Even after return to QE infinity, the Federal Reserve has some more work to do

  • The Federal Reserve still has policy options left even after taking interest rates to near-zero over the weekend.
  • Among them would be interventions in the commercial paper market as well as areas of fixed income.
  • Markets slumped Monday, mainly because Wall Street is still waiting for more fiscal action.
  • “This is much more like ‘QE infinity’,” said Michelle Meyer,  U.S. economist at Bank of America.

Extraordinary Federal Reserve actions over the weekend were unable to avert yet another market bloodbath Monday and may yet prove insufficient to address the economic carnage from the coronavirus crisis.

That doesn’t mean, though, that central bank officials won’t try, as they still have weapons at their disposal to at least play a secondary role in a recovery.

The 1 percentage point rate reduction and institution of $700 billion in asset purchases — quantitative easing — announced Sunday represented two of the Fed’s more obvious policy choices. Now, a slew of other options await, ranging all the way up to seeking emergency powers and even rewriting their charter.

“The Fed’s actions should help to stem some of the panic in markets, but it is just the start,” Michelle Meyer, U.S. economist at Bank of America Global Research, said in a note for clients. “We think the proper policy response will require coordinated and forceful action from both the fiscal and monetary front.”

Meyer was one of many Fed-watchers who characterized as powerful the arsenal it unloaded against what looks like a recession already in progress or not far in the future. The Fed sought both to pull down borrowing costs and to set up liquidity measures for the Treasury market and financial system.

“This is much more like ‘QE infinity’ — the Fed will do whatever it takes to make sure there is more normal functioning of the Treasury market,” Meyer wrote.

Even with the aggressive easing measures and the massive interest rate cuts, markets were left wanting for more.

Monday’s trading saw more huge losses for the major index, and observations from Wall Street pros took a familiar theme: Monetary policy alone won’t rescue the economy from the coronavirus abyss.

“Given the circumstances, I think they did what was within their power to do,” Eric Winograd, U.S. economist at Alliance Bernstein, said in an interview. “I don’t think the market reaction reflects any particular disappointment with what the Fed did. What is necessary goes well beyond what monetary policy can accomplish.”

Fed officials received some advice from a former central banker — one-time Governor Kevin Warsh penned an op-ed for the Wall Street Journal in which he encouraged delving into the financial crisis playbook. Specifically, he cited the Section 13(3) powers of the Federal Reserve Act to establish a Government-Backed Credit Facility to “ensure that sound businesses and households have ready access to cash to get through the crisis.”

Warsh’s commentary drew plenty of attention on the Street, but most economists, fixed income experts and market strategists said there are places the Fed can go first before extending itself that far.

For one, many watchers were disappointed there was no mention Sunday of the commercial paper market, where businesses go for unsecured short-term funding. Reports have circulated of a dearth of buyers for the paper companies were sending to market, and the Street was looking for some Fed intervention.

“There’s still more they can do and probably will do at some stage of the game,” said Kathy Jones, chief fixed income strategist at Charles Schwab. “They certainly pulled out the big guns and did a lot to preserve the markets and to address concerns about liquidity in the markets.”

In the days ahead, Jones expects the Fed to institute some type of facility to address commercial paper. In addition, she thinks the central bank will need to address issues in the corporate and municipal bond markets. 

“They may indeed need to amend their charter,” Jones said, as the Fed act as it is written does not allow for the purchase of corporate bonds. Others even have suggested the Fed buy stocks, likely through exchange-traded funds, though that, too, would require an act of Congress.

Source: https://www.cnbc.com/2020/03/16/even-after-return-to-qe-infinity-the-federal-reserve-has-some-more-work-to-do.html

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