- The Fed has taken a number of steps so far to help stem the damage from the coronavirus scare.
- Among them have been a 50 basis point interest rate cut and up to $1.5 trillion in liquidity for the financial industry.
- Some Wall Street veterans think the Fed will have to go beyond rate cuts and into more creative means.
- Among the options are financial crisis-era initiatives like TARP and other programs, well as aggressive quantitative easing.Â
The Federal Reserve took dramatic action over the past week to stabilize financial markets. Now, investors will be watching closely in the coming days to see what else the central bank has to offer to help the economy.
Market interventions not seen since the financial crisis appeared to have calmed the waters somewhat after a brutal week on Wall Street that saw major averages slide at a record pace and government bond yields plunge to regions they had never seen before.
But the work is not over yet.Â
The Federal Open Market Committee holds its policy meeting Tuesday and Wednesday and is expected to deliver more balm amid the raging coronavirus crisis.Â
The Fed thus far has enacted an emergency half percentage point interest rate cut and a funding program for banks that could total $1.5 trillion as well as a expanded move into monthly purchases of Treasurys.Â
With those moves already in the books, the central bank is more likely to look to other perhaps less obvious measures that nonetheless could help the market and economy navigate its way through the current issues.
“We believe the Federal Reserve is about to go all in with its policy response to the virus shock and dysfunctional fixed income markets,” Krishna Guha, head of global policy and central bank strategy for Evercore ISI, said in a note to clients over the weekend. “A key consideration in framing these expectations is that the set of conditions facing the Fed has changed dramatically over the past week.”
Guha and most others on Wall Street see the Fed slashing overnight borrowing rates to zero and implementing a variety of other measures not seen since the financial crisis as part of a whatever-it-takes approach.
Interest rates are just one element in the Fed’s toolkit. There’s growing anticipation that the Fed must and will do more to address the economic damage to come from the coronavirus in both its human and economic toll.
“They tried shock-and-awe with the 50 basis point cut and saw how the market reacted. The mindset of the market is it’s good that we’ve gotten [the rate reduction], but that’s not going to stem the economic damage,” said Art Hogan, chief market strategist at National Holdings.
Goldman Sachs, Morgan Stanley, Bank of America and and a host of other forecasters are looking for a full percentage point reduction to take the Fed’s benchmark rate back to near-zero.
Hogan thinks it could be a mistake.
“Even cutting rates another 50 basis points is more psychological then functional now,” he said. “They should keep their powder as dry as they can. There’s a reason shock-and-awe didn’t work.”
Rather than going for another big interest rate cut, officials can deploy a number of other measures that could prove just as effective if not more so without appearing to be emptying their remaining ammunition.
Market pros point to some of the more likely but less obvious policy options the Fed could deploy.
One easy move is the use of “forward guidance,” or assuring the market that rates will stay where they are for a prolonged period of time. That worked well in the crisis and post-crisis years as the continuing reminder that rates weren’t going anywhere helped stabilize the market’s view of monetary policy.
But the Fed’s policy forecasts over the past few years, though, have been unwound almost as quickly as they were pronounced.
Chairman Jerome Powell and other officials insisted near the end of 2018 that there was still plenty of room to raise rates even after four hikes that year, then promptly had to cut three times in 2019 as part of what he called a “mid-cycle adjustment.” At the end of 2019 and into this year, officials said they felt that absence a material change in conditions, no further reductions would be forthcoming.
That’s one reason the Fed may have to move beyond forward guidance.
One Wall Street veteran who asked not to be named said the central bank should consider wheeling out some financial crisis-era programs that are still allowed under the Dodd-Frank banking reforms.
That would entail some of the initiatives offered through the Troubled Asset Relief Program, which had been credited as a pivotal move to pull the country out ofÂ its downward spiral. TARP helped clear out some of the damage done to bank balance sheets while also providing funding mechanisms for small businesses and other parts of the economy. The program also turned a $121 billion profit.
“The Fed’s got to pull out all the stops,” this source said. “They need to be creative in how they handle it. But they have a blueprint for how to get money to the people who need it.”
There are other weapons the Fed has as its disposal.Â
The next most likely option would be restarting the large-scale asset purchases implemented during and after the financial crisis. Known in the markets as quantitative easing or, more colloquially, money printing, the Fed did about $3.8 trillion in such purchases in three rounds, expanding its balance sheet to more than $4.5 trillion at one point.
The Fed recently has started buying Treasurys again, though the scale has been considerably smaller than the previous operations. However, the reception for those purchases indicates that the market would welcome a fourth round of QE. A round Friday in which the Fed bought across the yield curve saw huge demand from major institutions.