Two emergency meetings in two weeks: How the Fed ended up back at zero
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An emergency 50 basis point cut from the Federal Reserve on March 3 was not enough to stop market turmoil, and on Sunday night, the central bank made another abrupt announcement by slashing rates to zero.
Fed Chairman Jerome Powell said the central bank’s actions over the past two weeks did not calm financial conditions as policymakers hoped, spurring the second emergency meeting.
In addition to pushing rates down to zero, the Fed also restarted the crisis-era policy of asset purchases, announced U.S. dollar swap lines, and eased bank rules to encourage lending.
After the Fed’s 50 basis point cut, the central bank’s New York office attempted to flood money markets with money through its temporary repurchase agreement operations.
The repo market provides financing for banks and broker-dealers at the center of the economy, allowing the levered institutions to cover positions on their balance sheet by lending sums of cash to one another. The New York Fed has been offering its own repos since last September’s flare up in money markets.
Here is a recap of the Fed actions taken over the last couple of weeks:
Tuesday, March 3:
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The Fed abruptly slashes interest rates by 50 basis points to a target range of between 1.00% and 1.25%. A statement detailing the unanimous decision: “The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity.”
Sunday, March 8:
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JPMorgan’s global markets strategy team writes that high yield and U.S. dollar markets are flashing early signs of stress, warning that “credit channels might start amplifying the economic fallout from the COVID-19 crisis.”
Monday, March 9:
Oil prices crash after production cut negotiations between Russia and Saudi Arabia collapse. Overnight, bond yields fall sharply as the 10-year touches an all-time low of 31 basis points.
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Before the opening bell, the New York Fed announces that it is expanding the size of its overnight repo operations from $100 billion to $150 billion.
Wednesday, March 11:
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New York Fed further expands overnight repo operations to $175 billion.
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New York Fed offers longer-term agreements: a $45 billion two-week term repo and three one-month term repos of $50 billion each.
Bond yields rise as the stock market extends its sell-off, defying the normal dynamic of Treasury yields falling as investors shift from equity positions into risk-off assets.
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Evercore’s Krishna Guha and Ernie Tedeschi write that Treasury markets, largely seen as among the most liquid markets in the world, are “starting to feel dysfunctional.”