The modern-day Merlin pulls out the QE Infinity spell from his pocket.

The modern-day Merlin pulls out the QE Infinity spell from his pocket.

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In September 2019, the Federal Reserve began conducting its fourth quantitative easing operation since the 2008 financial crisis; on 15 March 2020, it announced approximately $700 billion in new quantitative easing via asset purchases to support US liquidity in response to the COVID-19 pandemic. As of mid-summer 2020, this resulted in an additional $2 trillion in assets on the books of the Federal Reserve. QE1, QE2 & QE3 were just the little test kids of the Fed’s laboratory. Now the game has changed forever.

It’s to infinity and beyond as the US Federal Reserve announces unlimited asset purchases to support markets roiled by Coronavirus panic and an oil price war.

“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. 

That effectively means that the Fed is willing to engage in large-scale asset purchases for as long as it takes to set markets straight. It will also significantly expand the range of that program to include corporate bonds issued by “investment grade US companies and US-listed exchange-traded funds whose investment objective is to provide broad exposure to the market for US investment-grade corporate bonds.”

The Fed’s previous actions – including the multitrillion-dollar expansion of its overnight repo program – have done little to calm markets amidst uncertainty over the Coronavirus outbreak.

“The Fed has thrown another lifeline to markets and the economy as the COVID-related disruption continues to ripple through the system,” said Anna Stupnytska, global head of macro at Fidelity International. 

“As its earlier interventions failed to abate severe stresses that have emerged in both US Treasury and mortgage-backed security (MBS) markets, the Fed has now pulled out the ultimate card – QE infinity – committing to unlimited purchases of government bonds and MBS. In addition, a number of new lending facilities have been unveiled, aimed at supporting the US corporate sector and households. This includes an unprecedented step of buying corporate debt – something other major central banks have done since the last crisis, but the Fed had so far managed to avoid.”

Further measures include the reopening of the Term Asset-Backed Securities Loan Facility (TALF), which will enable the issuance of asset-backed securities backed by student, auto, and credit card loans, as well as loans guaranteed by the Small Business Administration (SBA). 

“The Coronavirus pandemic is causing tremendous hardship across the United States and around the world,” the Fed said. 

“While great uncertainty remains, 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.”

Or as the legendary investor Jim Rogers put it best: "This is very unsound economics."


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