Fed Opens Floodgates on COVID-19
The 3-minute take on the Federal Reserve’s unprecedented actions
The U.S. Federal Reserve has reached a “whatever it takes” moment with the U.S. economy and the markets.
Federal Reserve Bank of St. Louis President James Bullard has warned that U.S. unemployment could hit 30% in the second quarter due to coronavirus-driven shutdowns. Economists are forecasting a fall in U.S. GDP in the April-through-June period of 20% to 30%.
The Fed’s response?
Following a $700 billion wave of coming liquidity meant to revive seizing capital markets, the Fed on Monday, March 23rd delivered a second tsunami to keep markets functioning in the wake of this month’s historic volatility.
- The Fed is deploying a slew of new programs to keep key arteries of the market’s circulatory system working, including first-time-ever purchases of agency commercial mortgage-backed securities; purchases of investment-grade corporate securities directly from issuers and in the secondary market; and buys of equity exchange-traded funds.
- The Fed is expanding its Money Market Lending Facility for municipalities via purchases of tax-exempt high-quality muni securities, including variable rate demand notes (VRDNs), rates of which sky-rocketed last week, and bank CDs.
- The monetary authority also called its Financial Crisis-era Term Asset-Backed Securities Lending Facility, or TALF, back into duty, allowing the Fed to extend non-recourse loans for institutional purchases of securities collateralized by small-business loans, auto loans, student loans, credit card and other assorted loans. The TALF and the two facilities to buy corporate securities leverage $30 billion in equity capital from the Treasury through the Exchange Stabilization Fund (ESF), for a total $300 billion in firepower. More will be coming if Congress agrees to increase the ESF.
Markets shrugged at the Fed’s latest intervention, perhaps in part because investors have been waiting for a fiscal stimulus package to bolster the Fed’s monetary exertions.
We have witnessed intense market volatility as investors scramble to raise cash and as leveraged positions violently unwind amid computer-driven trading that tends to prioritize speed over price.
Once the rates of new coronavirus infections plateau in the U.S. and Europe, and then start to decline, as they have in Northeast Asia, people will gradually get back to work and economies will start to rebound. In the meantime, we believe that the actions of the Fed and other central banks, in conjunction with coming fiscal stimulus, could keep a liquidity crisis at bay and reduce the scale of corporate insolvencies.