Federal Reserve Action and Market Volatility
In late March the Federal Reserve established the SMCCF (Secondary Market Corporate Credit Facility) to support credit to employers and provide liquidity for financial markets.
These new credit facilities gave the Federal Reserve the ability to purchase a larger array of financial products than traditional quantitative easing techniques previously allowed. This included the ability to purchase large amounts of investment grade corporate bonds through SPVs (Special Purpose Vehicles).
As shown in the chart above, this action by the central bank had a profound impact on the financial markets. In particular, the creation of these credit facilities caused a peak in volatility in both equity and credit markets.
The long-term impacts of the unprecedented monetary actions will remain to be foreseen. But for now, the Federal Reserve has been able to keep financial markets operating relatively calmly while the world navigates the Coronavirus pandemic.
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