The Fed and ECB stand pat but will likely shift to longer-term stimulus

Overview from recent Fed and ECB meetings

The US Federal Reserve (Fed) did not change its policy rate or its path in last week's Federal Open Market Committee meeting. Nor did it introduce new asset purchase or credit easing programs. The Fed has already done a lot and done it quickly over the past month, and the focus is now on implementation, working out details and explaining them to the public. The Fed's current quantitative easing (QE) program is focused on market functioning, which has been largely effective.

As for the longer-term and forward guidance, Chairman Powell emphasized that the Fed will not raise interest rates anytime soon and that market pricing is in line with that. While the Fed's current focus is to ensure the orderly functioning of markets, the focus will likely shift in coming meetings to longer-term stimulus and supporting economic recovery.

At its meeting last week, the European Central Bank (ECB) unveiled a package of liquidity provision measures intended to support the flow of credit to corporations and households. The key measure was sweetening the terms of its important funding-for-lending program, the Targeted Long-Term Operations (TLTRO) program. The borrowing rate for banks was reduced from -0.25% to -0.5%, but if banks maintain a threshold level of lending over a period of time, the borrowing rate can be further reduced ex-post to -1%. These are generous terms for banks. Second, the ECB introduced the Pandemic Emergency Longer-Term Refinancing Operations (PELTROs) program, which is an additional backstop for the banking system. It aims to bridge gaps in the TLTROs and provide support to money markets.

While neither the ECB nor the Fed announced significant new programs or policies last week, their decisive and unprecedented actions in recent months have been very supportive of market functioning and quality credit assets in general.

Learn more about the credit bounceback supported by the past Fed actions.

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