Fed throws several kitchen sinks at crisis, but market wants more

Published: March 23, 2020 at 7:56 p.m. ET, By Joy Wiltermuth

The Federal Reserve entered uncharted waters on Monday, opening its vault to “unlimited” bond purchases, as global markets convulse, businesses shutter and workers lose jobs in the wake of the coronavirus pandemic.

Will it be enough? That’s anyone’s guess at this point, particularly since everything hinges on stemming the spread of the virus and its economic fallout.

Financial markets remained in limbo Monday after lawmakers failed to pass a promised aid package to help staunch Main Street layoffs and to restore confidence on Wall Street, with the Dow Jones Industrial Average DJIA tumbling 3% to its lowest reading since Nov. 9, 2016, the day of President Donald Trump’s election.

Here’s a breakdown of the Fed’s efforts to steady rattled markets.

Interest rates:

March 15: In a surprise weekend move, the Fed cut benchmark rates by 100 basis points to a range of zero to 0.25%, but said not to expect U.S. benchmark rates to be pushed into negative territory, like some foreign central banks.The central bank also announced it would be using its balance sheet to help lenders, businesses and households absorb the shock of daily American life grounding to a halt.

Bond purchases:

March 15: Plans unfold to buy at least $700 billion of U.S. Treasury debt and “agency” mortgage bonds, or assets with government backing, in a bid to soothe tumult, even safe-haven assets, as investors rush to sell what they can to raise cash.

Kathy Bostjancic, chief U.S. financial Economist at Oxford Economics points out, the Fed bought $1.5 trillion during its first round of bond purchases in the wake of the 2007-’08 financial crisis and $1.3 trillion during its third round.

Agency mortgage bonds are sold by housing giants Freddie Mac FMCC, Fannie Mae FNMA and Ginnie Mae and come with government guarantees, which in functioning markets, makes them as easy to sell as Treasury bills, notes and bonds.

March 23: In a dramatic, pre-market move, the Fed said aggressive action was needed to soften the blow of the pandemic. To that end, it unfurled a plan to buy an unlimited amount of bonds that already have government backstops, including some commercial mortgage debt.

Importantly, the expanded purchases exclude so-called “private-label” residential and commercial mortgage-backed securities, where a sizeable chunk of Wall Street loans on hotels, malls, office buildings and other property types are packaged into new bond deals.

Commercial paper:

March 17: Fed invokes section 13(3) of the Federal Reserve Act to provide a backstop for a key source of short-term funding for big businesses, after calls by investors for the U.S. central bank to unclog the so-called commercial paper market. It’s a roughly yearlong program that aims to support the real economy, rather than just the financial sector, by helping businesses meet payrolls, inventory payments and other short-term liabilities.

Primary Dealer Credit Facility

March 18: Another 13(3) program to supply key dealers of securities on Wall Street with up to 90-day loans at ultralow cost to jump-start trading again and boost liquidity across financial markets. A range of collateral will be eligible, from commercial paper to municipal bonds to asset-backed securities, as well as equities, as economist warn the U.S. could be thrown into a recession, putting credit on ice.

Primary Market Corporate Credit Facility

March 23: Emergency Stabilization Fund is tapped to provide $30 billion worth of equity to three new 13(3) credit facilities. They will fund $300 billion in new loans. The first, the PMCCF will be open to investment-grade companies seeking new loans or bond financing. Borrowers may be allowed to defer principal and interest payments for six months initially, to keep cash on hand to pay employees and suppliers. The idea is to prevent companies facing pandemic fallout from shedding employees and business relationships, which could further damage the economy.

Read: Unemployment could reach 30% in the U.S., says St. Louis Fed’s Bullard

See: Shoring up customers is first step to protecting banks from coronavirus carnage, says banking expert

Secondary Market Corporate Credit Facility

March 23: SMCCF is established to sop up existing corporate debt with investment-grade ratings, including exchange traded funds, which in recent weeks have been pummeled by record outflows.

Read: The Fed is going to buy ETFs. What does it mean?

Term Asset-Backed Securities Loan Facility (TALF 2.0)

March 23: Fed revives another 13(3) crisis-era program that gives companies like Ford Motor F, American Express AXP and others heavily involved in consumer credit an easy way to sell new asset-backed bonds for funding without much risk, since the Fed is providing a backstop to bond investors. To be eligible, the bonds must be AAA-rated, and backed by new or recently originated student loans, unsecured consumer loans or small business loans.

Municipal bonds:

March 20: The Fed again uses its crisis-era powers to roll out another new program to help rescue the municipal-bond from soaring yields, a sign that investors are concerned about rising defaults. The plan expands its money-market mutual fund program to let banks get loans from the Fed by using assets purchased from single state and other tax-exempt municipal money-market mutual funds.

Currency swap lines:

Global market volatility also has led to a desperate dash for U.S. dollars, the world’s reserve currency, writes MarketWatch’s Greg Robb, in no small part because the greenback is used for most international trade and payments. Analysts say the rush into dollars has amplified the worldwide equity selloff and volatility across financial markets, as many industrial nations all but shutter their borders in an attempt to contain the spreading pandemic.

March 19: To help ease dollar funding strains, the Fed sets up $30 billion to $60 billion worth of U.S. dollar swap lines with nine central banks in Asia, South America and Europe, which are expected to stay in place for at least the next six months. The Fed already had standing facilities with central banks in Canada, England, Japan, New Zealand and the European Central Bank.

March 20: The Fed and five other major central banks move together to bolster their global funding efforts by moving to daily seven-day U.S. dollar funding facilities, up from weekly ones. In addition, the group of central banks will keep offering weekly 84-day maturity U.S. dollar operations to help tamp down market turmoil.

Repos:

Since chaos erupted in the overnight lending market in September, the Fed has been offering billions of dollars’ worth of short-term loans to Wall Street’s roughly two dozen “primary” securities dealers to help ease pressure in this key corner of the market. On March 20, it was ramped up to a stunning $1 trillion in daily liquidity, split between a morning and afternoon borrowing facilities.

What do market participants say?

“The Federal Reserve has heroically stepped in with a host of reactivated 2008-era facilities to backstop global dollar funding. But cash cannot reach every nook and cranny of the global system,” wrote James Sweeney, chief economist at Credit Suisse, in a Friday note.

“Even with the recent extension of swap lines, lending facilities for money-market funds, and direct purchases of commercial paper, the Fed has not assured everyone’s funding, and the risks of a financial accident with long term consequences is still high.”

Read: Fed could buy $4.5 trillion of debt if it starts snapping up corporate bonds, says Bank of America

Source: www.marketwatch.com