Fed takes emergency action to stave off a depression
James Bullard, President of the Federal Reserve Bank of St. Louis, discusses the Federal Reserve’s “planned temporary shutdown of the US economy” in response to the coronavirus crisis.
The Federal Reserve is signaling it will do whatever it takes to save the coronavirus-ravaged American economy from a depression.
The US central bank massively accelerated its rescue plans Monday by announcing unlimited bond-buying, three new credit facilities and an upcoming Main Street lending program.
Taken together, the Fed said the new programs will provide up to $300 billion in new financing to an economy getting crushed by the crippling health restrictions aimed at fighting the pandemic. The Fed is going all out to prevent the health crisis from turning into a full-blown financial crisis.
Crucially, the Fed pledged to buy bonds “in the amounts needed” to support markets, signaling there are no bounds to its rescue effort. And the Fed is invoking emergency powers to set up a special entity that will buy corporate bonds. The shackles have been removed.
That promise echoed Mario Draghi’s vow last decade to do “whatever it takes” to prevent the collapse of the eurozone.
US stock futures spiked on the new emergency actions from the Fed, which has already slashed interest rates to zero. Recession fears and a liquidity crunch have crashed the stock market over the past month and caused parts of the bond market to malfunction.
The Fed said it will support American households and businesses, but it acknowledged “our economy will face severe disruptions.”
“The coronavirus pandemic is causing tremendous hardship across the United States and around the world,” the Fed said in a statement.
Major steps announced include:
- QE infinity: open-ended quantitative easing. Just over a week ago, the Fed had set a limit of $700 billion on these bond-buying programs
- Fed will start buying commercial mortgage backed securities (CMBS)
- Two lending facilities to large companies: Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance, and the Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for existing corporate bonds
- Corporate bonds and even bond ETFs could be purchased by the Fed.
- Bringing back crisis-era Term Asset-Backed Securities Loan Facility (TALF) to support the flow of credit to consumers and businesses
- Expanding money market mutual fund liquidity facility to include wider range of municipal bonds
- Expanding commercial paper credit facility
And the Fed said it expects soon to launch a Main Street Business Lending Program to support small- and medium-sized businesses.
“This is an all-out effort to ensure that the business sector can continue to exist even as economic activity temporarily collapses,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a Monday note to clients. “The Fed is now effectively the direct lender of last resort to the real economy, not just the financial system.”
In other words, the Fed is doing everything it takes to prevent a major credit crisis.
Debt fears loom large
The social distancing policies imposed to fight the coronavirus crisis have brought the American economy to its knees. Malls are empty. Factories have been shut down. Casinos have gone dark. And countless flights have been suspended. The economic toll is massive.
Goldman Sachs warned second-quarter GDP could collapse by a record 24%. Unemployment claims could spike eightfold to 2.25 million this week. White House economic adviser Kevin Hassett said the United States could face a repeat of the Great Depression.
The central bank’s intervention into the debt market underscores fears about Corporate America’s massive debt load.
Aided by extremely low interest rates, US businesses have borrowed heavily over the past decade to hire workers, build factories, research new products and pay for share buybacks. That debt now looks especially treacherous as the economy goes into a tailspin.
Not only is the Fed buying ultra-safe government debt, but now it can effectively buy corporate bonds as well. The New York Fed is setting up a special purpose vehicle, funded by the Treasury Department, to buy corporate bonds. That’s a step the Fed never took during the 2008 crisis, though the ECB has resorted to this form of stimulus.
The Fed said its secondary corporate credit facility may purchase corporate bonds that are rated at least BBB, the last step before junk territory. And those bonds must have a maturity of five years or less. In another first, this Fed facility can also buy investment grade bond ETFs.