The Federal Reserve pledged that it would continue to provide liquidity and keep interest rates at zero until economic conditions materially improve. It sees the coronavirus having a negative impact on economic activity, employment, and inflation for a prolonged period of time.

Given that inflation readings are also at historically low levels, there is no pressure on the Federal Reserve to raise rates anytime soon. This was affirmed by Chair Jerome Powell at his press conference where he said, "We're not going to be in a hurry to withdraw these measures or to lift off. We're going to wait until we're quite confident that the economy is on the road to recovery."

Actions to Date

In addition to cutting rates to zero, the Fed has also started ten different programs to support credit markets, provide loans, and inject liquidity in order to prevent a negative, economic spiral. Essentially, the Fed has prevented a liquidity crisis in which companies are unable to get funding. The effects of it are already clear in terms of recovery prices in assets and the huge number of bond offerings in April.

Equally important, Powell also emphasized that "there was no limit" to the Fed's purse, and more aggressive action was coming if it would be necessary or conditions didn't sufficiently improve. The Fed has immense power, but it can also achieve so much just by signaling what it's going to do.

For example, the Fed was concerned about the weakness in investment-grade debt (LQD  ) during March and announced it would start buying corporate bond ETFs. Although this program hasn't started, the ETF returned to pre-coronavirus levels, rates dropped, and issuance was strong. In effect, it achieved its aims without doing anything other than signaling its intentions to be the liquidity provider of last resort.

Housing Bubble vs Coronavirus Response

It's interesting to compare the Fed's quick and aggressive actions during the current crisis to the housing crash. The housing bubble started to deflate in 2006 and intensified in 2007. Policymakers at the time didn't see the risks of it snowballing and beginning to affect the broader economy. At the time, Fed Chair Ben Bernanke labeled it "contained". It wasn't until 2008 when balance sheet losses for banks led to a liquidity and solvency crisis. It's quite possible that if the Fed acted earlier, much of the financial and economic damage could have been prevented.

Impact on Asset Prices

Many asset prices have recovered to pre-virus levels. Others more directly impacted by the virus such as physical retail, restaurants, casinos, airlines, and hotels remain significantly lower. One explanation is that the Fed's actions have removed the "tail risk" of a financial crisis that could emerge from an economic crisis. For companies whose top-line and bottom-line are un-impacted by the coronavirus, they are now able to benefit from looser financial conditions.