The Federal Reserve, racing again to contain mounting economic and financial-market fallout from the coronavirus, unveiled a sweeping series of measures that pushed the 106-year old central bank deeper into uncharted territory.
In a surprise announcement Monday before markets opened in New York, the U.S. central bank said it will buy unlimited amounts of Treasury bonds and mortgage-backed securities to keep borrowing costs at rock-bottom levels — and to help ensure chaotic markets function properly. It also set up programs to ensure credit flows to corporations as well as state and local governments.
The Fed’s latest steps landed as investors wait for U.S. lawmakers to deliver a multi-trillion dollar package of coronavirus support, which failed to come together Sunday when Democrats objected that it did not do enough for average Americans.
Following a string of emergency measures last week, the moves also increasingly push the central bank into new territory by providing direct support to U.S. employers, municipalities and households, which would traditionally be viewed as fiscal policy.
“Wow, just wow,” George Rusnak, head of investment management at Wells Fargo Private Bank, said on Bloomberg Television.
“Hopefully you’ll come out of this with some fiscal stimulus as well, and you’ll be set with good growth opportunities in the long run.”
In a sign, however, of just how unnerved investors are by the pandemic, the Fed’s moves failed to spark anything beyond a brief rally in stocks and corporate bonds Monday after weeks of staggering losses.
Stocks fell 4.5 per cent in New York. Yields on 10-year U.S. Treasuries initially sank below 0.69 per cent as investors digested the news before pushing back to around 0.74 per cent.
Some pockets of the market reacted positively to the Fed moves. Signs of stress in the corporate debt sector eased, with the CDX Investment Grade index spread tightening. Bond ETFs eligible for central-bank purchases rallied and the dollar retreated versus major peers.
Monday’s Fed action followed an already-dizzying number of steps taken by Chairman Jerome Powell in the past three weeks that would have been unthinkable just months ago. They represent a dramatic reaction to the sudden stop inflicted on the economy by the contagion and by the subsequent panic among investors.
Group of 20 finance ministers and central bank chiefs separately joined an emergency call to work on a joint response to the economic blow dealt by the pandemic.
The U.S. economy is reeling as cases rise and the death toll mounts. Federal Reserve Bank of St. Louis President James Bullard predicted the U.S. unemployment rate may hit 30 per cent in the second quarter, along with a 50 per cent drop in gross domestic product. Morgan Stanley expects the U.S. economy to plummet 30 per cent in the second quarter.
The package included several unprecedented steps for the Fed, including intervention in the corporate bond market, purchases of commercial asset-backed mortgages and exchange-traded funds, and, if Congress clears the way, a significant Main Street lending program directly aimed at aiding small businesses.
Not a ‘Slush Fund’
“This is not a slush-fund,” U.S. Treasury Secretary Steven Mnuchin told Fox Business earlier on Monday. “It’s a mechanism we can use working with the Federal Reserve to provide another US$4 trillion of liquidity into the market. That’s on top of the Fed’s balance sheet. This is a massive liquidity program.”
Beyond the unlimited quantitative easing program, the new emergency facilities will employ a total of US$300 billion, backed by US$30 billion from the Treasury’s Exchange Stabilization Fund.
Roberto Perli, a former Fed economist and partner at Cornerstone Macro LLC in Washington, said he expects those facilities to grow substantially if Congress moves ahead with plans to pump more money into the ESF.
The draft of an economic aid bill currently being hashed out on Capitol Hill included US$425 billion for the ESF to support Fed actions.
The Fed’s new credit facilities carry limits on paying dividends and making stock buybacks for firms that defer interest payments, but have no explicit restrictions preventing beneficiaries from laying off workers.
The Fed said a week ago it would buy at least US$500 billion of Treasuries and US$200 billion of agency MBS. The Fed will now make those purchases unlimited and will take on a slew of new efforts, many aimed at directly aiding employers and households, as well as cities and states.
“This is a great step forward,” said Julia Coronado the president of MacroPolicy Perspectives. “Getting to the corporate bond market was critical. A lot of people needed to be clear the QE was unconstrained.”
- Two more programs were created to support large employers — a Primary Market Corporate Credit Facility for new bond and loan issuance, and a Secondary Market Corporate Credit Facility to provide liquidity for outstanding corporate bonds.
- Yet another program, a Term Asset-Backed Securities Loan Facility, will “enable the issuance of asset-backed securities backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration and certain other assets.
- The central bank also said it would expand the existing Money Market Mutual Fund Liquidity Facility to include a wider range of securities, including municipal variable-rate demand notes
- Finally, the Fed said it would expand the existing Commercial Paper Funding Facility to also include high-quality municipal debt, another move to help cash-strapped states and cities.
- “The Fed’s latest moves signal a resounding ‘whatever it takes’ approach from the central bank, and dispel any notion that monetary policy makers are either sparing ammunition or running out of unconventional tools,” Andrew Husby and Carl Riccadonna, of Bloomberg Economics, wrote in a note to clients.