Updated 3:20pm ET March 23, 2020
Federal Reserve doing whatever it takes
The Federal Reserve isn't just talking about doing whatever it takes to support the U.S. economy right now, it's doing it.
Earlier this morning, the Fed unveiled a series of new initiatives that build on prior measures designed to improve the functioning of financial markets and to promote the expansion of credit and liquidity in the U.S. economy.
In particular, the Fed lifted the $700 billion cap on its purchases of Treasury and agency MBS, saying that it will buy "in the amounts needed," which also now includes agency commercial MBS. There is no limit. The new line in the market is that it's "QE infinity."
That's not an outlandish line.
The Fed said today that it will be doing things it has never done. For instance, it will be buying investment-grade corporate bonds, municipal debt, and U.S.-listed exchange ETFs with an objective to provide broad exposure to the market for U.S. investment grade corporate bonds.
It has established a Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance and a Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds.
Notably, if an issuer uses the PMCCF and elects to defer interest payments, that issuer will be prohibited from paying dividends or making stock buybacks during the period it is not paying interest.
The Fed is also establishing a Term Asset-Backed Securities Loan Facility (TALF), like it did during the financial crisis, and will be taking a pioneering step that includes the establishment of a Main Street Business Lending Program that will support lending for eligible small-and-medium sized businesses, complementing efforts by the SBA.
The monetary policy stimulus efforts are being ramped up to meet the debilitating economic challenges of the spreading coronavirus, which the Fed acknowledged is causing "tremendous hardship" across the U.S. and around the world.
These new measures are complements to prior stimulus measures already taken by the Fed.
The speed at which the Fed is announcing these programs is partly a reflection of the crisis-management lessons it learned during the financial crisis when it had to think outside its normal policy toolkit box of lowering interest rates. At the same time, it reflects just how bad it is out there for all businesses, and individuals, dealing with a sudden economic stop that has never been seen in such scale.
The problem for the Fed at this point is that it's only one-third of the solution. The other two-thirds, namely the flattening trajectory of the coronavirus infections and the fiscal stimulus response, are still indeterminate.
The Fed's quick-footed actions are laudable. Unfortunately, they aren't enough to restore consumer, business, and investor confidence at this time. They will have more impact in the future, though, when consumers, businesses, and investors are more confident that the worst of the coronavirus impact is over.
In the meantime, the Fed is doing what it can with the clear message that it is going to do whatever it takes to keep confidence from eroding further and to help the U.S. economy recover in due course.
--Patrick J. O'Hare, Briefing.com
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