With stocks plunging Wednesday amid a resurgence in coronavirus cases and fears that the spiking numbers of infections will upend any progress made for the economy, the Federal Reserve is once again in the spotlight, with investors looking for help.
When the coronavirus pandemic froze capital markets and drove the economy into recession, the Federal Reserve was quick to move in with a $2.3 trillion package to attempt to bolster the economy. Up until now however, the central bank has only begun to scratch the surface of that support.
In the three months since a bevy of programs were released, the Fed has loaned out only $143 billion, just 6.2%, a small fraction of its total storehouse. Officials anticipate that will change soon however.
“The economy is getting better, so you’re not seeing as many firms short of cash as you’d seen in March and April,” said Yiming Ma, an assistant finance professor at the University of Columbia Business School. “Some of the terms are just not very attractive to firms who potentially do need the funds.”
But with stocks tanking again on Wednesday amid a resurgence of coronavirus infections in a number of states, the Fed may be pushed to start lending more.
The Dow Jones Industrial Average dropped 3%, while the S&P 500 traded 2.9% down and the Nasdaq Composite fell 2.6%. The Nasdaq has been making fresh highs recently and is targeting its first daily drop in nine trading sessions.
Stock index ETFs are tanking along with the underlying benchmarks. The SPDR Dow Jones Industrial Average ETF (DIA), SPDR S&P 500 ETF Trust (SPY), and Invesco QQQ Trust (QQQ) are trading all trading red Wednesday, as are most stocks and sectors.
“The latest coronavirus news is not positive for the stock market which was betting the worst of the pandemic recession was behind us,” said Chris Rupkey, chief dinancial economist at MUFG. “All the hopes of investors looking for a better economy to improve the bottom lines of companies shut down in the recession have been dashed. Forget about the fears of the virus coming back in the fall, the number of new cases and hospitalizations in states like Arizona, Texas, and Florida says the threat is happening right now.”
Still, despite the continuing pressure from the virus, and a slow process of disseminating funds from the available stimulus package, many investors and analysts believe the Fed has acted quickly and appropriately to stem as much damage as possible and avoid a potential depression-like scenario.
“The speed and magnitude that they acted on in the beginning was just phenomenal,” said Professor Ma, of Columbia University. “The Fed did an amazing job in the beginning of really preventing freezes in the credit market that would have really turned this economic crisis into a deeper financial crisis. It’s very early to tell on the success or failures of these programs.”
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