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Fed policy is supporting credit market conditions and functioning, but effective fiscal policy is critical.

Starting in early March, the Federal Reserve has taken aggressive steps to soften the economic fallout from the pandemic and the measures taken to slow its spread. In short order, the Fed cut rates to zero and drastically increased its purchases of Treasuries and mortgage-backed bonds to support market liquidity and functioning.

The Fed established several programs and lending facilities to provide liquidity to various parts of the credit market and support access to credit for businesses and state and local governments. Market conditions remain volatile, but these programs have had a positive effect. The Fed’s actions and statements over the past few weeks are aimed at sending a clear message: The central bank stands ready to do whatever is necessary to promote credit market stability and liquidity.

Those actions were meaningful, but there are limits to the central bank’s ability. Fed policy can’t reduce the spread of the virus, lift quarantines, or convince Americans to spend. It can foster the functioning of markets, reduce the cost of borrowing, and promote conditions needed to reduce the impact of the downturn and set the table for recovery. Without question, the central bank’s rapid, decisive actions have provided a backstop to market conditions. Effective fiscal policy will be critical to providing support to households, businesses, and government entities impacted by the sudden slowdown.

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Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.

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