The Federal Reserve pulled no punches on Monday morning when it announced ‘extensive new measures to support the economy’.
The US central bank said it is “committed to using its full range of tools to support households, businesses and the US economy overall in this challenging time”.
“Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and income and to promote a swift recovery once the disruptions abate.”
What is it doing?
The Federal Open Mark Committee (FOMC) “will purchase treasury securities and agency mortgage-backed securities (MBS) in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy”.
This differs from a previous commitment to buy at least $500bn (€467.7bn) of treasuries and at least $200bn of agency MBS.
The change forms part of a range of measures announced by the FOMC on 23 March.
Other elements of the plan include:
- Supporting the flow of credit to employers, consumers, and businesses by establishing programmes that, taken together, will provide up to $300bn in new financing. The Department of the Treasury, using the exchange stabilisation fund (ESF), will provide $30bn in equity to these facilities.
- Establishment of two facilities to support credit to large employers – the primary market corporate credit facility (PMCCF) for new bond and loan issuance and the secondary market corporate credit facility (SMCCF) to provide liquidity for outstanding corporate bonds.
- Establishment of a third facility, the term asset-backed securities loan facility (Talf), to support the flow of credit to consumers and businesses. The Talf will enable the issuance of asset-backed securities (ABS) backed by student loans, auto loans, credit card loans, loans guaranteed by the small business administration (SBA), and certain other assets.
- Facilitating the flow of credit to municipalities by expanding the money market mutual fund liquidity facility (MMLF) to include a wider range of securities, including municipal variable rate demand notes (VRDNs) and bank certificates of deposit.
- Facilitating the flow of credit to municipalities by expanding the commercial paper funding facility (CPFF) to include high-quality, tax-exempt commercial paper as eligible securities. In addition, the pricing of the facility has been reduced.
In addition, the Fed expects to announce soon the establishment of a main street business lending programme to support lending to eligible small-and-medium sized businesses, complementing efforts by the SBA.
Response
David Page, head of macro research at Axa Investment Managers, described the package “unprecedented” but said it is “incomplete”.
“One of the measures, the main street business lending programme, likely [requires] additional measures to be announced in the broader stimulus package that government is currently trying to pass.
“Nevertheless, the scale of the Fed’s intervention should not be understated, with the Fed providing a backstop for the majority of private sector liabilities.”
Button has been pushed
AJ Bell chief investment officer Kevin Doran said “the Federal Reserve have opted to go nuclear” in the wake of the European Central Bank and the Bank of England rolling out their “quantitative easing cannons”.
“Impressive in another era, but essentially still trench warfare in a world where the enemy has gone airborne.
“Providing liquidity to markets is helpful, but shoring up asset prices isn’t what’s called for this time around.
“What people are looking for is certainty over either their income or expenses.
“[UK chancellor] Rishi Sunak’s furlough funding scheme is a step in the right direction, but until these kind of policies themselves go viral, the panic will continue.”
