop money market funds.

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Fed Could Provide Massive Support for Business, States in Bill

Congress could hand the U.S. Treasury at least $425 billion to backstop potentially much larger support by the Federal Reserve for business and municipal borrowers as part of an economic aid package being hammered out by the Trump administration and Congressional leaders.

The latest draft of the Republican-written bill, which GOP lawmakers are trying to finalize and pass Monday, would authorize the Treasury to use $425 billion “to make loans, loan guarantees, and other investments in support of programs or facilities established by the Board of Governors of the Federal Reserve System for the purpose of providing liquidity to the financial system that supports lending to eligible businesses, states or municipalities.”

Earlier Sunday, Treasury Secretary Steven Mnuchin said the bill would provide up to $4 trillion in liquidity through broad-based lending programs operated by the Fed.

Lever Up

Details were unclear, but some analysts took the view that the money identified to support Fed programs would seed much larger assistance from the U.S. central bank.

“This is money the Fed can lever up,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & CO. in New York. “It’s a very positive step. I hope the $4 trillion is enough but there’s no guarantee.”

Senate Banking Committee Chairman Mike Crapo told Bloomberg News that the legislation would expand the Fed’s authority to include state and local governments as entities it can lend to, and buy debt from, to assist them.

Crapo said he supports the measure and would expect other Republicans to do so as well, but also noted that a supplemental appropriations bill would provide direct support to states.

Democrats on Sunday were not yet on board.

Emergency Lending

Last week, the Treasury backstopped two new emergency lending facilities rolled out by the central bank with a combined $20 billion. That was seen as enough to support up to approximately $1.7 trillion of eligible short-term securities.

The Fed has come under pressure from lawmakers and some former central bankers to extend support beyond shorter-dated debt markets and purchase long-run corporate and municipal bonds.

Companies, states and cities have found it increasingly difficult to borrow money as investors flee for safety amid the expanding coronavirus pandemic and the economic havoc its creating.

Cash Drain

”The cash drain on households and businesses, and state and local governments, is going to punch a massive hole in the global glut of savings, and this is an aggressive effort to fill that gap,” said Lou Crandall, chief economist at Wrightson ICAP.

Federal Reserve spokeswoman Michelle Smith declined to comment on what the legislation signaled on future Fed moves.

It’s unclear whether the Fed would require separate congressional approval for buying long-dated corporate and municipal bonds. Eric Rosengren, president of the Boston Fed said March 6 the Fed would need lawmakers’ consent to make such direct purchases.

But that might be open to debate.

Joseph Gagnon, a former Fed official now at the Peterson Institute for International Economics in Washington, has said he believes the Fed can extend credit to any entity as long as the collateral received in exchange is deemed adequate.

— With assistance by Saleha Mohsin, Ryan Beene, and Daniel Flatley

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Fed Restarts Commercial Paper Facility to Ease Market Strain

The Federal Reserve will restart a financial crisis-era program to help U.S. companies borrow through the commercial paper market after it came under “considerable strain” due to the coronavirus pandemic.

The central bank is using emergency authorities to establish the Commercial Paper Funding Facility with the approval of the Treasury secretary, according to a Fed statement on Tuesday. The Treasury will provide $10 billion of credit protection from its Exchange Stabilization Fund.

The move follows mounting pressure to act after the Fed’s Sunday evening emergency interest-rate cut to nearly zero and other measures failed to stem market strains as investors reacted to the risk that the virus will tip the U.S. and global economy into a potentially damaging recession.

Help Businesses

“By providing short-term credit, the CPFF will help American businesses manage their finances through this challenging period,” Treasury Secretary Steven Mnuchin said in a separate statement.

The Fed said it will provide financing to a special-purpose vehicle that will purchase A1/P1 rated commercial paper from eligible companies, and purchases will last for one year unless the Fed extends the program.

Pricing will be based on the then-current 3-month overnight index swap rate plus 200 basis points, and each issuer must pay a facility fee equal to 10 basis points of the maximum amount of its commercial paper the SPV may own.

