Faced with the crisis, the Fed (Federal Reserve, central bank of the United States) was very quick to act by significantly adjusting its rates, with a first drop of 0.50% at first. Then, facing the explosive deterioration of the economic situation and on the financial markets, the Fed continued its muscular action with a surprise drop of 100 basis points at once (or 1%) to bring the range of the key rate between 0% and 0.25%. A rate cut accompanied byan asset purchase program 700 billion dollars including 500 billion on treasury bills and 200 billion on MBS (mortgage credit securities). But despite that and despite ECB announcements, volatility continued to progress on the equity markets with an SP500 volatility index (the VIX) which approached its historic record marked during the 2008 crisis a few days ago.
But despite the scale of these emergency measures announced on March 15 (a Sunday evening just before the opening of the American futures markets), the Fed proceeded very quickly with these purchases: 340 billion treasury bills and MBS were purchased in just one week. Almost half the program! Faced with the speed of the deterioration of the American economy (several American banks anticipating 2-digit declines in GDP in the 2nd quarter) and persistent stress on the markets, with containment measures increasing in the United States, the Fed further accelerated the pace on Monday. She announced that she will make $ 625 billion in asset purchases this week alone!
Logically, the expansion of the Federal Reserve’s balance sheet accelerated. It hit a new record high at 4670 billion dollars by exceeding the previous record marked in 2015, it should reach 5000 billion in the coming days or the equivalent of 23% of American GDP.
Evolution of the Fed’s balance sheet (click on the image to enlarge)
Alexandre Baradez, head of market analysis at IG France
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