To soothe the markets, the Fed will purchase at least $500bn of Treasuries and $200bn of mortgage-backed securities
Central banks are not known for their spontaneity. They do not tear up their calendars lightly. And when they do, it is not usually a good sign. Both the Bank of Japan and America’s Federal Reserve were scheduled to hold policy meetings later this week. But neither felt they could wait that long.
If that was all it needed to do, it could probably have waited until its regular meeting on March 17th and 18th. But it also faced a more urgent problem in two of the most important financial markets in the world: those for mortgage-backed securities and American Treasury notes. In times of crisis, such as recessions, wars or today’s covid-19 pandemic, investors flock to American Treasuries as a safe haven, driving their prices up and their yields down.
Will further measures be necessary? Mr Powell pointed out that the economy was likely to shrink in the second quarter, as firms and people hunker down to avoid infection. Growth could be as low as -5%, at an annual pace, according to Goldman Sachs. Efforts to slow the spread of the virus also inevitably slow the economy. In China, which has gone further than most to contain the pandemic, industrial production shrank by 13.5% in January and February, compared with the previous year.
The Bank of Japan cannot afford to be so particular. It introduced negative interest rates more than four years ago and has been buying equities, through exchange-traded funds , for even longer. Although Japan has been more successful than Europe or America in slowing the spread of the covid-19 virus, its economy was already shrinking before the epidemic emerged.
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