The U.S. Federal Reserve said it will buy an unlimited amount of government debt, as well as corporate and municipal bonds, in the biggest expansion of its balance sheet in history.
The Fed said it will buy Treasury bonds and mortgage-backed securities, which form the basis of its traditional quantitative easing program, in "in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy", a massive increase from the $700 billion in announced last week. It will also add purchases of corporate debt, municipal bonds and other assets as it balance sheet looks set to balloon from its current $4.7 trillion level.
"The Federal Reserve is committed to using its full range of tools to support households, businesses, and the U.S. economy overall in this challenging time," the Fed said. "The coronavirus pandemic is causing tremendous hardship across the United States and around the world. Our nation's first priority is to care for those afflicted and to limit the further spread of the virus."
“It has become clear that our economy will face severe disruptions," the statement added. "Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate.”
U.S. stock futures rallied sharply on the news, but gave back those gains as the cash trading session started, with the Dow falling 200 points after the opening bell and the S&P 500 retreating 20.5 points in the opening minutes of dealing.
The CBOE's key volatility gauge, known as the VIX, was marked 6.5% higher at 70.3, and some 13 points south of its record high, but options traders are still pricing in a 70% chance that the S&P 500 will rise or fall by 70% over the next year.
The U.S. dollar index, which tracks the greenback against a basket of six global currencies, was marked 0.90% lower in the session but still held at three-year highs of 101.94 as benchmark 10-year Treasury notes rallied to 0.75%.
The Fed "will purchase in the secondary market corporate bonds issued by investment grade U.S. companies and U.S.-listed exchange-traded funds whose investment objective is to provide broad exposure to the market for U.S. investment grade corporate bonds," it said, and will also establish a new $300 billion financing program, in conjunction with the Treasury, to support the flow of credit to employers, consumers and small businesses.
Last week, the European Central Bank launched a €750 billion ($820 billion) QE expansion that included, for the first time, no limits on the amount of bonds the Bank could buy from individual member states.
Soon after, the Bank of England cut its main interest for a second time this month, taking it to 0.1% and the lowest levels in its 300 year history while warning of a "sharp and large" economic decline as a result of the coronavirus outbreak.
The BoE also said it would boost its largely-dormant quantitative easing program by £200 billion ($234 billion) and increase the size of a scheme designed to entice banks to lend into the real economy.