The US Federal Reserve has delivered some glum news for financial markets and regulators around the world: it doesn’t expect the credit freeze to ease for at least the next six months.

The looming fear of credit market collapse, rising defaults and continuing cuts in bank lending have forced the Fed to promise to pump $US800 billion to $US1.4 trillion of extra liquidity into US financial markets over the next six months, according to a statement issued on Friday.

It was the Fed’s second major attempt in six weeks to relieve the growing stresses in financial markets and after this there’s not much else it can do except cut interest rates to 1% or lower and hope.

The news of the massive credit injection came before the February US jobs figures revealed worsening employment with 63,000 jobs lost, compared to unduly optimistic forecasts of a 25,000 gain from market economists.

The combination of the Fed’s move, the jobs figures and the record level for credit spreads and insurance prompted the Lex column in Saturday’s Financial Times to remark that: “There is a hierarchy of precedents for financial crises. After a very nasty week in markets, the whispers are that it might even be the big one: the worst crisis since the 1930s.”

The Fed meets again in eight days with markets pricing in a cut of at least 0.50% to 2.5% as the economy grinds lower into recession. US analysts now think the Fed will cut all the way to 1% on its Federal Funds rate to soften the blow.

Many economists, including JPMorgan Chase, said the jobs figures confirmed the US economy had finally tipped over into recession; Goldman Sachs said the US was almost definitely in recession.

Peter Fray

Fetch your first 12 weeks for $12

Here at Crikey, we saw a mighty surge in subscribers throughout 2020. Your support has been nothing short of amazing — we couldn’t have got through this year like no other without you, our readers.

If you haven’t joined us yet, fetch your first 12 weeks for $12 and start 2021 with the journalism you need to navigate whatever lies ahead.

Peter Fray
Editor-in-chief of Crikey

JOIN NOW