By Nick Timiraos
The Federal Reserve is likely to significantly boost its government-bond purchases beyond the $500 billion minimum it committed Sunday to buy amid market strains that sent interest rates higher rise in recent days.
The Fed took a significant step in that direction Thursday, announcing it would purchase $150 billion in securities on Thursday and Friday -- on top of $125 billion in purchases earlier this week.
This means the Fed will have bought more than half of the $500 billion in Treasury securities in one week with little sign of restored market functioning, pointing to a growing likelihood for a much more aggressive round of purchases than appeared likely just a few days ago.
The central bank on Sunday also approved purchases of at least $200 billion in mortgage bonds.
Notably, the Fed didn't limit itself from additional purchases. Instead, the quantities announced Sunday, which it said would be executed over coming months, are minimum amounts the New York Fed has been directed to buy.
The recent, rapid pace of bond buying suggests Fed officials will need to consider in the coming days how to communicate their intentions about even-larger quantities of purchases amid a full-throated effort to prevent strains in financial markets from undermining national efforts to fight the coronavirus pandemic.
Mortgage bond markets have also shown severe strains in recent days, and the New York Fed said Thursday it would purchase $20 billion in those assets later in the day.
The Fed purchased more than $3 trillion in Treasury and mortgage securities in three separate rounds of bond buying, dubbed quantitative easing or QE, between 2008 and 2014.
To get a sense of the scale of recent purchases, the current round is on pace to exceed in just weeks the $600 billion in the second round of bond buying, called QE2, that the Fed conducted between November 2010 and June 2011.
Those programs were deeply controversial, drawing attacks from Republican lawmakers, conservative economists and some Fed officials. They warned it would lead to runaway inflation, which it didn't, or that it represented an improper incursion by the central bank into fiscal policy.
Thus far, the purchases have met with few, if any, objections from lawmakers on Capitol Hill.
While an initial round of purchases was focused on improving market functioning during the height of the 2008 financial crisis, most of the purchases were aimed at helping stimulate economic growth by pushing down long-term yields and encouraging investors to buy riskier assets like corporate bonds and stocks.
The current purchases are focused squarely on reducing turmoil in financial markets, rather than on stimulating economic activity.
Rising interest rates, now, when inflation is likely to decline means monetary policy is growing tighter at a time when the central bank is trying to ease financial conditions. Long-term bond yields have risen in recent days. Yields on 10-year Treasury notes have risen to more than 1.2% Wednesday from 0.6% on March 9.
"Higher real rates are a huge problem for the Fed and the global economy if they continue. In economic terms, they raise the cost of the recovery, " said Jim Vogel, an interest-rate strategist at FHN Financial.
For the Fed and the Trump administration, the purchases could prove to be one of the most powerful tools deployed by the U.S. government. Not only do the purchases pump money into the financial system and avert higher borrowing costs, but they could facilitate the massive federal budget deficits that will be needed to fight the virus and the economic toll it takes on the nation.
The Fed has been moving at the central bank's equivalent of light-speed to re-engineer a range of facilities to prevent credit markets from deteriorating further. In addition to bond purchases, the Fed cut its benchmark rate to near zero on Sunday.
It announced a lending facility on Tuesday to help unclog the $1.1 trillion market for short-term corporate IOUs called commercial paper, and another program on Wednesday to help money-market mutual funds to raise cash in order to meet redemptions they are facing.
On Thursday, the Fed said it would establish a temporary program to help lend billions of dollars at near-zero interest rates to central banks in Australia, South Korea and seven other countries, following an earlier round of these "swap" lines announced Sunday for central banks in Europe and Japan.
Write to Nick Timiraos at firstname.lastname@example.org