Fed asset purchases focused on fixing ‘market malfunction’

The Federal Reserve’s decision to again purchase longer-term U.S. government debt will address turmoil in the government bond market, said Allianz Chief Economic Adviser Mohamed El-Erian.

“It’s a very good thing that the Fed is finally reacting, because we cannot afford to have market malfunction reverse-contaminating what’s happening in the real economy,” El-Erian told Yahoo Finance’s On the Move on Friday.

On Thursday, the Fed announced that it would be buying a “range of maturities” of U.S. Treasuries. On Friday, the Fed provided more detail and clarified that it would include bonds with durations of up to 30 years as part of its $60 billion of purchases each month.

For the past few trading days, the U.S. Treasury market showed signs of illiquidity as bond yields rose. But bond yields normally fall when the stock market sells off, raising concern that the usual bond traders were sidelining themselves as the coronavirus continued to roil markets. 

The Fed’s intention to buy Treasuries of all duration hopes to provide liquidity by adding the central bank as its own counterparty in the bond market.

Balancing fiscal and monetary policies

El-Erian said the Fed is only part of the solution, emphasizing that the U.S. government ought to to figure out a holistic way to address the economic impact of the coronavirus.

“If you just cut interest rates, cut tax credits, it’s not going to make people go to the movies, it’s not going to make people get back on airlines,” El-Erian said.

El-Erian said fiscal policymakers need to prioritize access to credit for small to medium companies, adding that financing the medical sector is critical.

On Friday, the Trump administration declared a national emergency. President Trump also announced a number of measures such as public-private partnerships to provide coronavirus tests, waiving interest on all federal student loans, and buying “large quantities” of oil.

El-Erian said the governments and central banks ultimately need to work together to battle the virus.

“We should be one big orchestra playing the same tune, with the same sheet of music,” El-Erian said.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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