Fed Issues Blank Check!

On Monday, the Federal Reserve announced that it is providing a backstop for the U.S. economy, by providing unlimited expansion of bond purchasing programs like Treasuries and mortgage-backed securities. The action is an attempt to ensure that individuals, businesses, and local governments have loans available to cover the time necessary for a bottom to be reached and an economic recovery to begin. The blank check is being made available to make necessary purchases “in the amounts needed to support smooth market functioning.” Not even the Great Depression saw such extraordinary move by the Fed.

“It has become clear that our economy will face severe disruption,” Fed leaders wrote in a statement. “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.” Initially, the Wall Street response looked positive, but as trading got underway the euphoria was short-lived. The president of the Saint Louis Fed, James Bullard, issued a warning that unemployment in the second quarter could reach 30%, a level higher than was seen during the Great Depression. A recession is inevitable at this point, but a serious depression could wreak far greater havoc.

As we’ve been warning for more than eight months, the Fed has very little left in its economic quiver. The market downfall we’re witnessing was inevitable, but the coronavirus and the recession it’s causing is sure to exacerbate anticipated economic woes to an even greater degree. The timing could not have been worse, as an overheated and oversold market is forced to brace for a large increase in unemployment and a serious tightening of consumer spending. With a majority of Americans struggling to pay the rent or mortgage, there will be little left for indulgences such as vacations or big ticket items, even once the coronavirus is contained and infections begin to recede. The government’s blank check may solve some short term problems, but ultimately will further contribute to the inflation that is sure to rear its ugly head.

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