“This provides a backstop and allows institutions to continue to rely on commercial paper to fund their short-term operations, so that’s good” said Roberto Perli, a former Fed economist and partner at Cornerstone Macro LLC in Washington.

Market Relief

Cross-currency basis swaps recovered from multi-year lows reached earlier on Tuesday amid speculation that the Fed could reintroduce the commercial paper facility and maintained those retracements after the central bank announced the news.

Still, three-month euro cross-currency basis swaps remain notably wider than they have been on average this year.

There was, however, some relief in broader markets with stock prices bouncing and the dollar strengthening immediately after the announcement. The S&P 500 index extended gains after earlier reversing losses, to trade 4.5% higher.

Not Generous

Perli said he was somewhat surprised by the facility’s pricing, at 2 percentage points above the overnight index swap rate. “That’s a big premium,” he said. “That’s not particularly generous or lenient.”

The step comes as central banks and governments around the world roll out emergency liquidity measures for markets and economic stimulus programs designed to soften the impact of the spreading coronavirus. A number of economists have said virus-triggered closures and national lock-downs are making a global recession increasingly likely.

The Fed on Sunday slashed interest rates to nearly zero, announced enhanced dollar swap lines with other central banks and said it would buy at least $700 billion in Treasuries and mortgage backed securities to ensure market functioning and keep credit flowing.

Flight to Safety

In financial markets, the rush of investors into cash and other safe havens has threatened to deny companies a crucial source of short-term lending. Firms frequently issue commercial paper — IOUs that generally mature in fewer than 270 days — to fund everyday expenses, like rent and payroll.

The facility reprises a program the Fed rolled out in the depths of the financial crisis in October 2008 as global credit markets seized up. At the time, companies were even more reliant on short-term lending and the crisis left several industrial giants, including General Electric Co., scrambling for cash.

The controversy that surrounded that program, and several other facilities implemented during the crisis, however, spurred lawmakers to put greater restrictions on the Fed’s use of emergency lending.

Under changes created by the Dodd-Frank Act, the Fed has to secure permission from the U.S. Treasury to purchase commercial paper, and must also report to Congress on the program’s recipients and the collateral that is offered to secure the loans.

Despite clearing those hurdles, the step could prove controversial again, with some Democrats likely to call it a bailout for corporations and banks while Americans struggle to pay bills. Some Republicans may also attack it as unnecessary government intervention in the market.

— With assistance by Rich Miller, and Alex Harris

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Powell’s Fed Seeks to Limit Pain of Unavoidable Economic Slump

Federal Reserve Chairman Jerome Powell recognizes that he can’t prevent what increasingly looks like a sudden stop of the U.S. economy, but he’s still hoping to avoid a freezing up of financial markets that makes the pain even worse.

In a roughly 40-minute conference call with reporters on Sunday after the Fed slashed interest rates close to zero and launched a fresh quantitative easing program, Powell acknowledged the economy is set to contract in the second quarter as companies and households hunker down to hinder the spread of the deadly coronavirus.

And he said how long the downturn lasts is “unknowable” because it depends on how the contagion develops.

“We’ve hit a wall. The economy is in free-fall,” said Mark Zandi, chief economist for Moody’s Analytics, who reckons that gross domestic product will shrink at a jaw-dropping 5% annualized rate this month as business comes to a standstill.

What the Fed is focused on first and foremost, Powell said, is providing liquidity to financial markets so they can function smoothly and supply credit to companies and consumers to tide them over during the fallout from the virus and the necessary distancing actions taken to contain it.

That’s a tacit acknowledgment that sharp rate cuts alone are insufficient to spur demand and stabilize the current economic emergency, but may help drive a rebound once the virus is under control.

“We’re really going to be looking to see that financial markets are returning to more liquid, more normal functioning,” Powell said. “We take that job very seriously. It’s probably the most important thing that we’re doing now.”

Despite the Fed’s multi-pronged approach, U.S. stock futures tumbled and Treasuries rallied on Monday as investors continue to question whether the Fed has done enough to ease a credit crunch, keep markets flowing and avoid a lengthy recession.

