16 to 22 March: The Fed deploys targeted tools, whilst Capitol Hill stalls

We wrote about the Federal Reserve’s (Fed) comprehensive set of measures last week, which were taken to reduce debt service costs, ensure credit flow to the economy and to reduce liquidity-related stress in financial markets. The Fed took further steps during the week by expanding the number of open USD swap lines with central banks (including some emerging central banks, such as the Brazilian, Mexican and South Korean), setting up a special purpose vehicle backed by the Treasury’s guarantee to purchase commercial papers, establishing a liquidity facility to enhance the functioning of state and municipal money markets amongst a raft of other measures. In our opinion, the Fed is attempting to target as many segments of its domestic money market as possible, whilst doing its best to distribute USD liquidity through most economically significant geographical regions. These targeted tools serve as proof that the Fed is doing everything it can to prevent the sudden stop in economic activity turning into a financial crisis.

Meanwhile, the fiscal rescue package in the US got stuck in the Senate on Sunday, as the motion to advance the legislation failed on a 47-47 vote, short of the 60 votes needed. The total value of the blocked agreement would have totalled a meaningful USD 1.3tn (about 6% of GDP). Democrats claimed that the Republican-designed package favoured corporations, whilst not going far enough to aid individuals facing unemployment and loss of income. We are of the view that lawmakers in the US need to find the common ground as soon as possible to increase visibility and reduce economic uncertainties as much as possible to limit the magnitude of the (expected) recession and to speed up the recovery phase.

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