China News Client Beijing March 24th (Cheng Chunyu Xie Yiguan) witnessed history again! However, it is not the history of the US stock market meltdown, but also the history of the Fed's "king bombing".

On March 23rd (local time) local time, the Federal Reserve launched its most radical move-opening the door to unlimited quantitative easing (QE). What does unlimited QE mean? Can American stocks be rescued from the plunge?

Data map: US Federal Reserve Chairman Powell. Photo by Shaoxing Ting, China News Agency

Fed's most radical move: unlimited QE

The US Federal Reserve announced on the 23rd that it will adopt a wide range of new measures to support the economy. It will continue to purchase US Treasury bonds and mortgage-backed securities to support the smooth operation of the market. There is no ceiling, which is equivalent to an open quantitative easing policy. At the same time, the Fed also announced that it would expand the scale of money market liquidity facilities.

The Fed said in a statement that it will purchase "necessary-sized" government bonds and mortgage-backed securities to support the smooth operation of the market and the effective transmission of monetary policy, and will include institutional commercial mortgage-backed securities into the purchase category.

The Fed said it will buy $ 75 billion in Treasuries and $ 50 billion in institutional home mortgage-backed securities every day this week, with daily and regular repo rates quoted to be reset to 0%. At the same time, the Fed will begin to provide unprecedented credit support to households, small businesses, and major employers.

The Fed said in a statement that the measures were taken because the new crown pneumonia epidemic is causing great difficulties in the United States and the world. "It has become clear that our economy will face severe chaos." The public and private sectors must take proactive measures to limit losses to employment and income, and promote rapid economic recovery after the epidemic is brought under control.

This is by far the most aggressive market intervention by the Federal Reserve since the outbreak of the new crown pneumonia outbreak in the United States. Earlier, the Federal Reserve has cut the target range of the federal funds rate to between 0% and 0.25%, announced the launch of the US $ 700 billion quantitative easing policy, and the commercial paper financing mechanism that was only used during the 2008 financial crisis and the Great Depression.

Chris Rupkey, chief financial economist at MUFG Union Bank, said, "The Fed's policy is shifting to higher gears, trying to help support an economy that currently appears to be in free fall." "The central bank is changing its role and is no longer the last loan. People, but the last buyer. Don't ask how much they will buy, this is truly unlimited quantitative easing (QE). "

Hongye, Managing Director of Bank of Communications International, said that open-ended purchases of treasury bonds, MBS (mortgage-backed securities), bond ETFs (trading open-end index funds); establishment of ABS (asset securitization), student loans, credit cards and small business loans TALF (Term Asset Guaranteed Securities Loan Facility); also prepares small business loans. The US Federal Reserve put all its bets on it, opened unlimited, bottomless QE, and the global market was in jubilation. This is a historic moment.

Data map.

What does unlimited quantitative easing mean?

Quantitative easing is an unconventional monetary policy. It mainly means that after the central bank implements the zero interest rate or near zero interest rate policy, it purchases medium and long-term bonds such as government bonds to increase the base money supply and inject a large amount of liquid funds into the market. Quantitative easing is often described as "indirect printing of banknotes".

From the end of 2008 to October 2014, the Federal Reserve successively introduced three rounds of quantitative easing policies, with a total purchase of assets of about $ 3.9 trillion.

"'Infinite QE' is the ultimate currency credit." The chief fixed income analyst at CITIC Securities clearly believes that the word "infinite QE" is more signal than practical. The Fed's policy is undoubtedly to boost Market confidence.

Zhang Jun, dean of the School of Economics at Fudan University, believes that the Fed ’s policies are meant to save the market, but to give everyone a peace of mind, but it may also create further panic and some policies that inject liquidity into the market will not really solve the epidemic ’s impact on the US economy The problem of shock.

Zhang Ming, director and researcher of the International Investment Research Office of the Institute of World Economics and Politics of the Chinese Academy of Social Sciences, commented that the Fed ’s actions to a large extent undermined the Federal Reserve ’s monetary policy independence established by Volcker in the 1980s . In the long run, it will damage the dollar's international standing. In the short term, once market sentiment has stabilized, the US dollar index will enter a new round of bear market.

Why do European and US central banks frequently use QE? Obviously, it is because the failure of the credit expansion of the banking system is related to too low interest rates and strict regulatory requirements. But most importantly, the lack of growth due to the fragility of the global economic framework. In the ten years after 2008, the world ’s currency has finally achieved a growth rate of about 2%. In 2020, due to the impact of the epidemic, the world is likely to see large-scale negative growth again. At this time, banks are definitely unwilling to expand credit, because not only are there no gains, but they also have a lot of credit risk. Therefore, it is only possible to rely on the central bank for credit expansion.

As of press time, the US stock market's intraday chart.

Can unlimited QE stabilize US stocks?

The Trump administration ’s $ 2 trillion fiscal stimulus bill had just failed in a key procedural vote in the Senate before the Fed “protected the disk”. Affected by this news, the US stock index futures on the 23rd triggered a meltdown.

"Is unlimited QE effective in suppressing the epidemic? Ineffective; effective in boosting the economy? There is uncertainty; effective in preventing defaults on junk bonds and investable corporate bonds? Uncertainty exists; effective in stabilizing the stock market? Maybe Yes, "Zhang Ming said.

After the Fed's unlimited QE news came out on the 23rd, the US stock index futures once rose and turned straight up, but then the three major US stock indexes opened and fell, and the S & P 500 index fell 1.66% to 2266.62; the Nasdaq index opened. It fell 0.62% to 6,87.06 points; the Dow Jones index fell 1.87% to 1,814.77 points at the start of the day. At the beginning of the trading day, the decline in U.S. stocks further expanded. The Dow and the S & P 500 index once fell more than 3%, a new low since US President Trump took office in January 2017.

As for other financial market indexes, as of press time, the financial market panic index VIX is now up 8%. European stock markets followed the decline of US stocks. British, French, and German stocks collectively turned green. The French CAC40 index and the German DAX index fell nearly 2%. Brent crude futures fell nearly 3%. Safe-haven funds have once again flowed to U.S. Treasury bonds, etc. The yield on U.S. 10-year Treasury bonds fell to a daily low of 0.744%, and the London gold spot is now up nearly 3%.

Zhang Jun bluntly stated that the financial markets were panicked first, and the Fed had expressed its hope that it would stabilize, but it may not be stable because the epidemic situation has not been controlled and is still developing. The development of the epidemic will cancel or slow down economic activities. It directly impacts GDP and causes economic growth, which in turn will have a greater impact on financial markets.

Pan Xiangdong, chief economist of New Era Securities, told reporters on the China News Network that the Fed's continuous injection of liquidity into the market will not save the impending recession.

Pan Xiangdong said that because of the new crown pneumonia epidemic, consumers had to reduce consumption, and producers had to stop work. At the same time, enterprises also faced a sharp reduction in orders brought by the future shrinking consumption. Some companies may face a cash flow crisis due to the sharp decrease in income, and may even have to face the risk of bankruptcy. The resulting increase in unemployment will exacerbate the economic recession. These economic activities, the Fed's injection of liquidity will not have much effect.

If the US stocks continue to fall in the future, what other measures does the Fed take? In Zhang Ming's view, the possibility of the Fed's next announcement of a direct purchase of stock market ETFs, large blue chip stocks, or investable bonds is not ruled out. (Finish)