The Fed Goes Past All-In. Congress Drags Its Feet.

The U.S. Federal Reserve (the Fed) announced a barrage of policy measures this morning that collectively were both impressive and creative.

  • The main asset purchase program (previously $700 billion of Treasuries and mortgage-backed securities (MBS) was upgraded to have no dollar limit—effectively a whatever-it-takes approach to ensuring market functioning and accommodative financial conditions—and broadened to now also include commercial mortgage-backed securities (CMBS).

  • New purchase programs were announced of investment-grade corporate bonds in the primary and secondary market totaling $200 billion.

    Two notes here:

    First, the Federal Reserve Act does not allow the Fed to buy corporate bonds, but they seem to have gotten around the rules with an equity injection from the Treasury, their emergency powers under Section 13-3 and lending funds to a special purchase vehicle that will implement the purchases. Very creative.

    Second, in terms of the details, there's a provision that the Fed will allow companies to avoid paying any interest on the bonds for six months (subject to restrictions on dividends and buybacks) and has reserved the right to extend this provision as warranted. It's not quite as powerful as a cash injection, but those terms are about as good as it gets from a central bank.

  • Among other facilities, the Fed also teased a soon-to-be-announced “Main Street Business Lending Program” to support small business loans. We suspect the funding for this initiative is being negotiated as part of the current Senate bill. Details are in flux, but reports have suggested the Senate could earmark $425 billion of funding that the Fed could then lever up 10 times to $4.25 trillion for this program and others, similar to what was done with the corporate bond purchase programs today.

Markets awaiting U.S. fiscal stimulus package

As of midday Pacific time, U.S. and global equity markets are off a couple percentage points. The Senate had conditioned investors to expect its stimulus bill to pass today. While the politicians say they are “close to a deal,” two votes have already failed today and skepticism is setting in.

We’d make a couple of points here: First, as we’ve written about before, market selloffs can be a self-correcting force, pushing politicians to act and sometimes act in greater size than they otherwise would have. Second, there does appear to be strong bipartisan support to act, even if there may be tension over the details.

Monetary and fiscal stimulus measures continue across globe

Thematically, we are seeing the same forces of monetary and fiscal stimulus globally. For example, over the weekend the Australian government added 3.5% of GDP (gross domestic product) to their package—including cash payments to small businesses and income support for households. Globally we are tracking roughly $2.5 trillion of fiscal stimulus coming through the pipeline—a massive number that is approaching the level of support provided in the financial crisis of 2008 and 2009.

Coupled with more attractive valuation multiples on global equities and credit, now is a good time to remain committed to your long-term strategic asset allocation. We cannot forecast the turning point of the virus, but the standard building blocks for a recovery—an accommodative monetary and fiscal policy backstop—are falling into place.


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