That shows there is a lot at stake. While the efforts to contain virus will have, in Powell’s words, “a significant effect on economic activity in the near-term,” whether that metastasizes into a prolonged downdraft depends in part on the what policy makers in response, including whether they succeed in avoiding market dislocations.

“The task at hand for governments and central banks has been and continues to be to ensure that the recession stays relatively short-lived and doesn’t morph into an economic depression,” Joachim Fels, global economic adviser for Pacific Investment Management Co., said in a report Sunday to clients.

Goldman Sachs Group Inc. economists now expect the economy to stagnate this quarter and shrink 5% in the subsequent three months. But they expect recoveries of 3% and then 4% in each of the next two quarters.

Besides the 100 basis-point rate cut and $700 billion QE program, the Fed reduced rates on its discount-window loans to banks and on its dollar swap lines with major foreign central banks. It also did away with commercial bank reserve requirements, freeing up what some analysts reckon is close to $150 billion for potential loans, as part of a surprise Sunday package.

Other central banks also acted Monday. Those of New Zealand and South Korea cut rates, while the Bank of Japan boosted asset purchases and others sought to keep markets liquid.

President Donald Trump, who has been relentless in his criticism of the Fed, welcomed Sunday’s moves.

“It makes me very happy and I want to congratulate the Federal Reserve,” he said. “That’s a big step and I’m very happy they did it.”

With interest rates now effectively at zero, many economists — and seemingly Powell himself — believe that it’s essential that Trump and Congress weigh in with more measures to support demand — just as happened in the 2008-09 financial crisis. Trump and fellow Group of Seven leaders are set to discuss the crisis by teleconference later Monday.

“We do think fiscal response is critical and we’re happy to see that those measures are being considered,” the Fed chair said.

Treasury Secretary Steven Mnuchin said on Sunday that an $8 billion emergency spending bill and a House of Representatives-passed economic relief plan for households are only the first two innings of a nine-inning baseball game.

“We have a lot more we need to do with Congress,” Mnuchin said. “We will make sure the economy recovers.”

What Bloomberg’s Economists Say…

“The Fed’s actions are aimed at the immediate objective of preventing a breakdown in financial markets, and the longer term objective of preparing the economy for the fastest-possible post-outbreak recovery.”

–Carl Riccadonna, Yelena Shulyatyeva, Andrew Husby and Eliza Winger

See more here

Powell argued that the Fed also has more tools to wield to aid the economy, including forward guidance on the future direction of short-term interest rates and more asset purchases. He did though seem to rule out taking rates negative — a tactic that other major central banks have employed.

“The Fed is now effectively out of the picture,” JPMorgan Chase & Co. chief U.S. economist Michael Feroli told clients. “They did what they could do but they can’t do much more.”

Fed watchers said the central bank may need to go further in its efforts to achieve what Powell suggested was its primary goal at the moment — keeping the markets functioning and credit flowing — though it’s not clear it can do that on its own.

Besides buying Treasury and mortgage-backed securities, some economists think the Fed should set up emergency lending windows as it did during the financial crisis to support specific segments of the market, such as commercial paper, which provides critical short-term financing for many businesses.

Read More:
  • The Fed’s Future Is Already Here as U.S. Joins Zero-Rate World
  • The Fed and Friends: What Central Banks Did in Past 24 Hours
  • Central Banks Coordinate to Boost Global Dollar Liquidity
  • Why the Fed Is Bringing Big Firepower to Combat Virus’s Threat
  • A Fed Decision Only Alan Greenspan Could Love: Daniel Moss

“The market is in effect saying cutting rates to zero and restoring market functioning in Treasuries and MBS is a necessary but not sufficient condition for restoring credit supply to households and businesses,” Krishna Guha, head of central bank strategy at Evercore ISI, said in an email.

Powell left the door open to further action on that front, though he also seemed to acknowledge that there was a limit to what the Fed could do.

“We don’t have the tools to reach individuals, and particularly small businesses,” he said.

Megan Greene, an economist and senior fellow at Harvard’s Kennedy School of Government, agreed.

