Bullard says market ought to relax over Fed loan programs ending

Financial markets should not fret if the Federal Reserve’s emergency lending facilities are not extended at the end of this year, when all but one are due to expire, Federal Reserve Bank of St. Louis President James Bullard said.

“Whether we extend them or not may not be that material to financial markets because we can always start up the liquidity programs again in the future,” said Bullard, wading into a partisan debate that has divided Democrats and Republicans in Congress. “Even if you said we are going to shut them all down and something happened in 2021, we could open them all back up again,” he told reporters on a conference call Friday.

Almost all the Fed’s array of emergency lending programs, launched this spring to stabilize markets and extend credit to U.S. companies as the COVID-19 pandemic took hold, terminate on Dec. 31.

Federal Reserve Bank of St. Louis President James Bullard

There’s broad agreement that most of them have worked well in quelling the panic that froze markets as the virus took hold. They assured investors that the Fed was there as a backstop and would act as lender of last resort to broad swathes of the economy if needed. But with markets now calm, the discussion about keeping them on the Fed’s books has turned political.

Some Republicans in Congress are opposing an extension, arguing the programs have served the purpose for which they were intended.

These include Pennsylvania Sen. Patrick Toomey, who serves on congressional oversight commission created to keep tabs on what’s being done with the taxpayer money that stands behind the facilities.

“There are many strong reasons that these programs should not be extended past year-end,” he said in an interview with Bloomberg News Thursday, arguing that the problem they were created to fix has been solved.

“They were always intended just to serve that very discrete purpose of restoring functionality to our market, they were never meant to be a permanent tool in the toolbox of the Fed,” he said.

Democrats, noting surging infection rates, say the facilities should be kept in place for as long as the virus remains a threat. Four powerful Senate Democrats wrote to Fed Chair Jerome Powell and Treasury Secretary Steven Mnuchin last week to make the case.

“Although these programs have been only lightly used, they have had tremendous signaling for the market and guidance that has helped restore market liquidity and market depth,” said Gemma Wright-Casparius, senior portfolio manager at Vanguard Group Inc. “There is no harm in leaving them there given that we possibly are going to go through more winter COVID dominate-type headlines before we get the vaccines rolled out and widely distributed.”

Most of the facilities are largely idle. Fed officials have talked enthusiastically about the benefits of having them as backstops in case the virus delivers another economic hit, but publicly have treaded carefully on the topic.

“From a market perspective the key idea has been the Fed is willing and able to act as a backstop to these various markets. Knowing that, that’s what affects behavior,” Bullard said.

Bloomberg News
Monetary policy Federal Reserve Bank of St. Louis Federal Reserve James Bullard FOMC Coronavirus
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