MERISTEM INSIGHTS

THE USS FEDERAL RESERVE

As the pandemic unfolded, the Federal Reserve took unprecedented actions to combat the economic fallout and restore liquidity to several key areas of the market. This included such measures as slashing its benchmark rate to near-zero and implementing enormous buying programs of select securities like Treasuries, mortgage-backed bonds and “fallen angel” high yield debt. Though some referred to the aggressive stimulus measures as the “Fed bazooka”, in actuality it was more like the “Fed aircraft carrier.”

Source: Variant Perception

The chart above illustrates that the amount of liquidity in the market now exceeds previous bear markets like the dot-com bust and the Great Financial Crisis. What is truly astounding, however, is the sheer rapidity of the stimulus. Where previous Fed administrations took several months to implement more accommodative polices, this recent stimulus was injected in the span of just a few weeks. We are seeing multiple signs that this liquidity is supportive of a broad range of equity and credit markets. This jaw-dropping dynamic is also emblematic of a more aggressive Fed that Chairman Jerome Powell described as one that, “will not run out of ammunition.”

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