What To Know About The Fed's Limitless Asset Purchase Order

Dow futures briefly hit their “limit down” overnight, but stocks ripped higher on Monday morning after the Federal Reserve lifted restrictions on its quantitative easing asset purchases and launched multiple new stimulus programs aimed at lending to small businesses and maintaining liquidity in the credit markets.

The Fed said it will no longer quantify its quantitative easing, seemingly pledging to devote any amount of money necessary to buying assets in the near-term.

“The Federal Reserve will continue to purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions,” the Fed said in a statement.

The Fed had previously announced it would buy at least $500 billion in Treasuries and $200 billion in MBS. The FOMC vote on the new program was unanimous.

New Programs

In addition, the Fed announced $300 billion in new financing to facilitate credit flow to employers, consumers and businesses. It also created the Term Asset-Backed Securities Loan Facility (TALF), which will support credit flow to consumers and businesses. The TALF will enable the issuance of securities backed by student loans, auto loans, credit card loans and loans guaranteed by the Small Business Administration.

The Federal Reserve also established the Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance and the Secondary Market Corporate Credit Facility (SMCCF) as facilities to support large employer credit in both the primary and secondary markets. The SMCCF will purchase investment-grade corporate bonds of U.S. companies and select U.S.-listed exchange-traded funds.

Finally, the Federal Reserve expanded the scopes of the Money Market Mutual Fund Liquidity Facility (MMLF) and the Commercial Paper Funding Facility (CPFF) to include additional assets.

Markets React

The market initially reacted positively to the prospect of limitless stimulus for the U.S. economy. The SPDR S&P 500 ETF Trust SPY traded higher by 2.4% in pre-market trading, while the SPDR Dow Jones Industrial Average ETF DIA was up 1.8%.

Craig Erlam, Senior Market Analyst at OANDA Europe, said Congress needs to follow the Fed’s example and get an aggressive stimulus package passed as soon as possible.

“Safe to say, the chaos of the last few weeks is going nowhere and the way this week has started, it could feasibly be the most remarkable week of the lot. There's no doubting that the Fed is doing everything within its power to see the economy through this period of unbelievable turmoil,” Erlam said.

Benzinga’s Take

When the Federal Reserve cut interest rates to 0%, many investors said it was “out of bullets” to combat the negative economic impact of the coronavirus outbreak. However, lifting restrictions on quantitative easing really does seemingly leave the Fed out of additional bullets to stabilize the economy and the markets short of cutting interest rates into negative territory.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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