“When it comes to directly supporting households and small and medium-sized enterprise facing a temporary sudden halt in income, fiscal policy needs to carry the weight,” she said. “So far the fiscal measures on the table are woefully insufficient, and until Congress does more and a natural peak for the coronavirus emerges, the markets are unlikely to find a bottom.”

— With assistance by Vince Golle, Steve Matthews, Catarina Saraiva, Matthew Boesler, and Christopher Condon

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Why the Fed Is Bringing Big Firepower to Combat Virus’s Threat

The Federal Reserve on Sunday concentrated a massive amount of monetary-policy firepower on helping the U.S. economy and financial markets weather the coronavirus outbreak.

The central bank slashed its benchmark interest rate by a full percentage point to near zero and promised to boost its bond holdings by at least $700 billion — a combined force aimed at thwarting the potential effects that include the possibility of large job cuts and revenue shortfalls at American businesses.

The following charts help show why the Fed, which had already cut interest rates by half a percentage point on March 3 in the first such emergency move since the 2008 financial crisis, took a bigger swing aimed at mitigating the disease’s negative economic impact:

Economic growth was steady around 2% prior to the outbreak. Now, with more Americans hunkering down at home and curtailing social activities from attending sporting events to dining out to travel, consumer spending is slowing. That explains why economists are dialing back economic-growth projections.

“We expect U.S. economic activity to contract sharply in the remainder of March and throughout April as virus fears lead consumers and businesses to continue to cut back on spending such as travel, entertainment, and restaurant meals,” Goldman Sachs Group Inc. economists led by Jan Hatzius said in a note to clients, adding that the slowdown could be classified as a recession. “Emerging supply-chain disruptions and the recent tightening in financial conditions will likely add to the growth hit.”

The risk of global recession has increased markedly in the face of economic stoppages. The Fed said it will keep interest rates near zero “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

To support smooth functioning in the Treasury and mortgage-backed securities markets, as well as keep borrowing costs low, the Fed said it would lift its holdings of Treasury securities by at least $500 billion and of MBS by at least $200 billion.

“It certainly won’t avert recession, but I think they have taken bold action to mitigate the risks from financial tensions that could make the negative economic shock from Covid-19 far, far worse,” said ING Groep NV Chief International Economist James Knightley. “It is the right thing to do — no reason to wait.”

Stocks have plunged as investors grapple with valuing companies whose earnings will suffer as economic activity slows sharply.

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Federal Reserve cuts interest rates to near zero in attempt to prop up US economy

The US Federal Reserve stepped in on Sunday to prop up the US economy in the face of the escalating Covid-19 crisis.

In its most dramatic move since the 2008 financial crisis the Fed announced it is cutting its benchmark interest rate to near zero and said it would buy $700bn in Treasury and mortgage-backed securities as it attempts to head off a severe slowdown.

The outbreak has already led to large US companies including AT&T, Ford and General Motors sending workers home and has hit industries, especially the travel and leisure industry, particularly hard.

In a coordinated effort to see off a potential global economic crisis, the central bank also said it was working with the Bank of England, the European Central Bank and others to smooth out disruptions in overseas markets.

“The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States,” the Fed’s rate-setting committee said in a statement. “The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses.”

The highly unusual move comes as Fed chairman Jerome Powell has been facing intense criticism from Donald Trump over the president’s perception that he has moved too slowly to cut rates.

On Saturday Trump claimed he had the power to remove or demote Powell, the latest in a series of threats against the independent central bank’s leader.

The week that shook the markets: in charts

The Fed moves comes after one of the worst weeks for US stock markets in decades. All the major US markets are now in “bear” territory, meaning they have lost 20% or more from their recent highs.

At a press conference on Sunday, Trump congratulated the Fed on the move. “It makes me very happy,” he said.

Many economists are already predicting that the US will go into recession as a result of the outbreak, ending the longest streak of economic growth in US history.

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Coronavirus Pandemic Puts Fed on Rapid Route to Zero: Eco Week

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With the coronavirus outbreak rewriting the rules of the global economy, the Federal Reserve is under increasing pressure to keep the flow of support coming this week.

