More Heavy Lifting from the Fed—While Congress Squabbles

The US Federal Reserve continues to use whatever tools it can to help combat economic fallout from the coronavirus. Sonal Desai, Chief Investment Officer, Franklin Templeton Fixed Income, calls its latest response “a whole new level” of stimulus.

The Federal Reserve (Fed) today raised its response to the coronavirus crisis to a whole new level, announcing open-ended quantitative easing (QE) as well as purchases of short-dated investment-grade (IG) corporate debt and exchange-traded funds (ETFs), measures that had not been adopted even at the height of the global financial crisis just over a decade ago.

The decision to buy corporate debt takes a page from the European Central Bank’s playbook, and disproves market concerns that this step might be beyond the Fed’s institutional reach; the fact that purchases will target the whole investment-grade spectrum and not be limited to AAA issuers is bold.

The decision to purchase ETFs follows the Bank of Japan’s example, and expands the purchase of IG debt to longer maturities. Together, these measures show that the Fed understands the need for a creative, decisive and adaptive strategy to fight the current crisis.

The Fed announced a raft of new measures and facilities aimed at: (i) providing targeted relief to affected households and businesses; (ii) giving broad support to economic activity; and (iii) ensuring the smooth functioning of money and credit markets. These include:

  • Open-ended QE. On March 15, the Fed had launched $700 billion in asset purchases. Today, it announced it will purchase Treasuries and agency mortgage-backed securities (MBS) “in the amounts needed” to keep markets functioning smoothly and ensuring monetary policy can do its job. The sky is the limit, in other words.
    • The scope of purchases is now broadened to encompass agency commercial.
  • New facilities to support credit to households and businesses with up to $300 billion in new financing, seeded with $30 billion in equity by the Treasury:
    • A Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance; this will provide four-year financing to investment-grade companies, and borrowers will be able to defer interest and principal payments for the first six months (extendable at the Fed’s discretion). The PMCCF will extend loans through a Special Purpose Vehicle (SPV) seeded by the Treasury.
    • A Secondary Market Corporate Credit Facility (SMCCF) for outstanding corporate bonds across the investment-grade spectrum as well as ETFs; this will also work via a Treasury-seeded SPV.
    • A Term Asset-Backed Securities Loan Facility (TALF) to support the issuance of asset-backed securities (ABS) based on student, auto, credit card loans and loans guaranteed by the Small Business Administration.
  • Expansion of the Money Market Mutual Fund Liquidity Facility (MMLF) and the Commercial Paper Funding Facility (CPFF) to a wider range of securities.
  • Planned launch of a Main Street Business Lending Program to support lending to small- and medium-sized businesses.

Three crucial things to note, in my view, to assess the likely impact on the economy and markets.