Fed goes ‘all-in’ to stabilize markets
The Federal Reserve continued its “aggressive” and unprecedented actions to try to stem the economic bleeding caused by reaction and shutdowns related to the COVID-19 outbreak.
Analysts say that while the Fed continues to try everything in its power, fiscal stimulus from Congress and getting the virus contained will be instrumental in calming the markets.
“The initiatives involve open-ended, massive [quantitative easing], purchases of investment grade corporate debt on the secondary market and a number of other programs that will increase the flow of liquidity into an array of financial sectors and support ongoing lending,” according to Mickey Levy, Berenberg Capital Markets' chief economist for the U.S. Americas and Asia, and U.S. Economist Roiana Reid.
The Fed is being more aggressive than it was responding to the 2008-2009 financial crisis, they said, having “clearly learned” from that crisis. And while the actions should “help financial markets to operate as efficiently as possible during the acute stage of this current crisis,” Levy and Reid said, they “do not and cannot contribute to fixing the health crisis and can only partially mitigate the negative economic fallout from the various mandated government shutdowns.”
Some of the moves “are a radical departure from normal Fed operations and reflect the intensity of the Fed’s efforts to stem the financial crisis” in its “role of lender of last resort for investment grade firms that are adversely affected by the pandemic and government shutdowns,” they added.
“The Fed went all in on Monday, announcing unlimited, open-ended QE among numerous other measures to support the economy and markets," said Craig Erlam, senior market analyst, UK & EMEA at OANDA. “There's no doubting that the Fed is doing everything within its power to see the economy through this period of unbelievable turmoil. The coronavirus has wreaked havoc global and ground the economy to a halt forcing drastic action from the fiscal and monetary authorities. It's time for Congress to get its act together as well.”
“The Fed once again shows it’s prepared to do whatever it takes to lubricate financial markets and keep credit flowing,” Dec Mullarkey, managing director, investment strategy at SLC Management noted. “As it expands its playbook beyond what was used in the financial crisis to supporting commercial paper, municipal lending and corporate bonds — it’s leaving no stone unturned in assuring that credit markets don’t freeze.”
In the face of an economic shutdown, the Fed is moving to keep credit markets open, he said. “The comprehensive scale of these moves is beyond anything imagined several weeks ago.”
In its announcement, the Fed said: “Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate.”
The release said the Federal Open Market Committee (FOMC) will buy Treasuries and “agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy,” basically open-ended QE, after saying last week it would purchase “at least $500 billion of Treasury securities and at least $200 billion of mortgage-backed securities.” The Fed will also buy “agency commercial mortgage-backed securities.”
The Fed will also provide up to $300 billion in new financing for loans “to employers, consumers, and businesses” in an Exchange Stabilization Fund (ESF).
It also created “the Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance and the Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds.”
A Term Asset-Backed Securities Loan Facility (TALF), will “support the flow of credit to consumers and businesses,” allowing “the issuance of asset-backed securities (ABS) backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA), and certain other assets.”
It will expand the Money Market Mutual Fund Liquidity Facility (MMLF) — to include municipal variable rate demand notes (VRDNs) and bank certificates of deposit — and the Commercial Paper Funding Facility “to include high-quality, tax-exempt commercial paper as eligible securities.” This includes municipal VRDNs.
But BNP Paribas Securities' Chief U.S. Economist Daniel Ahn said he was most excited about the measure the Fed “teased”: a Main Street Business Lending Program for small-and-medium sized businesses.
While the overall package is “a little tiled toward investment grade,” Ahn said “ground zero is small- and medium-sized firms, which are cash poor.” And helping those businesses survive is “absolutely critical,” since they are “the most affected sector of the economy.
While he’s “reasonable hopeful” the Fed “has put out the fire for the moment,” Ahn said a fiscal package from Congress and signs the virus is contained will be crucial for the markets to find a bottom.
Marc Odo, client portfolio manager at Swan Global Investments, said “corrections and bear markets are natural part of investing. However, government policy has been to extinguish any and all ‘fires’ before they took hold.” As a result, there’s “too much excess and ‘dry tinder,’ and once ignited the fire has become an inferno the government can't control.”
He added, “Treasuries saw the traditional spike during the ‘flight to safety’ but investors must take into account the longer-term impact of locking up their money at a 0.75%-1.5% yield. With people now talking in trillions, all funded by debt, the long-term outlook for bonds is not good.”
Additionally lost revenue resulting from the crisis “will worsen our economic outlook. With unemployment surging and a recession unavoidable, tax revenue will also take a big hit,” Odo said.
“The inability of Congress to agree to a stimulus package over the weekend is reminiscent of the negotiations around the TARP package during the global financial crisis,” he said. “There will be a stimulus and relief package soon; Congress simply cannot wait much longer."