The U.S. central bank is facing calls to slash borrowing costs to zero at or before Wednesday’s decision, adding to its attempt last week to buttress free-falling markets with extra bond purchases. The Bank of Japan is also expected to act, after a week that saw institutions around the world cut rates and unleash a raft of extraordinary targeted measure to keep economies afloat amid the spreading pandemic.

What Bloomberg’s Economists Say…

“Given the ongoing deterioration of both economic and financial conditions, as well as the Fed’s demonstrated willingness to act in a proactive fashion, Bloomberg Economics expects policy makers to move to the effective lower bound.”

–Carl Riccadonna, Yelena Shulyatyeva, Andrew Husby and Eliza Winger

With central banks — which are also scheduled to hold rate decisions from Switzerland to Brazil to Indonesia this week — running short of policy room, a greater onus is also falling on governments. Group-of-Seven leaders are due to discuss their response to the escalating crisis on Monday, as more and more nations introduce drastic measures to try to keep the spread in check.

Here’s what happened last week and below is our wrap of what else is going on in the world economy this week.


All eyes will be on the Federal Open Market Committee and its decision Wednesday, with the main questions being how deeply it will cut interest rates, what other actions might be announced and whether officials might even act before their regularly scheduled gathering.

Data on February retail sales and industrial production will give a sense of how the economy was performing as the coronavirus emerged in the U.S., while March factory indexes and homebuilder sentiment may show dents from the outbreak.

  • For more, read Bloomberg Economics’ full Week Ahead for the U.S.


China on Monday will announce industrial output, retail spending and investment numbers for the first two months of the year — giving a comprehensive look at the damage the coronavirus lockdown has done to the world’s second-largest economy.

Australia’s central bank will release minutes of its March meeting on Tuesday, with investors scouring them for views on whether another interest-rate cut and the adoption of quantitative easing lies ahead. On Thursday, central banks in Japan, the Philippines, Indonesia and Taiwan will meet just hours after the Fed’s decision is announced. All face pressure to increase monetary stimulus as the virus threat to global growth deepens by the day. On Friday, China will announce its loan prime rate, with economists expecting a 5 basis point reduction to both the 1-year and 5-year levels.

  • For more, read Bloomberg Economics’ full Week Ahead for Asia

Europe, Middle East and Africa

With most of Europe in partial lockdown because of the coronavirus, euro-area finance ministers are set to meet on Monday to discuss the state of the bloc’s economy as well as the measures their governments are taking to cushion the economic impact of the outbreak. A day later, Germany’s ZEW investor confidence indicator is predicted to show the weakest reading since August.

In the U.K., new Bank of England Governor Andrew Bailey kicks off his term in exceptional circumstances on Monday, while the nation is also scheduled to report jobs and public finances data from before the virus outbreak.

The Swiss National Bank is expected to hold on Thursday as the European Central Bank’s decision not to cut rates allows policy makers led by President Thomas Jordan to maintain its record low -0.75% interest rate. South Africa is expected to cut rates, while Turkey’s central bank, which has slashed interest rates to 10.75% from 24% last June, may find it difficult to heed President Recep Tayyip Erdogan’s calls to continue to single digits: the lira is trading at the lowest levels against the dollar since the currency’s 2018 meltdown.

In Russia, where policy makers meet on Friday, pressure is building on the central bank as President Vladimir Putin engages in an oil-price war with Saudi Arabia that’s sent the ruble plunging.

  • For more, read Bloomberg Economics’ full Week Ahead for EMEA

Latin America

On Wednesday, Brazil’s central bank will all but certainly cut its key rate for a sixth straight meeting from the current record-low 4.25%. Even before factoring in the expected drag on growth from the coronavirus outbreak, Latin America’s biggest economy is sputtering and inflation is right at the 4% year-end inflation target.

Earlier in the day, Chilean data is expected to show that the economy last year posted its poorest performance since the Great Recession. With prices for copper, the country’s biggest export, tumbling amid the coronavirus outbreak 2020 may be no better.

