The Fed is running out of options to stave off a coronavirus depression
These are troubling times for the US Federal Reserve. The US central bank is trying everything it knows to pull the financial markets out of their tailspin but nothing seems to work.
Before Wall Street opened the Fed announced that its new plan was to provide infinite amounts of money through its quantitative easing programme. The response of traders was to shrug and carry on selling.
In truth, though, this was little more than a massive holding operation. The Fed was buying time so that two things can happen: Donald Trump manages to get a fiscal rescue package through Congress and there are definitive signs of a slowdown in the incidence of new Covid-19 cases.
It didn’t really help the prospects of a market rally on the back of the Fed’s announcement that Wall Street and the rest of New York’s financial district were locked down along with the rest of the city, but in the end the central bank had little choice.
Here’s how things looked from the Fed’s Washington DC HQ. Figures due out on Thursday could show that 2 million Americans have been laid off in a week as a result of the coronavirus pandemic. The financial markets looked to be about to have another sharp fall. Congress had failed over the weekend to agree a $1.8tn (£1.6tn) rescue package.
As the Fed noted in a statement, the pandemic is causing “tremendous hardship” not just in the US but around the globe. When it said the US economy would face “severe disruptions” that was a classic piece of central bank understatement. These are the sort of “severe disruptions” that John Steinbeck would have recognised.
Time then for the Fed to act like the grownup in the room by pledging to provide unlimited amounts of money to the financial system through its QE programme – under which the central bank buys government bonds and other assets for cash.
The Fed announced a $700bn package of asset purchases only eight days ago but was working its through that sum extremely quickly to try to calm down markets bordering on the dysfunctional.
As a result, it has gone much further than it did during the financial crisis of 2008 by making QE open-ended. It also expanded the range of assets that it is prepared to buy and announced a joint operation with the US Treasury to provide direct support to businesses and consumers. The Fed will provide up to $300bn of new financing to firms and households, with the Treasury providing $30bn to cover any losses.
The Fed will create a primary market corporate credit facility that will provide new loans on generous terms to investment-grade companies. There will be no interest payments for the first six months and analysts expect takeup to be high.
In addition, the Fed has got round an act that prevents it buying corporate bonds through the establishment of a special purpose vehicle that will buy the debt of companies rated BBB (just above junk status) or better.
The world’s most powerful central bank is pushing at the boundaries of its mandate in ways that carry both political and commercial risk. It doesn’t care about that. The fear of a second Great Depression is to the US what fear of a return of hyperinflation is to Germany: something to be avoided at all costs.
That said, the Fed is running out of options. Short of getting approval from Capitol Hill to start buying shares, it is not immediately obvious what more it can meaningfully do. The onus is now on Congress to act and to act quickly.
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