The Federal Reserve has gotten fairly aggressive in its response to the COVID-19 pandemic. In early March, after Wall Street began to recognize the widening outbreak as a threat to the economy and investors sent the major stock indexes down by more than 10% in a week, the central bank made an emergency 50-basis-point cut to the fed funds rate. Less than two weeks later, it cut the fed funds rate all the way to zero and announced a $700 billion quantitative easing program. And since then, it has made several other moves in an effort to keep financial markets functioning effectively.
But on Monday, the Fed took its liquidity-providing efforts to another level.
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Unlimited quantitative easing should help calm markets
The Fed announced that it will continue its asset-purchasing program "in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy."
In other words, the Fed isn't committing to a specific amount of asset purchases. In the wake of the financial crisis, the institution's balance sheet grew to more than $4 trillion thanks to three rounds of quantitative easing, so it's fair to assume that the central bank could end up purchasing far more than $700 billion worth of assets in its response to this crisis.
In addition, the Fed said that the unlimited asset purchases will include commercial mortgage-backed securities; the previous plan only included residential agency mortgage-backed securities.
There are two halves of the equation when it comes to ensuring the U.S. economy will keep operating during uncertain times like these -- fiscal policy and monetary policy. The Fed just made its biggest move yet to smooth the road ahead and calm investors' fears on the monetary side. If the widely anticipated third (and largest) stimulus bill makes its way through Congress in the next few days, that would be a massive relief on the fiscal side.