  • For more, read Bloomberg Economics’ full Week Ahead for Latin America

— With assistance by Benjamin Harvey, Malcolm Scott, Peggy Collins, Robert Jameson, and Viktoria Dendrinou

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Investors Clamor for the Fed to Slash Rates to Zero

All of Wall Street’s eyes are on Washington again, but only Federal Reserve Chairman Jerome Powell is catching its gaze.

With few encouraging signs of a comprehensive fiscal policy response from the U.S. government to the coronavirus, investors are looking to the central bank to fill the vacuum. It unleashed a trillion dollars but failed to halt the stock market rout. That has investors clamoring for the Fed to slash interest rates to zero next week — or sooner.

The Fed on Thursday announced massive repo operations and expanded securities purchases to ease “temporary disruptions” in the market. Stocks briefly rallied on the dramatic news but then resumed the slide, with the S&P 500 ending down a staggering 9.5% for the steepest losses since 1987.

Investors don’t believe Fed actions will do enough to shelter the economy from the virus without support from fiscal policies that remain under debate, despite assurances from President Donald Trump as recently as Wednesday in an address to the nation. His administration is talking to Congress about emergency legislation but it would still take time to sign anything into law.

While the Fed had hoped for a multi-pronged response by the government to contain the virus, which is disrupting national life and could end the country’s record-long economic expansion, it still has to do what it can to ease the pain and hasten the recovery.

“In light of the continued growth in coronavirus cases in the U.S. and globally, the sharp further tightening in financial conditions, and rising risks to the economic outlook, we now expect the FOMC to cut the funds rate 100 basis points on March 18,” Goldman Sachs Group Inc. chief economist Jan Hatzius and his colleagues wrote in a note Thursday.

The Federal Open Market Committee is scheduled to meet March 17-18 in Washington.

Deepening Alarm

Trump’s speech on Wednesday contained few details on fiscal stimulus measures, but his imposition of restrictions on travel from Europe to the U.S. deepened the sense of alarm.

“What’s changed is we thought we might get some meaningful policy response out of the White House. To the extent that we did get a response, it increased fear and uncertainty,” said Karl Haeling, head of strategic debt distribution at German banking group LBBW in New York. “We are moving toward a crisis of confidence in leadership generally.”

A growing number of economists — including at Morgan Stanley, Deutsche Bank Securities, Barclays and MacroPolicy Perspectives — have changed their calls and expect the Fed to use up its remaining policy space and cut to zero this month.

The Fed’s surprise move Thursday follows an emergency half-point rate cut last week that also failed to calm panicked investors as the virus spread. The most important input to economic analysis right now is the government’s response, and so far it’s been a disappointment.

Missing in Action

“The markets are reflecting a view that what we have seen so far from fiscal policy is insufficient,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank Securities in New York. “The severe tightening of financial conditions we have seen — credit spreads are widening and volatility is rising — will have significant effects on the economic outlook.”

Trump’s error-laden speech from the Oval Office Wednesday left investors stunned. Stock futures fell overnight and the slide deepened over the day.

But a cut of the benchmark lending rate to zero next week would leave the Fed with limited options to further stimulate the economy.

It could ramp up bond buying above the current $60 billion monthly pace. On Thursday it extended those purchases beyond bills to coupon-bearing notes across the yield curve. That move goes in the direction of the quantitative easing, or QE, used during the financial crisis, though the Fed isn’t currently buying bonds to deliberately lower yields.

Even if it took that step and announced QE4, long-dated yields don’t have much further to fall. Ten-year Treasuries were trading at 0.8% in late New York trading Thursday.

Eroding Confidence

The limitations on the Fed’s toolkit may also be eroding market confidence, which is leading some officials to say it is time to ask Congress for an expansion of what they can do.

“We should allow the central bank to purchase a broader range of securities or assets,” Boston Fed Chief Eric Rosengren said in a speech Friday in New York.

Even central banks that have broader powers are warning that these still won’t be enough to solve a crisis caused by a pandemic, which is disrupting everything from supply chains to travel.

“An ambitious and coordinated fiscal policy response is required to support businesses and workers at risk,” European Central Bank President Christine Lagarde said Thursday in Frankfurt. “Governments and all other policy institutions are called upon to take timely and targeted actions.”

