What else can the Fed do to mitigate the impact of the coronavirus?
By Hannah Lang and Jim Dobbs
WASHINGTON – The Federal Reserve made it clear on Tuesday that it was ready to go beyond cutting interest rates to mitigate the economic fallout from the coronavirus.
But following its rebirth of a facility backed by commercial debt and the establishment of a credit facility for primary dealers, the question that still hangs over the Fed is how far the central bank is willing to go to ensure that credit continues to flow to consumers and businesses.
“They may have to get creative here because liquidity throughout the system is freezing,” said Mark Zandi, chief economist at Moody’s Analytics.
The commercial paper facility announced on Tuesday resembles the one the Fed put in place during the mortgage crisis of 2008. The agency restored the safety net under its emergency powers in section 13 (3) of the Federal Reserve Act, following criticism that its previous actions to reduce the federal funds rate to zero in response to the crisis were insufficient.
Yet immediately after the Fed’s announcement of the facility, observers were divided among those who saw the stocks as the full the extent of what the Fed can do, and those who believe the Fed may feel pressured to do more.
“Our expectation remains that the pressure will be on the Federal Reserve to expand its use of 13 (3) to ensure there is enough credit for businesses and households,” said Jaret Seiberg, Cowen analyst. Washington Research Group, in a note.
Zandi said the Fed may consider launching more credit facilities to help other parts of the liquidity market, such as asset-backed securities. Still, he and several others said the Fed had already gone to great lengths in response to the virus outbreak and there was little that could be done.
“[The Fed is] running out of wiggle room here, ”Zandi said. “Responsibility is changing rapidly or has already shifted to the Trump administration and Congress to enact fiscal stimulus.”
Indeed, much of the focus this week has been on economic stimulus proposals from Congress and the White House, including the idea of giving all Americans direct cash payments.
The establishment of the two credit facilities was just the latest steps the central bank has taken in recent weeks to ensure the availability of credit, as fears about the coronavirus have grown rapidly.
Safety net for commercial debt issuers will allow consumers and businesses to bypass banks access credit, which “will ensure the proper functioning of this market” during a period of economic stress, the Fed said.
The move was widely anticipated as part of the Fed’s larger recent efforts to pump as much liquidity into the financial system as possible – a move that resembles the central bank’s playbook during the financial crisis.
“Now we have a situation where we could potentially have corporate and household credit issues, so the Fed is realizing this unequivocally and it wants to avoid any kind of credit freeze or any breach of credit facilities, and that’s why she pumped so much money into short-term funding, ”said Dec Mullarkey, Managing Director of SLC Management.
The commercial paper market is an essential short-term lending facility for businesses, many of which frequently use the market to pay their bills or do payroll, Zandi said.
“Yes [businesses] can’t issue commercial paper or short-term IOUs, and can’t raise funds, so they’re going to turn off the lights and cut jobs, and that’s going to be cataclysmic for the economy, ”he said. he declares. “So it’s absolutely necessary.”
The new facility could also help small businesses and consumers who may not have directly benefited from the Fed’s emergency rate cuts this month in the short term.
“It’s not a panacea, but it should help kick-start things,” said James Bradshaw, analyst at Bridge City Capital.
Mike Matousek, trader at US Global Investors, said the uncertainty surrounding the ultimate impact of the novel coronavirus on the consumer-driven economy gives the Fed a reason to establish a new facility, among its other steps, to accelerate the response and help people whose finances are directly impacted by the pandemic.
“We are almost certainly going to see a recession, but its duration and severity depend in part on the effectiveness and efficiency of programs like this,” said Matousek.
The Fed has also encouraged banks to lend via the discount window and announced $ 700 billion in asset purchases on Sunday night. The agency and other banking regulators have also taken steps to encourage financial institutions to use their excess capital and liquidity reserves to stimulate lending and other support measures.
Fed Chairman Jerome Powell suggested the central bank could issue more forecasts and steer more asset purchases. But Powell also urged the White House and Congress to take their own action.
“We don’t have the tools to reach individuals and especially small businesses,” Powell said at a press conference on Sunday. “But it is a multi-faceted problem, and it requires responses from different parts of government and society.”
At this point, the Fed has done ‘just about everything [it] can, ”Mullarkey said.
“I applaud the Fed for the leadership they are showing here, and they do it with a lot of emphasis, and they do just about everything they can to show that we’re going to do whatever it takes here, for our part, “he said,” but the transfer is now shifting to fiscal policy and governments need to act quickly on this. “
Congress has already passed a massive spending bill focused on the public health care system, and the House passed a sick leave, unemployment insurance and food stamp bill last week, but Congress is under increasing pressure to do more.
Meanwhile, some fear the Fed’s extreme actions will backfire.
Some investors saw the Fed’s interest rate cuts as the restart of “quantitative easing” policies, an extraordinary series of agency interventions following the 2008 crisis.
Further short-term action could signal Wall Street that the Fed fears the US economy is on the verge of something much deeper than a short-term recession.
“By hitting so hard from the start, especially with rates, they’ve already scared off investors,” Matousek said. “More and more people are going to start asking, ‘What does the Fed know that we don’t know? And it can snowball beyond what we’re already seeing. “
But at the same time, the Fed has also been under pressure to open its toolbox to deal with a new kind of financial crisis.
Some critics have said the rate cuts were an inadequate response to help those who need them most. In a statement released Monday, House Financial Services Committee Chair Maxine Waters, D-Calif., Called on the Fed to “provide much needed support to those on the front lines of this pandemic.”
Sheila Bair, former president of Federal Deposit Insurance Corp. says MarketWatch On Monday she agreed the Fed needed to “get creative.”
“Lowering interest rates to zero doesn’t help if businesses can’t repay their loans and they don’t have cash flow,” she said. “We need to get help, especially for small businesses and people who are already losing their jobs.”