Since March, the Fed has injected a series of liquidity operations to continuously refresh the policy bottom line.
(1) First, an emergency interest rate cut of 50 BP was conducted on March 3. This is the first time that the Fed has cut interest rates outside of the interest rate meeting for the first time since 2008.
(2) March 12 raised the limit of reverse repurchase and injected short-term liquidity through open market operations.
(3) On March 16, it suddenly cut interest rates to zero again, and announced a QE of at least US $ 700 billion. (the fourth quantitative easing in history) , To buy 500 billion US dollars of national debt and 200 billion US dollars Fannie Mae, Freddie Mac issued MBS, referred to as two-room MBS) .
(4) The commercial paper financing mechanism was reopened on March 17, bypassing the bank’s direct purchase of corporate short-term commercial paper to protect corporate cash flow.
(5) On March 18th, the money market mutual fund liquidity tool (MMLF) was launched until September.
(6) On March 19th, we established temporary dollar swap arrangements with the central banks of nine countries, including Australia and Brazil, to ensure the liquidity of the US dollar between countries.
On March 23, the Fed issued an announcement announcing the use of a “full set” of tools to support the capital market and the real economy, using its “full power” to provide “strong” support for credit flows to the US economy.
The Federal Reserve will also continue to purchase government bonds and institutional mortgage-backed securities to provide market liquidity. It will purchase US $ 75 billion of national debt and US $ 50 billion of institutional housing mortgage-backed securities every day for a week after March 23. This is the normal operation of the Federal Reserve, or QE.
In addition, the Fed will include purchases of institutional commercial mortgage-backed securities in its institutional mortgage-backed securities purchases. In fact, the Fed is promising that as long as investors are willing, the government bonds in the market can be exchanged to the Fed for US dollars indefinitely. In other words, investors can access USD liquidity at any time.
The QE scale is expected to easily exceed the previous three QE scales.
What ’s more radical than cutting interest rates and QE is that the Fed has begun direct assistance to various market entities in the US real economy and capital markets:
①For physical enterprises and consumers: provide 300 billion US dollars in new financing projects, the Ministry of Finance will use the foreign exchange stabilization fund The project provides $ 30 billion in equity.
②Long-term credit for large enterprises: In the credit and bond markets, develop primary market corporate credit financing tools for large enterprises. (PMCCF) and secondary market credit financing instruments (SMCCF) .
③ Short-term credit for large enterprises: By expanding commercial paper financing tools (CPFF) , high-quality, tax-free commercial papers are qualified Assets are included in the scope of purchase.
④ Asset securitization market for assets such as short-term credit: student loans, auto consumer loans, credit card loans, small business administration (SBA) guaranteed asset-backed securities (ABS) to support these assets to avoid default.
⑤For local governments: By expanding the coverage of money market mutual fund liquidity financing facilities (MMLF) to ensure more local governments The issuance of bills, deposit certificates and other securities.
These complex measures are summarized in one sentence: the Fed bypasses commercial banks and purchases assets or provides guarantees directly in the bond and credit markets, and the logic behind it is the unlimited expansion of the Fed’s balance sheet,Because the Fed has a skill that no one else in the world has: It is legal to turn paper into dollars .
Three goals of the Fed’s “God Action”
To gain insight into the logic behind the Fed’s series of “historic” operations, it is important to understand the Fed’s policy goals. After the major stock market disaster of 1987, the Fed’s policy goals increased the goal of stabilizing the capital market on the basis of promoting employment growth and stabilizing prices. Therefore, since 1987, the Fed has been focusing on the performance of the capital market. For the capital market, the Fed has the following three goals.
1. Volatility of national debt and two-room MBS
Actually, it is not the stock market that has fallen, the Fed is about to save the market. The Fed’s most important target on the capital market is the volatility of Treasury bonds and two-room MBS. Because the US dollar is the reserve currency and anchored assets of the entire global financial market, the US government endorsement, excellent credit bonds and the two-room MBS interest rate are actually the world’s anchored interest rates. Once the volatility of these interest rates becomes large and becomes ups and downs, the global bond market will become confused, new bonds cannot be issued, and various types of bonds cannot be reasonably priced. A large number of investors will sell these extremely unstable Of bonds, causing bond prices to plummet and bond yields high. As a result, the rise in long-term interest rates in the economy represented by the bond interest rate will cause the financing cost of the real economy to rise and damage the economy and capital markets.
The reality is that since March 4, the volatility of US Treasury yields has risen sharply, which has been up and down, which the Fed is very reluctant to see. This is because behind the greatly volatile bond market, the market’s preference for liquidity has risen sharply under panic, that is, investors are selling assets to obtain cash as a safe asset, but under large fluctuations, the selling behavior will continue to increase. Only when the bond market stabilizes will liquidity pick up. So The Fed’s large number of QEs is to fight down the volatility of national debt and two-room MBS.
The above analysis can explain that (Knowing the internal model of the Federal Reserve indicates that for every USD 1 trillion of QE, Can only bring about 0.2% -0.3% GDP growth) , why does the Fed carry out large-scale QE.
2. Term spreads
The second easing policy intention of the Federal Reserve is to narrow the maturity spread of government bonds, and when the short-end interest rate falls to extremely low, reduce the long-term interest rate by purchasing government bonds, thereby reducing the cost of long-term funds . This also explains why the Fed is eager to reduce policy rates to zero before launching QE.
Many people in the market are criticizing the Fed for cutting interest rates sharply to zero, worrying about running out of bullets. What do we do in the future? In fact, at this critical moment, the purpose of the Fed’s interest rate cut is not to directly stimulate the economy, and the Fed also knows that in the liquidity trap, the effect of interest rate cuts to stimulate the economy is limited.
The purpose of cutting interest rates is actually to prepare for QE, because a large number of QEs have lowered the long-term interest rate. If the short-term interest rate is not lowered, the term interest rate will be inverted, and a large number of financial institutions will “borrow short-term loans” (borrow short-term money and buy long-term assets) . Inverted maturity interest rates will cause financial institutions to have higher debt costs than asset returns, which will cause financial institutions to lose money. Generate potential systemic risks.
3. Credit spread
Large credit spreads indicate that investors’ risk appetite is extremely low in a panic mood, and companies with poor credit need to pay extremely high interest rates to borrow money. These high interest rates form a large difference with other high-quality bond rates.