Fed announces open-ended asset-buying programme

US central bank will buy assets linked to small business loans, credit card loans and student debt as it tries to make sure money flows through the economy

Federal Reserve chairman Jerome Powell. The Fed made an open-ended commitment to buy bonds "in the amounts needed to support smooth market functioning" on Monday.  AP Photo

The US Federal Reserve said it was committed to using its “full range of tools to support households” as it announced an unprecedented open-ended asset purchase programme.

The Fed said it would buy bonds and asset-backed securities "in the amounts needed to support smooth market functioning", citing a mandate from Congress to promote maximum employment and keep prices stable.

It also pledged to buy a broad stream of assets from commercial paper held by large employers to asset-backed securities linked to student loans, car loans, credit card loans and small business loans in a bid to ensure credit flows through the whole economy.

The Fed said on Monday, “It has become clear that our economy will face severe disruptions”.

“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.”

Despite the announcement, US markets were trading sharply lower on Monday as investors await the details of a third fiscal stimulus package of up to $2 billion (Dh7.34bn) from policymakers.

The Dow Jones Industrial Average was down 3.8 per cent, the S&P500 index fell 4.7 per cent and the Nasdaq Composite fell 2 per cent.

Gold prices jumped, with spot gold trading 2.6 per cent higher at $1,422.57 per ounce, and one-month gold futures up 3.6 per cent at $1,542.20 per ounce at 7.09pm UAE time.

"The Fed move created an explosive upward move in the gold price," said Naeem Aslam, chief markets analyst at forex broker Avatrade.

"We have been saying all along that gold price below $1,500 is a bargain. However, it is important to keep in mind that if the current move fails to calm the market nerves, then we have a real problem because the Fed is completely out of all bullets," Mr Aslam said, adding that gold could fall again if panic selling ensued.

Goldman Sachs forecast that GDP in the US is set to decline by 24 per cent in the second quarter of 2020, but said a recovery in the second half of the year would mean a GDP decline of 3.8 per cent for the world’s biggest economy this year.

JP Morgan forecast a shallower GDP decline of 14 per cent in the second quarter, but also a shallower recovery.

“There is no longer doubt that the longest global expansion on record will end this quarter. We now think that the Covid-19 shock will produce a global recession, as nearly all of the world contracts over the three months between February and April,” said Bruce Kasman, JP Morgan's chief economist.

Neil Shearing, group chief economist at Capital Economics in London said that on the basis that most economies will face widespread shutdowns of 10 to12 weeks, most economies will suffer quarter-on-quarter GDP declines of between 10 to 20 per cent either in the first or second quarter of the year, depending on when the impact of the virus is most keenly felt.

"We've marked our forecast for global GDP in 2020 down from plus 2.9 per cent year-on-year to minus 1 per cent. That would eclipse the fall in output in 2009 [minus 0.5 per cent] and be the worst year for the global economy since the 1940s."