Central banks can use their policies to address market liquidity and a big shock to aggregate demand, said Michael Hanson, global economist at JPMorgan Chase & Co. But they can’t do everything needed to curb the blow from a pandemic.

“You have this mythology around central banks that is becoming a little bit unraveled” during the coronavirus pandemic, Hanson said. “They are not superheroes, they are not going to save the world.”

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Fed Announces Emergency Rate Cut In Response To Coronavirus Outbreak

Even with the next monetary policy meeting just two weeks away, the Federal Reserve announced a surprise move to enact an emergency interest rate cut on Tuesday in response to the economic risks posed by the coronavirus outbreak.

The Fed announced that it has decided to lower the target range for the federal funds rate by 50 basis points to 1 to 1-1/4 percent.

In the accompanying statement, the Fed said the fundamentals of the U.S. economy remain strong but noted the coronavirus poses evolving risks to economic activity.

The central bank added that it is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.

The surprise move by the Fed comes shortly after finance chiefs from the world’s largest economies released a statement pledging to use “all appropriate policy tools” to address the economic fallout from the deadly coronavirus outbreak.

Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell led a conference call with the G7 Finance Ministers and Central Bank Governors to discuss the coronavirus.

In the statement released following the call, the G7 finance chiefs reaffirmed their commitment to use “all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks.”

The emergency rate cut, the first since the financial crisis, also came after President Donald Trump ramped up pressure on the Fed to lower rates.

“Our Federal Reserve has us paying higher rates than many others, when we should be paying less,” Trump said in a post on Twitter. “Tough on our exporters and puts the USA at a competitive disadvantage.”

“Must be the other way around. Should ease and cut rate big,” he added. “Jerome Powell led Federal Reserve has called it wrong from day one. Sad!”

The unanimous decision to cut rates was widely expected to be announced after the Fed’s next monetary policy meeting on March 17-18.

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Gold Futures Settle Modestly Higher On Safe-haven Demand

Gold prices rose on Friday as worries about the potential financial damage due to the coronavirus prompted investors to shun riskier assets and seek the safe haven of the yellow metal.

The dollar’s sharp decline and falling U.S. treasury yields supported gold’s uptick.

The dollar index dropped to 95.71 before regaining some lost ground. Still, at 96.11, the index was down as much as 0.74% from previous close.

Gold futures for April ended up $4.40, or about 0.3%, at $1,672.40 an ounce. The contract rose to a high of $1,690.70 before giving up a significant portion of its gains.

On Thursday, gold futures for April ended up $25.00, or 1.5%, at $1,668.00 an ounce.

Silver futures for May ended down $0.130 at $17.263 an ounce, while Copper futures for May settled at $2.5605 per pound, down $0.0125 from previous close.

Worries about the economic impact of the coronavirus spread continue to take a toll of riskier assets such as equities.

According to reports, the virus has infected over 100,000 people worldwide, and has killed more than 3,300 people.

The number of new infections due to the virus has risen in Italy, Greece, France and Iran. A cruise ship has been halted off the Californian coast to test passengers showing symptoms of the disease.

The Asian Development Bank has said the coronavirus outbreak will cut global growth by 0,1 to 0.4%, and will have a significant impact on developing Asian economies.

The outbreak and subsequent spread of the coronavirus “has brought with it new risks to the economic outlook”, New York Federal Reserve President John Williams said on Thursday.

This week’s 50-basis points rate cut was “strong policy action” that provides “meaningful support to the economy and will help sustain the economic expansion. But “the outlook is evolving and highly uncertain”, he added.

In economic news today, a report from the Labor Department showed employment in the U.S. surged up by 273,000 jobs in February, matching the upwardly revised spike in January.

Economists had expected employment to increase by about 175,000 jobs compared to the jump of 225,000 jobs originally reported for the previous month.

With the much stronger than expected job growth, the unemployment rate unexpectedly edged down to 3.5% in February from 3.6% in January. The rate had been expected to remain unchanged.

A separate report released by the Commerce Department showed the U.S. trade deficit narrowed to $45.3 billion in January from a revised $48.6 billion in December.

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