The Federal Reserve said it would pump trillions of dollars into the financial system in a dramatic response to signs of stress in short-term funding and US Treasury markets.
The US central bank is also making changes to its programme of Treasury purchases “to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak”.
For the third time in four days, the Fed’s New York arm announced on Thursday that it will increase the size of its lending in the repo market, where investors borrow cash in exchange for high-quality collateral like Treasuries — this time by multiples of the amounts previously on offer.
The action provided a jolt to US equity markets, which had been down as much as 8.8 per cent before the intervention amid mounting fear of the economic impact of efforts to contain the coronavirus. The S&P 500 index recovered some ground and was 5.5 per cent lower a half hour after the statement.
The Fed will now offer up at least $500bn in three-month loans, beginning immediately, with another $500bn of three-month loans on Friday. It said it would also provide a $500bn one-month loan on Friday that settles on the same day.
Beginning next week, the Fed said it would offer both three-month loans for $500bn and one-month loans for $500bn on a weekly basis through April 13.
It said it will alter the composition of its ongoing $60bn Treasury purchases for the month of March, to “roughly match the maturity composition of Treasury securities outstanding”, answering calls from traders concerned about deteriorating liquidity conditions.
The terms of operations will be adjusted as needed to foster smooth Treasury market functioning and efficient and effective policy implementation,” it added.